September 11, 2003

More Bad Unemployment News

More bad unemployment news:

Jobless claims rise to 422,000 in latest week - Sep. 11, 2003: The Labor Department report said 422,000 people filed for benefits in the week ended Sept. 6, compared with an upwardly revised reading of 419,000 in the prior week. Economists, on average, expected 400,000 new claims, according to a Reuters poll. "These jobless claims figures strongly suggest that the any discussion of a runaway economic recovery have been greatly exaggerated," said Anthony Chan, chief economist at Banc One Investment Advisors. "Instead, what we see here is a recovery that continues to face significant headwinds emanating from the employment front." U.S. stock market futures weakened after the report, pointing to a negative opening on Wall Street. Treasury bond prices recovered from earlier losses.

Though the economy's growth has clearly accelerated in the late summer and fall, the long-suffering labor market has shown few signs of recovery. Many economists now believe the economy's problems are structural rather than cyclical, that technology-driven gains in productivity have enabled manufacturers to make more goods with fewer workers.

Many manufacturers, and many politicians, say competition for cheap labor from other nations, particularly China, has made it difficult for U.S. businesses to hire U.S. workers, and have called for measures to level the playing field, including forcing China to revalue its currency...

Sigh. First of all, faster productivity growth is an opportunity. It means that we have the power to become a richer and better-off society. It also means that government needs to take steps to make sure that demand grows fast enough to soak up the benefits of higher productivity and still put pressure on businesses to hire more workers.

Unfortunately, the Bush Administration focused on passing tax cuts that will do much more to cut taxes late in the decade than they do to boost employment now. And what's the Bush Administration's response to bad unemployment news? To blame China.

I'm sure that Treasury Secretary John Snow's people have told the White House by now that their best estimate is that a 20% revaluation of China's currency would--after two years or so--have the potential to shift demand to reduce the American unemployment rate by 0.1% (yes, that's one-tenth of a percentage point). But will that change the White House's apparent decision to make China-bashing the centerpiece of its "employment" policy?

Do pigs fly?

Posted by DeLong at September 11, 2003 06:44 AM | TrackBack

Comments

The folks around here had expected the White House to make a big public push to get China to liberalize its fx regime before the fact. The reason was simple. US goods makers and unions were agitating for it. China is long been, for one reason and another, part of the US electoral landscape. This time around, the cluster of jobs, trade and exchange rates is the issue. Knowing that political opponents would take up the issue, the White House needed to insulate itself, so arranged for Treasury Secretary Snow to step in front of the parade. The National Association of Manufacturers is still dissatisfied, and still considering filing trade action. Several senators are calling for a review of Treasury's response to China"s fx and trade policies, not satisfied with Snow's efforts.

Knowing these things, you don't need to know the likely impact on the US jobless rate to have a pretty good idea what the White House is going to do. The question is, has the White House let China in on the joke? Has Snow be less than enthusiastic in pushing the fx/trade issue, a tacit admission to the Chinese that his efforts are just for show during the campaign? Has he been explicit in telling the Chinese that North Korea is more important than trade (having had it explained to him that China is more likely to make earnest efforts on our behalf regarding North Korea than regarding trade), so just let me ramble but don't take it seriously? We won't know for quite some while, if at all.

Posted by: K Harris on September 11, 2003 07:29 AM

The RMB was last devalued in 1994. Since then it has held more-or-less constant at 8.27 to the dollar, even appreciating slightly during the late 1990s when the USD rose against most foreign currencies. So maybe I am missing something, but what are the grounds of the claims that the BOC is manipulating the renminbi for short-term advantage?

I'd bet heavily against appreciation anytime soon. Given continued high domestic unemployment, adopting a more deflationary policy probably isn't a top priority. Perhaps more practically, given the size of NPL problem in the Chinese banking sector (the latest official stats conservatively estimate 20% of all loans as NPLs), keeping foreign capital flowing in is vital to maintaining liquidity to the Chinese banking sector... the sector with the most influence on Chinese policy-makers.

And then again, I just don't see why Chinese policy-makers would appreciate to keep Bush happy.

Posted by: trevelyan on September 11, 2003 08:26 AM

Fine comments. We are in no position at all to pressure China on any issue other than North Korea. We may pretend to be chiding them, but we will not really pressure. We are in enough of a bind with lack of internatial support.

