The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 27, 2010

Real estate and municipal revenue

In September, the Federal Reserve Bank of Atlanta's Center for Real Estate Analytics sponsored a conference to examine the impact the real estate downturn is having on public sector finances.

It's no secret that state and local governments are currently experiencing substantial revenue declines. One popular explanation is that deteriorating local real estate conditions are responsible for a portion of that decline, but it turns out that this explanation is not the main cause, at least not yet. One of the sessions in the conference featured attempts by three economists from the Federal Reserve Board of Governors (Lutz, Molloy, and Shan) and two from Florida State University (Doerner and Ihlanfeldt) to estimate the direct impact of the decline in real estate values on local tax revenues. Both papers examined the multiple channels of influence between the decline in real estate values and local revenues.

The largest channel, of course, is the decline in property tax income related to declining assessed property values. Of course, property owners don't pay property taxes based on the current value of their home. They pay based on an assessment that is at least a year old. Thus, the decline in property values takes considerable time to work its way through the assessment process and into property tax revenues. Consequently, declines in property values have only more recently started to be reflected in lower property tax revenues. Experts expect the decline in those revenues to continue for another couple of years, with the worst shortfall two or three years out. Some of the assessments are fairly gloomy.

To illustrate that point, I've pulled a few charts from the Lutz, Molloy, and Shan paper. The first chart illustrates the decline in revenues led by individual and sales taxes. Notably, property tax collections grew at an increasing rate in 2009 over 2008.


The next chart directly depicts the relationship (or the short-run lack thereof) between housing price growth changes and property tax revenue. Lags in changes in assessments and the ability of local governments to change property tax rates can go a long way in explaining why overall property tax revenue continues to grow.


Finally, Lutz, Molloy, and Shan broke down the data by some states, and I include the case of Georgia below. (The Ihlanfeldt and Doerner paper does something similar—and in great detail for the state of Florida.) The Georgia case clearly shows the effect of the lags: property values rose through the first part of the last decade and, even though tax rates were falling, overall tax revenue rose. Post-2007, however, market values of homes declined while the aggregate assessed values continued to rise through 2009 (along with property tax revenue).


It is hard to imagine the trend of aggregate increased assessed valuation continuing. If the assessed values begin to track the market values, pressures will emerge on the government entities that depend on property taxes. The picture suggests that tax rates and/or spending on programs are likely to change notably during the coming few years.

By Tom Cunningham, vice president and associate director of research and acting director of the Center for Real Estate Analytics at the Federal Reserve Bank of Atlanta

October 27, 2010 in Economic Growth and Development, Fiscal Policy, Taxes | Permalink


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I think many, if not all, munincipalities change the mill rate of the tax assessment to collect the tax revenue needed. As in, they take their budget and divide THAT by the new lower total property values in the district to arrive at the new (higher) rate of individual parcel tax liability, so a lower property value does not necessarily mean lower taxes! Lower tax revenues are the result of income, sales, and other taxes, not property taxes.

Posted by: Thrill | November 01, 2010 at 01:22 PM

I disagree Thrill. I think that this is a fantastic post. In Illinois, virtually all property tax revenue goes to pay for local schools.

When a house is valued at 500k and resells at 300k, the property tax won't remain the same. Government revenue should decrease.

Posted by: Jeff | November 04, 2010 at 07:53 PM

You would only get a 3 BR if there were one male and one female child. Bear in mind, as well, that you may not get any voucher at all, if your area has a waiting list. The funding for Sec 8 is not unlimited, and it's generally a 'first come, first served' situation. There are many Sec 8 areas of the country in which the lists are so lengthy that they aren't even accepting applications.

Posted by: Poplar Bluff Real Estate | November 08, 2010 at 06:59 AM

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October 20, 2010

A good time for price-level targeting?

Though the idea arises periodically, interest in price-level targeting is a hot topic again thanks to recent comments from Federal Reserve Bank of Chicago President Charles Evans. The essence of Evans's approach (and described in his own words) is this:

"If the Federal Reserve decided to increase the degree of policy accommodation today, two avenues could be: 1) additional large-scale asset purchases, and 2) a communication that policy rates will remain at zero for longer than ‘an extended period.'

