Ben Bernanke made a speech today about the economy and the labor market that I’ve seen variously described as too pessimistic and too optimistic. I think both sides are right. You can see that in the first paragraphs:
My remarks today will focus on recent and prospective developments in the labor market. We have seen some positive signs on the jobs front recently, including a pickup in monthly payroll gains and a notable decline in the unemployment rate. That is good news. At the same time, some key questions are unresolved. For example, the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion. What explains this apparent discrepancy and what implications does it have for the future course of the labor market and the economy?
Importantly, despite the recent improvement, the job market remains far from normal; for example, the number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above what most economists judge to be its long-run sustainable level. Of particular concern is the large number of people who have been unemployed for more than six months. Long-term unemployment is particularly costly to those directly affected, of course. But in addition, because of its negative effects on workers’ skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy.
Bernanke then brings up the structural vs. cyclical unemployment debate, whether long-term unemployment comes from weak demand or mismatched skills. And Bernanke comes down on the side of weakness in aggregate demand. “Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.”
The problem is that many believe that the Fed’s monetary policies have not been accommodative enough to match the deep hole in economic performance. The other reason some became alarmed by Bernanke’s speech is that he accurately but incompletely touted the labor market recovery, with its 250,000 increase in private market jobs on average over the past three months. Bernanke goes through all the positive indicators and only at the end gets to the negatives, like the 5 million payroll jobs below peak, the still-elevated unemployment rate, and most importantly the shrinkage of the employment-population ratio and the labor force participation rate. Brad DeLong thinks that Bernanke is “preparing to declare victory,” and that “To transform cyclical into structural unemployment is not a victory for policy.”
But Bernanke is on the side of those who believe we’re still in a cyclical unemployment condition. And he clearly points the finger at weak demand. So I cannot get too riled up by his speech.
I think the larger issue is that it’s hard to talk accurately about such a slow recovery. You’re always going to be seen by hawks as too optimistic and doves as too pessimistic. That presents challenges for policy. But on the merits, I think clearly it’s not time to kick out the supports holding up this slow recovery, and in fact it’s time to buttress them. When Larry Summers and I are in agreement it’s a rare moment, but he’s right:
Such recovery as we are enjoying is less a reflection of the natural resilience of the American economy than of the extraordinary steps that both fiscal and monetary policymakers have taken to offset private-sector deleveraging — a process that is far from complete. A convalescing patient who does not finish the full course of treatment takes a grave risk. So too the most serious risk to recovery over the next several years is no longer financial strains or external shocks but that policy will shift too quickly away from maintaining adequate demand toward a concern with traditional fiscal and monetary prudence.
The recent Summers/DeLong paper even argues that additional stimulus can have a net GDP and lower deficit benefit, while an imposed contraction could make both worse. Even Summers, in the course of this, says that there are signs that this recovery may hold. So with this “better but not good enough” recovery you cannot help but equivocate.