Do we have enough workers pulling the cart?
Mitch Pearlstein and I were privileged to hear the remarks of Dr. Kocherlakota, President of the Federal Reserve Bank of Minneapolis at the Economic Club of Minnesota (May 10, 2012).
Dr. Kocherlakota’s speech was entitled “Monetary Policy Transparency: Changes and Challenges”.
While he did spend quite a bit of time on the new transparency at the Fed—which seems wise and inevitable given that we live in the information age (publishing, for instance, the target inflation rate of 2%)—the more interesting take away from the speech was his comment on the jobless rate and how it might prove to be more enduring even with a drop in the unemployment rate. He pointed to our socialist friend and special ally Sweden for evidence which he said should be viewed as “informative”.
I do not mean to short change the Fed’s new efforts at transparency—or to skip over the question I wanted to ask, “Should the Fed really have a dual mandate; price stability and full employment?” (My favorite writer on this topic is George Melloan; you can read his recent thoughts here).
The story of the day, picked up around the state and beyond, is that Kocherlakota said that the labor force participation rate for many prime age workers—kind of the “sweet spot” of our productive citizens—started dropping in the late 1990’s and then took a sharp dive in 2008. That may not be startling except that the labor force participation rate is not increasing as we crawl out of the recession and as the unemployment rate drops.
Here is Kocherlakota’s summary:
How persistent will these changes in U.S. labor markets prove to be?
Economists hold at least two views on this question. The first is guided by the patterns in post-World War II data for the United States. These patterns suggest that the current deterioration in U.S. labor market performance is indeed reversible under appropriate policy.
The second view is less sanguine. It says that the post-World War II data do not contain an economic crisis of the kind or magnitude that hit the United States in 2008. Such a crisis could well have a different kind of impact on labor markets than the earlier postwar recessions.
He then turned to a study of socialist Sweden which suffered a “triple crisis” in the early 1990’s (financial, banking, and currency crisis). Sweden is generally considered to have handled the crisis well—and to have largely recovered. But a closer look reveals a persistently low rate of labor force participation for the same age group.
Let’s also leave aside for now another related subject—i.e., our post-recession growth is anemic compared to other recoveries (the sharp clime in growth is absent unlike other recoveries)—and focus just on what it means if people who normally can be found in the workforce are absent. This fact begs the question, what are they doing instead? Are these all discouraged workers? And even if they are discouraged, if they need a job, you’d think that eventually they’d find something, anything and take it, right? (After the extended unemployment checks stopped.)
I talked to one of our policy friends after the lunch; his specialties are our ballooning debt and entitlements. He pointed out that many of these folks are transferring to SSDI (Social Security Disability Insurance) which is up about 20% in just the last 5 years (now about 10.7 million Americans). Others are taking early retirement—either social security, public pension, private savings and pension or some combo thereof.
So many people who used to work are no longer working and may be drawing on the public purse to get by (including health care). They also are not building up any additional savings and may be spending down any savings they already had. Even if you are well situated for early retirement, leaving the workforce for an extended time or at a younger age means that the economic pie as a whole is smaller. And a smaller pie mean less tax revenue to support social security, public pensions and other entitlements such as Medicare and Medicaid. It also means this generation will not pass on as much wealth to children.
None of this is good news for our recovery or for the long-term sustainability of entitlements, public pensions and other retirement benefits like health care. Minnesota’s economic debt per capita is at least $3,597 (this is just state general fund, net bonded debt and pension obligations) and with Governor Dayton at the helm, there can be no significant reform.
Many Minnesotans admire Swedish (or Norwegian) socialism even if they hail culturally from Great Britain, Laos, Germany, Mexico or Somalia; consciously or unconsciously many embrace a cradle to grave safety net for Minnesota and the nation. Or it was just here when they arrived and it has become a way of life.
The problem that President Kocherlakota pointed to is that Minnesota may have more people in the cart and too few people to pull it.
You can read Kocherlakota’s speech in its entirety (along with nifty charts) here.