"A third and complementary policy tool would be to announce that, given the current liquidity trap conditions, monetary policy would seek to target a path for the price level. Simply stated, a price-level target is a path for the price level that the central bank should strive to hit within a reasonable period of time. For example, if the slope of the price path, which I will refer to as P*, is 2 percent and inflation has been underrunning the path for some time, monetary policy would strive to catch up to the path: Inflation would be higher than 2 percent for a time until the path was reattained. I refer to this as a state-contingent policy because the price-level targeting regime is only intended for the duration of the liquidity trap episode."

The challenge presented by short-term interest rates near zero is one clear motivation for this policy proposal. Again, from President Evans:

"Risk-free short-term interest rates are essentially zero. Both households and businesses have an excess of savings relative to the new investment demands for these funds. With nominal interest rates at zero, market clearing at lower real interest rates is stymied."

By allowing inflation that is "higher than 2 percent for a time," inflation-adjusted short-term interest rates would fall, presumably moving real interest rate close to their market-clearing levels.

President Evans contemplates implementing the price-level targeting approach for "the duration of the liquidity trap episode," after which the Fed's objective would revert to a straight inflation target. Many believe a permanent price-level targeting approach, however, has a lot to recommend itself as an ongoing policy framework. The case rests on the presumption that, in the longer run, the goal is to limit uncertainty about the purchasing power of money, thereby reducing the risk premium associated with inflation volatility and lowering the real cost of borrowing. In principle, a price-level target is a stronger commitment to this goal than is an objective based on a target for the inflation rate.

Consider, for example, an annualized inflation target centered on 2 percent, with 1 percentage point tolerance range on either side of that target. This approach would be similar to the policy framework of the Bank of England, which describes the 1 percentage point tolerance level this way:

"A target of 2% does not mean that inflation will be held at this rate constantly. That would be neither possible nor desirable. Interest rates would be changing all the time, and by large amounts, causing unnecessary uncertainty and volatility in the economy. Even then it would not be possible to keep inflation at 2% in each and every month. Instead, the MPC's [Monetary Policy Committee] aim is to set interest rates so that inflation can be brought back to target within a reasonable time period without creating undue instability in the economy."

That flexibility would inevitably be a part of any reasonable inflation-targeting approach, but it comes at a cost. Because the hypothetical objective does not preclude the rate of inflation running as high as 3 percent or as low as 1 percent for a string of several years, the acceptable variation in the price level grows as time expands:


Of course, a price level growing at 2 percent annually is exactly the same as a 2 percent inflation target if the target is hewed to too consistently. And that seems to be exactly the story of U.S. monetary policy over the past 15 years.

The following chart shows the growth of the PCE price index since 1995 (the blue line), shown with a hypothetical 2 percent price level target (the green line). The upper and lower red lines represent hypothetical tolerance limits (set to two standard deviations of the actual PCE price series over the period since 1995).


I have a couple of observations to make here:

One observation is that I chose the year 1995 to start the chart above because it roughly corresponds to that last major break in the U.S. inflation trend. This timing is also near the beginning of the period when the notion that Fed policymakers had in mind an inflation goal near 2 percent became conventional wisdom.

Although the upper and lower limits of the hypothetical price level target were, in a statistical sense, chosen to bracket most of the actual path of the price level, the bounds are quite tight: The price level has almost always been within 2 percentage points of the implicit 2 percent growth path. If you still wonder why inflation expectations have appeared so remarkably stable even in light of the impressive amount of monetary stimulus applied over the course of the past several years, part of the answer may well be in the chart above. In fact, if in January 1995 you bet that the PCE price level would be within 30 basis points of a target 2 percent price level path as of August 2010, congratulations. You're in the money.