Remember, no one is forcing American companies to invest in China or India and we have long applauded the Chinese currency peg to the dollar.

The problem is American demand. We could be happily growing at a fairly smooth 5% with no price pressure, but fiscal policy has not helped more than a pinch especially if spending for the war in Iraq is taken from the current GDP bounce. Consumer debt is a problem in generating demand, but how much is not clear.

Posted by: anne on September 11, 2003 09:33 AM

trevelyan writes - "Given continued high domestic unemployment, adopting a more deflationary policy probably isn't a top priority [for China]"

Here's an article which describes the BOC efforts to restrain the Chinese economy from overheating. So apparently adopting a more deflationary policy is a top priority, it's just that they are choosing to restrain their domestic sector so that they have enough spare capacity to slave away for Americans. Not that I have any complaints about their methods since I believe this benefits Americans at China's expense. As long as Greenspan and Bush remember to supply the purchasing power this should not be an issue.

http://news.xinhuanet.com/english/2003-09/08/content_1068302.htm

"PBOC Governor Zhou Xiaochuan said last week the central bank may consider further moves to offset rises in money supply as a result of its purchases of excess US dollars aimed at stabilizing the exchange rate of the renminbi."

Posted by: snsterling on September 11, 2003 09:39 AM

A quick question: Is China's entry to the WTO contingent on their removing exchange controls on the yuan?

Posted by: David Yaseen on September 11, 2003 09:52 AM

A quick question: Is China's entry to the WTO contingent on their removing exchange controls on the yuan?

Posted by: David Yaseen on September 11, 2003 09:52 AM

My feeling is that these numbers are indeed serious. We need to wait till October to get next month's breakdown in order to have a clearer picture of what is happening. The manufacturing jobs are not the problem. The numbers to watch are the services ones, and not the low end cleaning and age-care, but the high value end. If the US cannot produce growth there then there could be a big problem. And this then won't be part of the Bush dimension. Any new in-coming president could well be faced with the same problem. How does the US pay its way in the world, and in particular how is it going to address that very special trifecta: the triple deficit (ie including private indebtedness)?

Global rebalancing anyone?

Posted by: Edward Hugh on September 11, 2003 09:54 AM

Well, we could replace the dividend tax cut with additional spending on American infrastructure. A fine electricity tramsmission grid and natural gas delivery system would be nice, and the building would mean lots of fine jobs. This is just a thought, but with this Administration "When pigs fly."

Posted by: lise on September 11, 2003 10:01 AM

So, the Administration gives us tax cuts for the richie rich which leves the economy growing too slowly to avoid more and more and more job losses. Then, the Administration blames China and asks the rest of the world to buy American to mask the real effects of the absurd tax cuts. Makes sense.

Posted by: lise on September 11, 2003 10:12 AM

Sounds like the news is GOOD for UNemployment. UNemployment is UP. Its NOT good news for EMPLOYMENT, which is... down.

Of course, it seems to be perfectly consistent with Bush Administration doctrine, as higher unemployment will, ultimately, reduce national labor costs, allowing (ultimately) increased profits (perhaps). And China-bashing is ALWAYS fun.

Have we not workhouses and prisons? Those are the institutions I support...

Posted by: the talking dog on September 11, 2003 10:17 AM

I have a secret plan to bring more jobs to California!

Posted by: Arnold S. on September 11, 2003 11:02 AM

To quote Al Gore form the 92 campaign.....EVERYTHING THATS UP SHOULD BE DOWN AND EVERYTHING THATS DOWN SHOULD BE UP!

Posted by: felix on September 11, 2003 11:11 AM

Another question: How much underemployment is there? How many of the unemployed have been forced to take low paying jobs at Wal-Mart with no benefits? Is there any good measure of this?

Posted by: Kosh on September 11, 2003 11:13 AM

I have some anecdotal good employment news. I regularly search Monster for job postings. I am a computer programmer and search for all postings for Java developers. The first half of this year the average number of postings nationally averaged around 3700. Over the last month or two that number has steadily climbed and is now right around 4400. So maybe there is the beginning of a turnaround in my field which I still expect to be depressed for some time due to secular not cyclical trends (namely offshore outsourcing). Certainly not an unambiguous indicator, but this is the first somewhat sustained upswing I have seen in job postings in my field since I first started doing regular searches in mid 2001.

