Mark Zandi now predicts that the job market will come back at a much stronger clip than he previously expected, with the jobless rate under 8% by the end of 2012 and under 7% by the end of 2013. Zandi is the guy who predicted a bottom in housing prices in 2008, 2009, 2010 and 2011. One of these days he may be right, and all of Washington will hail his analytical acumen.
In fact, he may even be right about the labor market. First-time jobless claims came in last week at the lowest rate since April 2008. Indicators show a mildly higher consumer sentiment, a slight pickup in manufacturing and decent, if sometimes mixed, signals from small business. The expectations are for another 200,000-plus jobs report tomorrow morning.
So Zandi may actually have nailed this one. But yet. There is a persistent pessimism from economic analysts, based not only on potential headwinds (Europe, gas prices or supply shocks), but because of a run-up in economic activity from mild weather in January and February and a buildup of inventories. Most forecasts have a slowing of growth later in the year, although that’s precisely what Zandi is breaking with in his new forecast.
For a representative version of this argument, consider Betsy Stevenson and Justin Wolfers, from Bloomberg:
Consider the current economic-policy debate. Most forecasters suggest that as the recovery slowly grinds on, unemployment will fall to about 7.5 percent by the end of 2013, from the current 8.3 percent. While this isn’t great progress, it is fast enough that some have argued against further stimulus.
We know, though, that the consensus forecast is highly likely to be wrong. Unemployment could fall to 6.5 percent, or rise to 8.5 percent. Each of these possibilities needs to be considered, and weighed according to its potential benefit or harm.
If unemployment falls to 6.5 percent, there’s no overwhelming reason for concern. Historical experience suggests that inflationary pressures are unlikely to build unless the jobless rate drops to 5 percent or 6 percent. Even if inflation does accelerate, the Fed has ample power to reverse course by raising interest rates to slow growth.
By contrast, the longer-run consequences could be dreadful, if we find ourselves with 8.5 percent unemployment fully six years after the recession began. Europe’s experience in the 1970s and 1980s demonstrated that persistently high unemployment can become entrenched, leading to further unemployment in the future — a process economists call hysteresis. Skills atrophy, hope fades and people lose contact with the networks that can help them find work. If this occurs with the millions of U.S. workers who have been without jobs for more than a year, it will be costly and very difficult to undo.
The point here is that you almost have to err on the side of doing more in order to avoid the worst-case scenario. That is what we have not done over the past few years. With the current Congress, it’s unlikely fiscal policy will change its trajectory. But it’s worth knowing that the cost of doing too little is far higher than the cost of doing too much. A recent paper from no less than Larry Summers (with Brad DeLong) showed that. In a “liquidity trap,” basically when interest rates are up against the zero lower bound, Summers and DeLong found that more fiscal spending helps an economy in BOTH the short run and the long run, for many of the reasons described by Stevenson and Wolfers.
There are two policy choices, in other words. We live with the status quo and hope that the analysis actually undershoots the mark. Or we prepare for the worst while expecting the best. Actually, the third choice is to undermine the recovery with sharp fiscal cutbacks. We’re seeing how that budget-cutting strategy is working in the states and in Europe. The answer: not well.