A second observation is that President Evans presents his case for allowing some pick-up in the inflation rate by noting that the current price level would be low relative to a 2 percent target implemented as of the beginning of the past recession (December 2007). As the second chart makes clear, where the current price level is relative to a long-run path is clearly dependent on the starting point. If the initial conditions for the price-level target path were chosen well in the past, it would not necessarily be the case that the price level would be sitting well below the target.

To some, that observation might weaken the case for a permanent price-level targeting framework, as it would seem to remove some of the justification for a higher short-term inflation path that would assist in generating desirable short-term real rates when the zero nominal bound problem is in play. But as the chart above illustrates, a price-level target with reasonable tolerance bounds is quite capable of accommodating the sort of inflation outcomes that President Evans suggests will assist in promoting the recovery.

Some commentators have expressed concern that President Evans's proposal could encounter difficulties with credibility and communications as a shift is made from the price-level targeting period to a permanent phase that focuses on more familiar inflation rate objectives. Here's Jim Hamilton:

"Although communicating from the beginning what the exit strategy from the price targeting is supposed to be in specific quantitative terms might seem attractive, I worry it could run into a similar embarrassment as the infamous graph of the projected consequences of the economic stimulus package. Even in the best of times, the inflation rate will differ substantially from forecasts and policy objectives. And when the inevitable miss comes, one could imagine that the public would be less rather than more assured as a result of the Fed's specificity in communication."

Some potential benefits of simply sticking with a price-level target is that it (a) is clearly consistent with longstanding Federal Open Market Committee (FOMC) behavior (as attested to by the second chart above); (b) avoids a potentially confusing impression that the central bank is jumping from one framework to another to serve whatever is convenient at the moment; and (c) gives the public a clearer way to monitor if and when the long-term price-level objective is being compromised (as can be seen by comparing the implied tolerance bounds in the two charts above).

In a speech earlier this week, Atlanta Fed President Dennis Lockhart offered this view:

"I am also open to a move that I believe would strengthen the effect and compensate for potential risks of the policy action [another round of quantitative easing]—that move is the adoption of a more explicit inflation objective by the committee. I believe doing so might serve as a further step to ensure the anchoring of public expectations about long-term inflation and the response of the FOMC to adverse price developments. I consider a more explicit inflation target as something the public could easily understand, and I believe it would reduce uncertainty at a time when it is badly needed."

Making that "explicit inflation objective" a price-level target is an option some believe is worth considering.

By Dave Altig, senior vice president and research director at the Atlanta Fed

October 20, 2010 in Federal Reserve and Monetary Policy, Inflation | Permalink


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I wonder if the Fed could successfully cause people to use their pronouncements, as opposed to the actual inflation experience, when forming their inflation expectations. Especially since the Fed tends to use inscrutable language in their pronouncements.

Posted by: don | October 20, 2010 at 08:21 PM

Our excessive rates of inflation (especially since 1965), has been due to an irresponsibly easy monetary policy. Our monetary mis-management has been the assumption that the money supply can be managed through interest rates

Between 1965 and June of 1989, the operation of the trading desk has been dictated by the federal funds “bracket racket”. Even when the level of non-borrowed reserves was used as the operating objective, the federal funds brackets were widened, not eliminated.

Ever since 1989 this monetary policy procedure has been executed by setting a series of creeping, or cascading, interest rate pegs.

This has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless legal reserves, whenever the banks need to cover their expanding loans – deposits.

We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

The effect of tying open market policy to a fed Funds rate is to supply additional (and excessive, & costless legal reserves) to the banking system when loan demand increases.

Since the member banks seldom operated with any excess reserves of significance (since 1942), the banks have to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion.

Apparently, the Fed’s technical staff either never learned, or forgot, how Roosevelt got his “2 percent war”. This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between.

This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation.

The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort. This plus controls on prices and wages kept the reported rate of inflation down.

Financing nearly 40% of WWII’s deficits through the creation of new money laid the basis for the chronic inflation this country has experienced since 1945. Interest rates, especially long-term, would have averaged much higher had investors foreseen this inflation. This was reflected in the price indices as soon as price controls were removed.