These government economic statistics are so messed up I do not put a lot of stock in them one way or another. For example I have serious doubts whether productivity is increasing at a 7% annual rate or whatever the latest figures claim and how is it that GDP grows every quarter now matter how depressed the economy is. I have enough unemployed friends and relatives that I think I will know when a real recovery is at hand by when a fair number of them secure employment. One of them recently did, but I think it was based more on his specialized skills (wireless handheld application development) than any generalized upturn.

Posted by: Joe Blog on September 11, 2003 11:16 AM

If you want new demand, you'll need to leave the door open to new products. When an ever smaller fraction of our workforce can produce all the stuff we currently consume, the rest are going to have to switch to producing things we've never had before.

That's a lot easier if you can just change your product around, or put out a brand new one, without spending lots of time playing Mother May I with bureaucrats before they'll let you sell it. The freedom to do just that was one of the main things that allowed the phonomenal IT growth over the past several years to occur. No one needed a license to get into the field, no one needed to get permission to sell new versions or completely new products, they just needed to get it out the door and get customers to buy it.

Now the consumers have plenty of computing power and aren't so hungry for more. Some other industry (preferably all of them) will have to be opened up in a similar way so that those excess workers can get to work building the next big thing, and so that we as consumers can get our hands on the next big thing ourselves.

Posted by: Ken on September 11, 2003 11:29 AM

"These government economic statistics are so messed up I do not put a lot of stock in them one way or another."

These government statistics are meticulously compiled and analyzed, but such statistics always present problems in compiling and analysis. Believe them, we have a pronounced employment problem and, though I trust the finding that ads for programmers are increasing, I can find no reason to think there will be a significant employment improvement this year.

Posted by: anne on September 11, 2003 11:32 AM

Joe Blog: Computerworld recently ran a story saying that postings are up, but IT managers say they don't plan to increase hiring in the fall.

I've wondered if much of the rise is due to headhunter firms doing speculative posts, hoping to find candidates for when the jobs actually appear, though the jobs may not materialize in the end.

Posted by: Jon H on September 11, 2003 11:33 AM

If you want new demand, you'll need to leave the door open to new products. When an ever smaller fraction of our workforce can produce all the stuff we currently consume, the rest are going to have to switch to producing things we've never had before.

That's a lot easier if you can just change your product around, or put out a brand new one, without spending lots of time playing Mother May I with bureaucrats before they'll let you sell it. The freedom to do just that was one of the main things that allowed the phonomenal IT growth over the past several years to occur. No one needed a license to get into the field, no one needed to get permission to sell new versions or completely new products, they just needed to get it out the door and get customers to buy it.

Now the consumers have plenty of computing power and aren't so hungry for more. Some other industry (preferably all of them) will have to be opened up in a similar way so that those excess workers can get to work building the next big thing, and so that we as consumers can get our hands on the next big thing ourselves.

Posted by: Ken on September 11, 2003 11:34 AM

snsterling -- I believe the responsibility for setting reserve requirements technically passed to a new organization called the CBRC earlier this year -- as part of a State Council led reform of the banking sector. This reform significantly downsized the PBOC -- it cannibalized the regulatory authority of the institution and restricted it largely to implementing monetary policy through control of the discount rate, etc..

Since the NPC has yet to ratify the SC decision though, we appear to be in the middle of a turf war where both agencies have legitimate claim to regulatory authority. As a result, I'm not we can interpret this decision as anything more than the PBOC staking a claim to its authority over this instrument of monetary policy.

http://ce.cei.gov.cn/enew/new_h1/p200hc21.htm

Posted by: trevelyan on September 11, 2003 11:36 AM

Jon H - hard to tell at this point how much follow through there will be. I would have to actually see some people landing jobs before I become a believer. Everything has a potential angle to it. In terms of the CIO survey, it seems like the "correct" thing to say in the business technology world right now is that I am not hiring anyone, not spending any money, and I am sending all the work offshore. Read one of those articles and I start seeing my future making batches of french fries, but I am willing to believe that it is not as bad as all that.

Posted by: Joe Blog on September 11, 2003 12:05 PM

Edward writes - "The manufacturing jobs are not the problem. The numbers to watch are the services ones, and not the low end cleaning and age-care, but the high value end. If the US cannot produce growth there then there could be a big problem." - and I have to ask about the reason behind this. Because I got the impression that the US could produce just anything right now if there only was a demand for it.

