You know your team’s in trouble when they start talking about moving the goal posts.
At the same time as economists are talking about the possibility that the economy will create net jobs in March, the Federal Reserve is thinking about redefining full employment for the U.S. economy.
And as you might suspect, the Fed isn’t talking about raising the bar.
Yesterday Charles Evens, president of the Federal Reserve Bank of Chicago, told a conference that the Fed is considering changing the definition of full employment from an unemployment rate of 4.75% to an unemployment rate of 5.25%.
So why does full employment mean an unemployment rate of 4.75% or 5.25% anyway?
Because economists at the Fed know that even when the economy is running full out some people are unemployed at any point in time because of the normal churn of hiring and firing. Exactly where that normal level is, however, is a judgment on the changing characteristics of the economy.
Right now economists at the Fed are debating whether the economic speed limit for the economy will be lower in the years ahead than it has been in the past and whether that plus an increasing mismatch between the skills in demand and the skills of laid off workers mean that it will take longer for unemployed workers to find new work. An increase in the duration of unemployment and job hunts would mean that number of people out of work at any point in time would rise.
The U.S. economy has seen as big increase in the duration of unemployment during the Great Recession. More than 40% of the unemployed have now been out of work for more than six months.
The question for economists at the Federal Reserve and elsewhere is whether this increase in the duration of unemployment is just a result of the recession or a signal of some more permanent change in the U.S. economy.
If the Fed is talking about increasing the definition of full employment—to 5.25% from 4.75%–you know where it is coming down on that question.
rolfer1,
Jim may correct me on this, but I think regional banks do more small business loans than private VC firms do (or at least they did before the recession).
It should be noted there are different kinds of small business loans too, not just start-up loans. For example, floorplan loans allow a small company (for example, an auto dealership) to finance their inventory at reduced rates (or no rates in some cases) for a short period of time, after which the rates go up. If the business can sell their inventory (more commonly referred to as “turning” it) before the rates increase, then they don’t have to worry about the financing (they pay off their principal and pocket their profit). By doing this, it allows the small business to keep their own capital from sitting in their inventory, allowing them to do other things, such as hiring more workers.
Jim & EdMcGon, et. al., – Aren’t most venture capital firms private and don’t they invest in high-risk/potentiall high-reward start-ups, like silicon valley type firms? VC firms don’t really lend to what most consider “small business” — small service or supply firms, for example, do they?
Also, local and regional banks have A LOT of commercial loans on their books — loans to small businesses that used their real estate as collateral. A lot of these loans are underwater resulting in these banks having to restrict new lending.
IMO the current “talk” about commercial loans and derivatives therefrom as being such a “minor”/”small”/”controllable” problem reminds me a lot of the similar talk in 2007 about CDOs and residential RE loan derivatives… we’ll see, I suspect many of these local and regional banks are going under (and will represent a great buy for the bailed-out huge, multi-national banks…)
Jim,
I agree there’s more than one cause for the lack of capital out there, and government debt is only one. But taking your banking example, remember when the government increased the reserve requirements on banks? The overwhelming majority of a bank’s reserve money is in…government bonds (the safest investment around, which no government regulator would ever question).
That’s why banks laugh when you ask them for a small business loan.
On a side note, that’s also why a lot of the stimulus money never hit the economy. That’s also why I’m not convinced we’ll see runaway inflation soon (although it is still lurking out there).
There are still venture capital companies out there specializing in mezzanine financing for small businesses (PSEC is my personal favorite, which I’ve been watching for a good price to buy). But where do companies like that get capital from? Private investors are sitting on the sidelines waiting to see what their tax burden will be from the new healthcare bill (as Nancy Pelosi says, we won’t know what’s in it until it passes!). As we know, banks won’t lend (another problem is them sitting on cash waiting for opportunities to vulture good business from failed bank portfolios being handed over to the FDIC).
Granted, I over-simplified the government debt problem. But as you can see, at every turn, there is government’s hand in the mix, sucking up venture capital. Whether it is through debt, regulation, or just simple fear of unknown future government actions, venture capital is not making it to the small business sector.
