The new issue of the Brookings Papers on Economic Activity features research on how much and how long workers laid off during recessions suffer earnings losses; where policy can be most effective in helping small businesses grow and hire; how much extending unemployment insurance has impacted the unemployment rate during the Great Recession; the effectiveness of the Federal Reserve’s quantitative easing programs; and the different monetary policy paths of the central banks of U.S. and Sweden during the recent recession. Justin Wolfers, Brookings nonresident senior fellow and co-editor of the Papers, offers this preview.
A job lost can mean 20 years of pain.
“ ‘Losing your job sucks’ – that is the message of this new paper in a way that is not entirely obvious. We know when you lose your job you are not going to have income straight away, but it is worse than that. [The authors] follow people who have lost their jobs as a result of a plant closing or some sort of general retrenchment – a lot like what we are seeing today – they follow them over the next 20 years. What we see is not only does your income fall maybe 30% or 40% in the year in which you lose your job, but it actually remains 20% lower even 20 years later. So you are a whole heck-of-a-lot poorer for a whole heck-of-a-long time. Then [the authors] quantify this. You take the net present value of changes in your earnings, and it turns out that getting fired during a recession is very different than during a boom. During an expansion, if you get fired your future earnings (its future value) falls by about $65,000. During a recession it is well over $100,000 (maybe $120,000). So recessions hurt, and they hurt a whole lot more than during booms.”
Central bankers make mistakes.
“Here, [the author of the paper is] the Deputy Governor of the Swedish Central Bank. He has been at the table as they are making monetary policy over there, and he has also been a very close commentator of monetary policy in the United States. The real question he is after is ‘can central banks make big mistakes?’ Lars Svensson thinks they can, and maybe they did. He looks at both the U.S. and Sweden. In both cases he sees a violation of what any central banker should do – if inflation is below your target and unemployment is above your target, both of those are arguments saying you should reduce interest rates. Yet he finds that in both Sweden, and (to a lesser degree) the U.S., they did not really follow this. Svensson’s point is that monetary policy gets complicated when we have to decide whether we care more about our inflation target, or about our unemployment target. But he is looking at the simple case when we are failing on both and reducing interest rates would help us on both. He argues that in both countries, in fact, we saw a failure to do what was right — which was to ease monetary policy in the face of low inflation (possible deflation) and high unemployment.”
The small business emperor has no clothes.
“In Washington, everyone talks about small business as our economic savior. The research says the emperor has got no clothes. You actually have to go and look inside the data and see ‘who are small businesses?’ ‘Are they these innovators?’ ‘Are they these job creators?’ Well, think about it for a moment (this is what the paper documents) – small business is, actually, really boring. It is barbers and hairdressers. It is real estate agents and lawyers. These are people who have occupations, just like you and I. The problem is that they are not entering into these industries with any great goals of new patents, of new innovations (the stuff that is going to push economic growth in the future). Most of them have no intention of growing, or even hiring. These are just mom and pop stores today that are planning on being mom and pop stores tomorrow. The big policy issue here is when we use the words ‘small business,’ I think what we really mean is ‘entrepreneurs.’ What the paper shows is small businesses are different than entrepreneurs. Huge policy implications… Instead of trying to target our entrepreneurship and R&D policy to small business, what we have got to do is actually do the hard work of finding out who the entrepreneurs are, and they are not all hiding in small businesses.
Extending unemployment benefits could help long-term.
“Unemployment insurance is one of the most contentious political issues right now. We have extended unemployment insurance during the recession trying to help people out. Whether we are going to continue to extend it is an open question—it is a big part of the Obama jobs plan. The claim from some is if you provide benefits while people are unemployed, they will remain unemployed longer. As a result, the unemployment rate will rise. Some people even thought this is a big explanation for our current unemployment woes. This paper looks very carefully at comparing those who get insurance versus those that do not; comparing states that extended benefits versus those that did not; looking at what happened when [government] did not extend benefits relative to when we did. [This investigation] suggests that there really is not much of an effect at all. In fact, the authors suggest that the unemployment rate, maybe, is 0.3% point higher, as a result of all these unemployment extension benefits. So that is small. It is there, but it is small. But at least half of that is probably due to people staying in the labor force, rather than dropping out. So in terms of its effect on jobs it, is an even smaller effect, again. Then as we start to emerge from the recession, it may even turn out to be a good thing. What we have done is we have kept people in the pool of unemployed, rather than outside the labor force. When the jobs return, these folks are going to be in a position to get back to work, so it is even plausible the effect is positive.”
The Fed can help the economy with words alone.
“Quantitative easing sounds mysterious – the Fed pumping money, billions of dollars, through the system. In fact, the reality is a lot simpler. What is the Fed trying to do? It is trying to reduce interest rates. Normally, the Fed reduces short-term interest rates. Right now they are at zero, so they are going to try to reduce long-term interest rates. That is what quantitative easing does; that is all these bond-buying programs you hear about. So what the authors do is they go and look at the first two episodes – QE1 and QE2 – and look to see how it did affect interest rates. When the Fed buys treasuries, it actually succeeds at doing what it is trying to do – reduce the interest rates on treasuries. What matters for businesses is that businesses do not borrow using treasuries (corporate bonds are different again). It turns out that, actually, QE1 and QE2 were quite successful at reducing the interest rates at which real businesses were borrowing.
There is a different issue though, which is we might care more about mortgage-backed securities (mortgage rates). It turns out that QE1 involved buying a lot of those securities and it affected those rates. QE2 did not buy those securities and did not affect those rates. So the way you do quantitative easing affects which interest rates are effected, and by how much. I think the broader and bigger point that the paper makes is actually it is not just the buying of bonds, but it is the ability of the Fed to shape the expectations of the market that really drives the biggest effects of quantitative easing. Basically, if the Fed says ‘we want long-run interest low and we have a big pile of money right here that we are going to do it with,’ they do not end up having to use the money, because the money markets understand that they could always come and use that money, and so long-run interest rates fall very quickly.”
[The "yellow vest" protesters are] working people and lower-middle-class people mostly because you have seen a wage stagnation in most of these European countries and unemployment across the board. It becomes a question of social justice and dignity.