I mean; if demand is the main problem, wouldn't then the low end jobs (whose posessors are most likely to spend their wages and perhaps even more) be the most important ones?

Posted by: Mats on September 11, 2003 12:24 PM

http://www.nytimes.com/financialtimes/business/FT1059479724271.html

We must wait to free-float the renminbi
By Rob Westerhof - CE Philips Electronics

The discussion about the exchange rate of China's currency is in full swing. Some interest groups of western, mainly American, manufacturers are calling for the Chinese authorities to free-float the renminbi and give up the peg to the US dollar, or at the least revalue their currency by 20, 30 or even 40 per cent in one go. John Snow, the US Treasury secretary, voiced these demands in a recent visit to China.

Fortunately, Beijing has not heeded these calls. A free float or sudden revaluation would be bad for China and bad for business. Instead, Beijing should maintain the peg for now and aim for a gradual revaluation of about 15 per cent over the next five years. Free-floating the renminbi can be considered only when China has a well established financial system. That will take at least another 10 years.

Over the past 15 years, many western companies have made huge investments in China in both production and research and development. For scores of large multinational companies, China is now an integral part of their supply chain and an increasingly important market. A third of Philips' products, for example, are manufactured in China and the country already accounts for 10 per cent of its sales....

Posted by: anne on September 11, 2003 12:27 PM

anne's NYT quote ends like - ". A third of Philips' products, for example, are manufactured in China and the country already accounts for 10 per cent of its sales...." - and China is indeed an important market in many aspects.

But the numbers are not impressing, Chinas economy was in USD at the prevailing foreign exchange rate about as big as the Italian or the French, a fourth (1/4) of the Japanese or a tenth (1/10) of the US in 2001. Unless of course I read the table wrong...

Posted by: Mats on September 11, 2003 12:37 PM

Of COURSE the Chinese will do nothing in response to American whining, until and unless that something matches their needs.
If the American whining becomes too intense, they will simply sit out the next round of Treasury auctions, perhaps even sell, and wait for the Americans to get the message. Who needs whom more in this relationship?

Posted by: Maynard Handley on September 11, 2003 01:00 PM

Fine point, but China is a transition market for goods that are re-processed and shipped abroad. The market is not for final consumption but for re-processing. Korea ships rolled and sheet steel products to China which in turn processes them and ships out final goods through the world.

The market for final consumption in China is small but growing, while the market for transition goods is large and growing very very rapidly.

Posted by: anne on September 11, 2003 01:00 PM

anne, you make quite clear that it is the potential, but even so - with steady 4% growth in USA and 8 in China, it would take 20 years for China's to grow to 1/5 the size of the US, and then another 20 years to grow to half the size of the US economy.

The US is so big, I think it will take quite some time for it to lose its status as the textbook example of a closed economy...

Posted by: Mats on September 11, 2003 01:11 PM

I keep seeing variations on this same theme: "Sigh. First of all, faster productivity growth is an opportunity. It means that we have the power to become a richer and better-off society."

The more I see it, the more I think it is time for some economists to step out of their ivory towers and into the real world because the theory does not match the reality.

All through school I was taught that rising productivity would result in higher wages for workers which would eventually allow us to work less while living better. Well, productivity has been going gangbusters for well over a decade but the fruits of the harvest have not gone to workers. Save for a brief shining moment in time during the last administration, real world wages have stagnated or fallen. As Krugman points out, the gains have not gone to those who produced them, they have gone to the executives (who seem to think they did it all by themselves) and the "investor class" (which is not a synonym for working stiffs with 401k stock holdings no matter how much ivory tower types try to say otherwise) which has resulted in an ever larger gap between the haves and the have nots. There is also the little matter of this super-productive system resulting in soaring budget deficits (to the point that unless something is done we really are headed for a fiscal meltdown) and cuts in services for those who need them most.

Something is broken. Severely. Come down the stairs and throw open the doors. Look out from that tower. The mess is there just waiting for you to see it.

Posted by: Romberry on September 11, 2003 03:01 PM

"If the American whining becomes too intense, they will simply sit out the next round of Treasury auctions, perhaps even sell, and wait for the Americans to get the message. Who needs whom more in this relationship?"

No they can't do this. If China fails to buy our debt, then the dollar falls and threatens their fixed exchange rate policy by overheating their economy even more. What message could they possibly send the Americans by taking an action which would guarantee that the dollar falls against their currency? This is Argentina in reverse--sooner or later they will not have a choice, they will have an inflationary mess. All we did was warn them.

