Posted by: Peter Coy on July 08
Guest blog from Economics Editor Peter Coy
Are older workers crowding out younger ones in this recession? It's tempting to say so, considering that employment has risen 1% among people 55 while it has fallen 5% among people 20 to 54 (see chart). Andrew Sum and colleagues at Northeastern University wrote a paper last December highlighting the discrepancy. It was called "Out With the Young and In With the Old."
The poster child for the worker who just won't quit--though here, child is definitely not the right word--is Emma Shulman, a consulting gerontologist at NYU Medical Center. She is 96 years old and has survived two husbands, more than 70 years of cigarette smoking, and a Scotch habit ("I was a Scotch maniac"), as described in a profile yesterday in The New York Times.
I was gratified to read about Shulman's continued ventures in the working world because I interviewed her for a 2005 cover story in BusinessWeek called "Old. Smart. Productive.: Surprise! The graying of the workforce is better news than you think." (That's Shulman in the middle of our cover.)
The idea that older workers displace younger ones assumes that there's a fixed amount of work to be done. That's known as the lump-of-labor fallacy--and it's at play in the anti-immigration camp as well. By and large, economies don't work that way. Workers earn incomes and spend the money and the recipients of the money hire more people and off we go. Growth.
Economists Jonathan Gruber of MIT and Kevin Milligan of the University of British Columbia looked at this question in a National Bureau of Economic Research working paper last year, "Do Elderly Workers Substitute for Younger Workers in the U.S.?" They conceded that their conclusion was "relatively weak" but said, "We find no consistent evidence of an impact of the employment of the elderly on the young or prime-aged in our sample."
Posted by: Peter Coy on July 08
Guest blog from Economics Editor Peter Coy
Paul Krugman accuses the news media of ignoring economists who favor more fiscal stimulus. In his post today, he says they're being treated like "unpersons." Unperson is a term from George Orwell's Nineteen Eighty-Four for people erased from the history books by the totalitarian state. So it's a bit strong. But, hey, we get his point.
Krugman provides a handy link to a constantly updated list of economists who favor another round of stimulus (a "third" stimulus, if you count the Bush Administration's last year as the first).
I don't think BusinessWeek can be accused of doublethink on this issue--witness yesterday's post on this very blog.
Posted by: Peter Coy on July 07
Guest blog from Economics Editor Peter Coy
Two excerpts from an article I wrote for BusinessWeek that ran online on Jan. 7, 2009, called "What the U.S. Can Learn From Japan's Lost Decade."
Fiscal conservatives in the U.S. worry about huge deficits, but one lesson from Japan is that halfway recovery measures lead to years of subpar growth that make deficits even bigger. ...
As big as it seems, Obama's stimulus is likely to be just a down payment.
Sure enough, the first stimulus is looking insufficient. And sure enough, fiscal conservatives are complaining that the government has already done too much. Obama Administration adviser Laura Tyson is taking heat for an overnight speech in Singapore in which she went beyond other administration officials in saying that a second fiscal stimulus should at least be prepared as a contingency.
One lesson from Japan is the importance of intervening quickly and massively. If you let an economy sink too far, fiscal and monetary policy become less effective. Likewise, it's easier to save a patient who has lost a pint of blood than one who has lost a gallon.
Posted by: Peter Coy on July 06
Guest blog from Economics Editor Peter Coy
Fed watchers note: Fed Vice-Chairman Donald Kohn is testifying this Thursday on the topic of Federal Reserve independence. It's before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. Should be interesting, coming on the heels of Fed Chairman Ben Bernanke's efforts to fend off congressional attacks, including a bill from Texas Republican Ron Paul seeking to audit the central bank.
Before he joined the Fed, when he was still a Princeton academic, Bernanke seemed to take the position that the Fed merited plenty of independence simply because it was uninvolved in politics. There's nothing political about managing the economy to hit an inflation-rate target that everyone agrees on, right?
But it's clear now that Bernanke has a bigger vision for the Fed, one that involves supervisory powers over the entire financial sector. You can argue that the Fed had broad power already, but in politics you never know how much power you have until you try to exercise it. That's what the Fed is seeking to do now--test its limits.
The deeper the Fed wades into running the financial system as well as the economy, the harder it will be to maintain its cherished independence. That's just a fact of life in a democracy.
Here's a link to a blog citing comments by St. Louis Fed President James Bullard defending Fed independence.
Posted by: Peter Coy on July 06
Guest blog from Economics Editor Peter Coy
Breaking a tidbit of economic news here: I just got off the phone with Yale's Robert Shiller, who has some interesting responses to the posting this morning on voxeu.org by Charles Calomiris and others that questions the existence of a "wealth effect" from changes in home prices.
The wealth effect theory, which says that rising home prices stimulated Americans to spend more during the boom years, has been cited frequently by Federal Reserve Chairman Ben Bernanke, and it's built into the Fed's main macroeconomic forecasting model. The theory seemed to be corroborated in a 2005 paper by Karl Case of Wellesley and Shiller--the namesakes of the Case-Shiller home price indices, among other badges of honor--and John Quigley of Berkeley.
Today, on voxeu.org, there's an important posting that denies the existence of the effect. It's called "The (mythical?) housing wealth effect" and it's by Charles Calomiris of Columbia and Stanley Longhofer and William Miles of Wichita State. It summarizes a June National Bureau of Economic Research working paper by the authors with the same title.
Calomiris et al. argue their case on both theoretical and factual grounds. In theory, they say, the only people who should be expected to experience a positive wealth effect from rising prices are those who expect to sell their houses soon to cash in. Renters who had hoped to buy should actually experience a negative wealth effect, as they realize they'll need more money than ever to buy. And people in the middle--most of us--should be neutral. Furthermore, they say, it's possible that even if consumption does rise when home prices go up, it doesn't have to be a cause-and-effect relationship. It could be, for example, that both consumption and housing are rising in response to an increase in expectations for future incomes.
Digging into the data, Calomiris et al. reanalyze the Case-Quigley-Shiller data and conclude that there is in most cases no statistically significant effect on consumption from housing wealth once you control for other possible contributions to consumption changes. (The working paper explains how they did this using instrumental variables--read it for yourself if you're interested.)
I was able to reach Shiller at his office at the height of summer vacation season and he had several top-of-the-head responses, which I will now relay pretty much unfiltered:
"I’m the most behavioral of the three authors on our paper, so this is me speaking: The effects of housing wealth operate through animal spirits rather than cold calculation. ... It seems to me that part of the effect is through people’s general sense of the world."
"This is the dismal law of economics, that it’s always difficult to disentangle the ultimate causes."
"The whole view of the world is changing all the time. ... I’m sorry to be pushing my book ["Animal Spirits"] but [Berkeley's George] Akerlof and I say that the economy is driven by stories, and one of the prominent stories [during the boom] is the triumph of capitalism."
In other words, it's hard to disentangle the income-expectation effect from the housing-wealth effect.
The problem with running regressions, Shiller said, is that it "inherently takes the world as unchanging for long periods of time. ... I can’t resist talking about what’s happening now."
Shiller's response is obviously a bit loosey-goosey, but he said he didn't mind being quoted. I think he and Case and Quigley are likely to have a more formal response in the weeks or months ahead.
