Greg Ip

Unions are winning again in Washington, but the big fights are still ahead

Getty Images

[Greg Ip] THREE years ago, when negotiations with the union representing air-traffic controllers reached an impasse, the administration of George Bush simply imposed a deal that froze salaries, slashed entry-level pay and even set a dress code. Barack Obama, then a senator, sponsored a bill to send the parties to arbitration, without success at the time. As president, Mr Obama ordered talks to resume. In late September, with the help of the arbitrators, the union got its new contract: 3% annual pay increases, higher starting pay and the right, once again, to wear jeans.

Ronald Reagan’s mass firing of illegally striking controllers in 1981 came to signify a turning-point in the fortunes of organised labour, whose share of private-sector workers has fallen to a new low of 7.3% so far this year (see chart). It is tempting to see the controllers’ new deal as marking a turning-point in the other direction. Read the rest of this entry »

A slump in September prompts thoughts of new stimulus

[Greg Ip] AFTER riding a wave of improvement since the spring, the economy stumbled in September according to the latest figures. Non-farm employment sank by 263,000, which was 62,000 more than in August, and the unemployment rate rose by 0.1% to 9.8%. Car sales tumbled as the federal “cash-for-clunkers” programme expired. Manufacturing activity cooled a bit.

All this is probably an air pocket; overall economic output almost certainly began to rise in the third quarter of the year and employment will eventually follow. Leading indicators such as the stockmarket and new claims for unemployment benefits are signalling recovery. But it is taking a painfully long time. Read the rest of this entry »

Pummelled by recession, manufacturers face an uncertain future

[Greg Ip] AFTER the worst slump in modern memory, American factories are showing signs of life. Manufacturing production rose in August for the second straight month, and a survey of purchasing managers says new orders are rising briskly.

Yet manufacturers remain gloomy. Both output and employment are down 15% from the start of the recession in December 2007, far more than overall GDP and employment. Shipments collapsed when the near-paralysis of the financial system a year ago caused businesses worldwide to cancel orders and run down their stocks. On September 15th Dan DiMicco, head of Nucor, a steel company, said operating rates would be higher in the third quarter than the second, but only because of inventory replenishment. “Real demand is in for a long, slow recovery,” he said. Bad as this year has been, John Engler, president of the National Association of Manufacturers, a trade group, says many of his members “think next year will be worse”. Read the rest of this entry »

Smaller nest-eggs enhance a long-term trend to later retirement

[Greg Ip] IN TERMS of output, America’s recession may be showing signs of ending; but it retains its painful grip on the labour market. Non-farm employment fell in August by the smallest amount in a year in absolute terms (though by a still-horrid 216,000); but the unemployment rate nevertheless rose, to 9.7%. That is up almost five percentage points since the recession began in December 2007.

One group, however, is so far looking a bit less gloomy. The number of people aged 55 and over who are in work has climbed almost 4%, or by nearly 1m, since the recession started, even as employment of young and middle-aged workers has fallen sharply (see chart). Read the rest of this entry »

The original article is linked here.

GREG IP plus another Economist correspondent

The economy may be pulling out of recession but unemployment is still surprisingly high. Celebrations should be delayed

Illustration by S. Kambayashi

WHEN Barack Obama visited Elkhart, Indiana, in early February, a few weeks after his inauguration, it was a sombre affair. In the previous 12 months the area’s unemployment rate had more than tripled to 18.3 %. The president pleaded for the passage of a massive fiscal stimulus, insisting that “doing nothing is not an option.” By the time he returned to Elkhart on August 5th he was quite a bit sunnier. Local factories are “coming back to life”, he proclaimed. A few days earlier he had declared the economy to have done “measurably better” than expected.

Mr Obama’s good spirits are well grounded: America’s recession appears to be coming to an end. Read the rest of this entry »

The original article is linked here.