To me it makes sense that the Communists are pursuing a policy which promotes both jobs for the export sector and austerity for the domestic sector. It keeps them in power. Well-off Chinese people are not going to want to be governed by Communists.

Posted by: snsterling on September 11, 2003 03:04 PM

I keep seeing variations on this same theme: "Sigh. First of all, faster productivity growth is an opportunity. It means that we have the power to become a richer and better-off society."

The more I see it, the more I think it is time for some economists to step out of their ivory towers and into the real world because the theory does not match the reality.

All through school I was taught that rising productivity would result in higher wages for workers which would eventually allow us to work less while living better. Well, productivity has been going gangbusters for well over a decade but the fruits of the harvest have not gone to workers. Save for a brief shining moment in time during the last administration, real world wages have stagnated or fallen. As Krugman points out, the gains have not gone to those who produced them, they have gone to the executives (who seem to think they did it all by themselves) and the "investor class" (which is not a synonym for working stiffs with 401k stock holdings no matter how much ivory tower types try to say otherwise) which has resulted in an ever larger gap between the haves and the have nots. There is also the little matter of this super-productive system resulting in soaring budget deficits (to the point that unless something is done we really are headed for a fiscal meltdown) and cuts in services for those who need them most.

Something is broken. Severely. Come down the stairs and throw open the doors. Look out from that tower. The mess is there just waiting for you to see it.

Posted by: Romberry on September 11, 2003 03:05 PM

In answer to David Yaseenís question about whether China's fx regime is a problem under WTO rules - yes and no. It is official WTO policy that member nations may not manipulate their currency with the objective of obtaining an advantage in international trade. However, the WTO operates more along the lines of a civil than a criminal court. It does not enforce the law on its own, but rather waits for aggrieved parties to come forward with complaints. If nobody complains about Chinaís fx policy to the WTO, then the WTO wonít act. The fact that Chinaís currency is pegged would probably offer pretty strong protection in a WTO trade case. China could argue that its fx regime is its fx regime, full stop. It is not manipulating, but rather pegging, and the trade results just fall out of that decision. China could claim the peg is intended to protect its financial system, rather than confer trade advantage. Tough to beat such claims.

If, like Japan, China employed a dirty float, then the case against China's fx policy would be stronger since nearly Japanís intervention is all aimed at preventing yen appreciation. That pattern belies any claim that financial stability, or even fx market stability, is the aim. Where is the symmetrical effort to stabilize when the yen is falling? Arguing that intervention is aimed at yen stability is not supported by the facts. The Japanese case, however, doesnít offer a very good precedent. Japan actively uses its currency for trade advantage, is a long standing member of the WTO/GATT, and has never been seriously challenged within the WTO for breaking the rule against manipulating currencies for trade advantage. Iím not even sure this is a case of the rules being different for the big guys. I am unaware of any instance of a currency complaint being brought to the WTO.

China has claimed that as a developing economy, it should get easier treatment on WTO rules. That claim was partly negotiated away (mostly by the US) on the way in. China has since, as a member of the WTO, reasserted the earlier claim to being too poor to follow the rules. Not cricket, but there you are. If confronted on WTO fx rules, China would plead "developing country" and there would be a big fight before anything of substance was decided.

Posted by: K Harris on September 11, 2003 03:23 PM

(I may be wrong, but,) I have to disagree with Romberry - to an extent.

I've noticed personally that many of the things that I enjoy I enjoy in part because of the productivity revolution. I expect to know where my package is (now!), I expect news to be delivered instantly, I search out better prices for products that I like, (through trade with China) I buy products more cheaply than I ever did a decade ago, I buy many products online.

There's a lot of pressure now to stay mobile with the market. I don't think that this was so 30 years ago. It's tricky, but manageable.

I think that we ought to rebuild our infrastructure such that we can very easily be retrained relatively often. With national health care I wouldn't worry about leaving a job for a University, and with free (or inexpensive) education it wouldn't kill me financially. If the US can't learn how to create a highly mobile retrainable labor force it will ultimately stagnate in the New Economy.

The US could easily accomplish this with part of the surplus from productivity increases.

Posted by: Saam Barrager on September 11, 2003 04:38 PM
Post a comment