Of course! After revising the definition of “unemployment”, Mr. Obama can say he “created” jobs. All the ignorant buffoons will fall for it. The Progressives have a fantastic talent for redefining words to their benefit; look throughout their history.
yea they had said in the 90’s that unemployment was so low that people that shouldn’t have been working were working.
Living in Charlotte NC forever I don’t think this city has ever been this slow. Can you believe the bank is fixing up the house next door to sell it.
Jim,
You hit things right on the head here about the small business lending. This is where I think we really see the SLOW recovery. Research shows larger companies recover a bit quicker than smaller businesses. Right about the time in this recovery we expect to see acceleration we are looking at not getting the fuel to keep the fires burning. (Is this on Jim’s worry list??).
Now we turn to capital financing……. Where was most of the capital going over the last 5 years???? Housing….. That leaves a lot smaller pool of cash.
Where’s the growth coming from? Companies that create a ton of cash and have high ROIC (Jim is WAY ahead of most people’s thinking here). This companies I think will have HUGE outsized returns for the next 5 years.
If the Fed were to change its view of “Full Employment” to 5.25 (or 5 or 6) from 4.75, and Full Employment being one half its mandate, it could justify increasing rates sooner than later- by pointing out we’re closer to the full employment it seeks.
Seems counter-intuitive in an institution hell bent on keeping rates low “for an extended period.”
I wonder whether this is one of Bernanke’s creative solutions to removing liquidity without actually removing it- simply hinting it will move in the hopes that the market reacts.
EdMcGon, I think yhou’ve conflated a number of different capital markets. From my experience covering institutional venture capital, from investing in a small business (So far a non-profit–You know the sign: “We’re a non-profit but we didn’t plan to be.”), and a small business owner myself, let me tell you that the different pieces have almost nothing in common. Institutional VC has gone through a rough patch because no one wants to put money into a private company if they can’t get it out–a healthy stock market sure helps. Small businesses are mostly funded with debt. Try walking into a bank these days and asking for a small business loan. Most bankers laff. (I’ve actually found one that says they’re looking to put money to work. One.) M ost banks that do this kind of lending–and we’re not tallking JPMorgan or Goldman here–are still shrinking their balance sheets. I think the stuff that’s ben proposed to increase lending to small businesses has been woefully inadquate so far. If yo wanted to start up a company weatherizing houses right now, you’d be hardpressed to get a loan. If jobs are so important–and restoring manufacturing is so importnat–and I think they both are, then we should sink real money into small businesses in these areas.
Here’s an interesting chart showing federal witholding taxes collected:
http://www.dailyjobsupdate.com/
It is not adjusted/messaged/estimated, just data and very sobering to see the drop off the cliff in 2008 on
I’m surprised no one has mentioned the 800 pound small-business-stimulating gorilla in the room: capital. More specifically, as the government keeps increasing it’s debt, it is sucking money out of the venture capital markets. Why loan money to Joe Shmoe for his small business which might go belly up, when you can buy treasury bonds?
Granted, that’s an extreme example, but you get the point. Government debt DOES have an impact on the economy.
We need to spend more time studying the “cause and effect” of each one of our decisions here as well…… I see a lot of things people are wishing for which would create an entirely different set of problems…..
I’m with everyone that lower taxes are better to stimulate business…. Some point we have to have higher taxes… But there are also great ways to stimulate business that the government/the people need to look at…… The regular fix here isn’t going to work
Domino412
Wasn’t there a census worker who was murdered KKK style in TN? This may be having some effect on applications in your area.
Concerning UI benefits, they may be reasoning that cutting benefits might contribute to worsening in other parts of the economy —- for instance increased mortgage foreclosures.
jaristrunk
Jim’s comments are about the Federal Reserve changing what they consider full employment. I don’t believe the current adminstration has control over what the Federal Reserve does. The chairman is nominated by the current administration but has to be approved by Congress. These guys are bankers/economists that don’t take orders from the Excutive Branch of government. I agree that providing tax incentives for small businesses would be beneficial to the employment numbers.