By Greg Ip

Can America wean itself off consumption? The first of a series on how the world’s four biggest economies must change to ensure sustainable global growth

GENERAL ELECTRIC has historically been a manufacturer, but in the long boom leading up to the financial crisis it became more like a bank. Half its profit came from its finance arm, GE Capital, which among other things had a lucrative business issuing mortgages and credit cards to American consumers. GE’s chief executive, Jeffrey Immelt, now talks like a man chastened. With GE Capital acting as a drag on the company, he vows that in the future finance will be a smaller part of the company. In its place GE touts its manufacturing and exporting prowess. Mr Immelt boasts of record aircraft engine orders at the Paris Air Show in June, none of them to American airlines.

Like GE, the entire American economy is at an inflection point. For decades, its growth has been led by consumer spending. Read the rest of this entry »

The original article is available here.

Employees are proving stoical in the face of pay cuts and compulsory unpaid leave

Illustration by David Simonds

BACK when times were better and the newspaper industry wasn’t fighting for dear life, reporters at the Cleveland Plain Dealer would regularly grumble at the measly pay increases their union negotiated. Last month, when the union announced it had negotiated a 12% pay cut in exchange for a promise of no lay-offs, there was applause. “It took me aback,” says Harlan Spector, a medical reporter and one of the negotiators.

Like many long-standing economic relationships, “wage stickiness” is being tested by the savagery of the recession. Read the rest of this entry »

Reasons to temper pessimism, but not to delay action in America

AP

IF BARACK OBAMA grows tired of being president, he might have a future trading bonds. On Thursday January 8th he predicted that data would show that America had lost more jobs in 2008 than at any time since the second world war. An official report published on Friday confirmed precisely that. Non-farm payrolls plunged by 524,000 in December from November, and the picture was made darker by downward revisions of 154,000 to the previous two months. That brought the loss of jobs since the recession officially began in December 2007 to 2.6m, the largest 12-month drop in absolute terms since the aftermath of the war.

The unemployment rate has jumped from 6.8% to 7.2%, a 16-year high, far above economists’ already dire predictions. It is up from a low of 4.4% in early 2007. Throw in discouraged workers who have given up looking for work and those working part time who would prefer full-time work, and the “under-utilised” employment rate is 13.5%, up from a little over 8% in early 2008.

It is easy to begin fearing that not only will this be the worst recession since the Great Depression, it may be another depression. Yet two reasons exist to temper the pessimism. First, while the magnitude of job loss represents a lot of misery, the American labour force is some two-and-a-half times larger than it was right after the war. The 1.9% drop in employment last year was smaller than the 2.7% 12-month declines recorded at the depths of the 1974-75 and 1981-82 recessions. As a new database from the Federal Reserve Bank of Minneapolis helpfully shows, (see Free Exchange), the percentage decline so far in this recession is exactly equal to the median decline at this stage of the ten post-war recessions.

Whether this remains a median-scale slump depends on what happens next, and the prognosis remains grim. David Greenlaw, an economist at Morgan Stanley, predicts that job losses will continue on the scale of the past few months until around April. “There was a very significant and unusual turn in the economy in September-October when…credit markets were most tight. The consumer stopped buying cars, planned for a weaker Christmas, companies stopped ordering and started looking where they wanted to cut employment…we are in for several more months of this kind of deterioration in overall economic activity.” He sees the unemployment rate reaching 9.5% by the end of the year.

Another reason to temper pessimism is that the earliest leading indicators, which are in the financial markets, have turned up. Stockmarkets bottomed in November and have since trudged higher, although they fell after Friday’s employment report. Spreads on corporate debt have narrowed since then, and on interbank loans even more so. To be sure, that is in large part thanks to the extension of federal guarantees to much of the financial system, but that demonstrates how rescue measures are getting some traction. Mortgage rates have tumbled on the purchases by the Treasury and the Fed of mortgage-backed securities (MBS), so waves of refinancing, which boosts consumer cash flow, and a rise in home sales, are not far off. “On the margin I’m less bearish on the economic outlook,” says Nancy Lazar, an economist at ISI, an investment group. Her favourite indicator is the broad money supply, which has grown at around a 20% annual rate in the past three months.

