Diary

TNR's Judis: Economy Still Collapsing

The conventional wisdom among liberals seems to be that the economy is improving – even if it has nothing to do with the ‘stimulus’ – but because employment is a lagging indicator, another massive spending bill may be needed to improve the unemployment picture. The New Republic’s John Judis argues for such a spending package. But unlike the upbeat liberals who argue that unemployment is merely lagging an improving economy, Judis argues that the economy is still collapsing:

Harvard economist Jeff Frankel takes this argument a step further, arguing that if you want to use employment figures to gauge economic recovery, you should look at the total hours worked rather than at the number of employed, because the beginning of a recovery businesses are likely to increase production by getting their employees to work overtime, or by raising them from part-time to full-time, rather than by hiring new workers. Frankel notes that increased work hours correlated with the beginning of recovery for both the 1990-91 and 2001 recessions.

If you apply this gauge to the current situation, there is little reason for optimism. Though some have used the Bureau of Labor Statistics’ May figures–which showed that the rate of unemployment growth had been slightly reduced–to predict an imminent recovery, Frankel observes that if you look at the figures in terms of hours worked rather than people employed, “the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September.” Indeed, in May, the average length of the work week fell to its lowest total since 1964–a sign that businesses are cutting back by reducing their employees’ hours. “The labor market does not quite yet suggest that the economy has hit bottom,” Frankel concluded diplomatically.

Policymakers in Washington should thus not be fooled by the slowed increase in unemployment numbers; they have to keep doing things that will get people back to work. The most important trigger for economic recovery over the last century has been the growth of aggregate demand for consumer goods–which comes primarily from employed workers. If the number of employed workers declines, then there is a corresponding decline in income and demand. In a recession, that kind of decline can degenerate into a vicious spiral, as those who are still employed, seeing the threat of unemployment looming, choose to save rather than spend. As a result, demand is further reduced, more people are laid off, and the downward spiral continues.

The amazing thing about this piece is how much it differs from the conventional wisdom. The evidence that the economy has turned the corner is ambiguous – to put it charitably. Yet many Washington Democrats act as if we’ve already entered a jobless recovery that’s just missing another $1 trillion or so of taxpayer money to make it complete.

The drumbeat for a second porkulus is getting stronger and stronger.