Or the government could be trying to create a more accurate picture and more realistic expectations.
If what is deemed full employment is recognized to be fewer workers as a share of all who want to work (and thus a higher unemployment rate) for the reasons stated in the post (because more workers with archaic skills take longer to upgrade their skills or never do and stay unemployed a lot longer as a result), then there needs to be recognition that these people are going to need assistance. With or without government assistance, these people are poor.
Or we can criminalize poverty- tell them they’re on their own, wait for them to become thieves, and then put them in prison forever. That’s been California’s approach the last 20 years or so.
The prison guards are making a fortune. The LOOOOOOOOOOOVVVVVVVVVVEEE this approach.
But us taxpayers, not so much. But perhaps it will work better in your state.
I’d rather have the government tell it to me straight so as a body politic we can come to some consensus (okay, stop laughing) on how to handle. Notably, the European Union members consider full employment to be closer to 8 or 9% than 5%. Good or bad, they’re at least being honest about the problem.
Those unemployed by choice are generally too old and feeble to work, wealthy enough not to work (including the Paris Hilton’s of the world) or living in a park.
Domino412,
Your are right on the money (no pun intended). The current administration would rather appear to be “changing” the current employment problem than do what is necessary to stimulate business (keep the tax rate down) which would make a more permanent improvement.
They want to extend the UI benefits till the end of the year..is this not the third time they have done this? If I remember correctly, the last time they extended, they said that was the absolute last time. How long will this nonsense go on? If things are getting better, why bother. And another thing, the Census Bureau says (in my area anyway(TN) that they are having trouble finding applicants. If the gov’t has jobs, why not offer those on Unemployment, a census job. If they refuse, cut the benefits. I applied for a census job, but figured later that I was probably not qualified since I am not fluent in Spanish. Oh well…
Jim,
Would it be possible or useful for you to do an update on your “What me worry” (5 reasons to worry) blog?
A couple of the “5 reasons to worry” seem to have (For the moment) receded, and others still seem valid on a 6 – 10 month horizon. I was wondering how your opinion on that blog and the 5 risks that you outlined may have evolved.
Perhaps the difficulty is in my wording. When I say “fed” I am referring to the government et al. Not the federal reserve.
My point is, are these numbers simply changing so that the fed can look better, or will they also sit down and say If we are going to “move the goal post” on this number, it is a defacto recognition that we (Federal, Congress, state and businesses) must also recognize that unemployment benefits are no longer doing the job that they were intended to do. Another words, in the interest of fairness, they should recognize that what’s “good for the goose, is good for the gander”.
southof8,
I’m talking about the Federal Reserve, not the federal government (although I have heard reasonable arguments they’re both one and the same).
My blog is at: http://politicsandpigskins.blogspot.com/
However, I don’t update it as much as I should. Frankly, I’m pretty fed up with our current government. We threw out one set of bad politicians and replaced them with worse ones. I’m just too disgusted to regularly complain about it.
southof8… Ed’s point is that the Fed does not control the length unemployment insurance is paid. That is decision by Congress & POTUS. Same with stimulus funds, the Fed has no direct control.
Ed, I disagree. A huge chunk of the stimulous package was direct grants to states to fund extended unemployment benefits. Remember the golden rule…
Where do you blog?
This reminds me of a street in downtown Atlanta that had a terrible reputation for crime, drugs and prostitution. The city could never clean it up, so they changed the name.
DJ,
Keep in mind, the Fed has no control over unemployment insurance.
Remind you of the Consumer Price Index?
If they do change it, I wonder who will be the first to trot it out in a press conference to declare victory over unemployment in, say, 2020.
If they are acknowledging that employment/employment cycle (And it has become a cycle for a significant number of folks out there) has fundamentally changed, and are looking at moving the “fully employed” status to 5.25 to reflect that, are they also willing to extend normal unemployment insurance to something more than the traditional 6 months ? Or is this simply an exercise so that their own numbers look better?
Personally, I think that deck chair looks better over here. Now excuse me, I have a request for the band…