Pessimists would note that the Federal Reserve, having cut its short-term interest rate to zero (in effect), is out of conventional ammunition. It is using tools such as open-market purchases of MBS whose stimulative effect is far less certain. But that uncertainty may be symmetric: the impact of these unconventional policy instruments may be larger or smaller than is commonly thought. There is no useful history by which to judge.

All that said, being less bearish is not the same as bullish. Ms Lazar notes that employment fell for more than two years in the past two cycles, and there is no reason to expect differently this time, even if output stops contracting by the end of this year.

More important, the rally in the financial markets in great part reflects anticipation of aggressive action to be taken by Mr Obama, such as $775 billion in fiscal stimulus, and the Federal Reserve, such as Treasury bond purchases. If they do not deliver, those gains may easily be unwound. “The situation is dire, it is deteriorating, and it demands urgent and dramatic action,” Mr Obama said after the release of Friday’s data. That is not just a political talking point: a gimlet-eyed bond trader would say the same.

The benefits awaiting America’s unemployed are outdated and skimpy

COMPARED with the systems in other industrialised countries, the American unemployment-insurance (UI) scheme pays lower benefits for less time and to a smaller share of the unemployed. In expansions this encourages the jobless to return quickly to work—and unemployed Americans do indeed work harder at finding jobs than their European counterparts (see chart). But in recessions, when there is less work to return to, it causes hardship. Like America’s training system, UI is ripe for attention from the incoming Obama administration.

Like much of the social safety net, the current UI system was a product of Franklin Roosevelt’s New Deal. States were prodded to provide benefits in accordance with federal guidelines; in return the federal government paid their administrative costs. But the system has not kept up with changes in America’s labour force.

States often require beneficiaries to have worked or earned an amount that disqualifies many part-time and low-wage workers. They also disqualify people seeking only part-time work—even though many people now work part-time for family reasons. Benefits typically last for only six months, more than enough time to find a new job in normal times but not in recessions. Extended benefits kick in automatically when unemployment reaches certain thresholds, but those thresholds are so high that they are almost never triggered.

Congress therefore has to pass special legislation to extend benefits, as it did twice last year, but political wrangling often delays such action. In the week that ended on December 20th, 586,000 workers filed a first claim for unemployment benefits, the largest number for 26 years. Yet such claimants are, in one sense, lucky: typically, 60% of unemployed people don’t qualify for the benefits at all.

Unemployment insurance is one of the economy’s most important automatic stabilisers, helping to maintain household purchasing power when the economy weakens. But that role is impaired by the short duration of benefits and their skimpy level. At just under $300, the average weekly benefit is less than half the average private-sector wage. Mississippi’s maximum benefit of $230 is not much more than the federal poverty threshold of $200 for an individual. Benefits are low, in part, because they are financed by payroll taxes that states levy on their employers. States don’t like to raise such taxes, even when times are good. But that means they lack the funds to pay benefits when times are bad, forcing them to raise other taxes or borrow from the federal government, as some 30 states are now considering.

One of the best features of America’s system is “experience rating”: employers that frequently lay workers off must pay higher payroll taxes, thereby discouraging such lay-offs. But according to Alan Krueger of Princeton, many states have neutered that feature by charging most employers the lowest tax rate.

Several moves are afoot to mend the flaws in the UI system. Under a bill put forward by Jim McDermott, a congressman from Seattle, the government would offer cash incentives to states to expand eligibility to part-time workers and make the benefit formula more generous. A second bill would significantly expand eligibility for the 46-year old Trade Adjustment Assistance programme, for example by including service-sector workers and providing more generous benefits. Both measures passed the House of Representatives but stalled in the Senate. As a senator, Barack Obama backed both. As president, he might make them reality.