There were recently 5 interest rates (ceilings tied to the Primary Credit Rate @.50%), that the Fed could directly control in the short-run; the effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE.

It is an historical fact. The money supply can never be managed by any attempt to control the cost of credit (i.e., thru interest rates pegging governments, or thru "floors", "ceilings", "corridors",
"brackets", etc). IORs exacerbate this operating problem. I.e., Keynes's liquidity preference curve is a false doctrine.

Instead, target the price-level.

Posted by: flow5 | October 20, 2010 at 08:44 PM

Wouldn't it be a lot easier if we let the markets determine interest rates? Meaning, the Fed no longer manipulates rates in any way. Is it a fair statement that the markets are infinitely better at determining rates than the FOMC? Why do 98% of economists today argue constantly about what the Fed should do with rates, instead of debating whether it should continue to be controlled? The same, predominant economic theory that continues to make suggestions on what needs to be done, is the same theory that put us in this position. I look forward to everyone's reply.

Posted by: The Albatross Avenger | October 27, 2010 at 05:08 PM

First, this is an excellent blog by Dr. Altig which discusses in an intelligent and open fashion a policy alternative which speaks to a pressing issue of the day. To raise this issue in an open forum is gratifying and invites comment.

Second, President Evans' suggestion should be adopted.

As described, price targeting has two aspects. First, it is an operational goal by which to determine whether the Fed is meeting its target. Second, it is a method of inducing economic activity by increasing expectations in a time of economic uncertainty.

We continue to face deflation in many segments of the economy. Deflaton is pernicious in discouraging businesses to invest in new undertakings, because they weigh carefully the risk that price drops could wipe out the best planning and care. Keynes wrote an essay in August, 1931, entitled, "The Consequences to the Banks of the Collapse of Money Values." He correctly observed that banks had become content to await better times to make loans, with "...a very adverse effect on new business. For the banks, being aware that many of their advances are in fact "frozen" and involve larger latent risk than they would voluntarily carry, become particularly anxious that the remainder of their assets should be as liquid and as free from risk as it is possible to make them. This reacts in all sorts of silent and unobserved ways on new enterprise. For it means that the banks are less willing than they would normally be to finance any project which may involve the lock-up of their resources." P.173, Essays on Persuasion. This certainly fits the situation today in the American economy.

A way to discourage this conduct by banks is to create the anticipation of a target inflation and then the fact of an achieved target inflation. Business planning becomes easier and banks have less to fear if the collateral they hold appreciates---modestly.

As to fear of the "infamous graph", the answer is to not make a graph and to emphasize that the Fed is not guaranteeing that these targets can always be achieved. Most people that understand the economy at all would understand that point.

Given how unlikely it is, on account of the election results of November, 2010, that there will be any fiscal stimulus through the creation of direct, increased government demand, it is time to do what can be done to ease the "liquidity trap."

The Fed is fortunately not tied to the electorate, by virtue of insightful design at its origin. The Museum in the Atlanta Fed's lobby has examples of Zimbabwe's hyper-inflation currency. For those inclined to more distant history, there is a real German mark from the 1920's , bearing a blue ink stamp affixed after the note's original printing, increasing its face value many, many fold. These exhibits are chilling reminders of the opposite evil of deflation. The Fed understands all of this and will not lead us to either extreme, an economy choked down by deflation or made inoperable by run away nominal values.

Posted by: mme | November 07, 2010 at 09:41 PM

I am no monetary expert, but wouldn't price level targeting only fuel more economic uncertainty and instability? My point is that if one year it's inflation on then inflation off won't capital flows be highly volatile across a bunch of different asset classes? Furthermore, isn't the majority of the deflation occurring now a result of decreasing costs, increased productivity and economies of scale among businesses of all types? For the last 3 decades or so employers have plowed money into IT, process improvement, and efficiency and now they have it. I say falling prices among consumer goods are a godsend to the American consumer. Falling financial asset prices are a terrible thing, but that is not really happening. I guess I am lost on why the FED is trying to reinvent the wheel. Every crisis need not carry with it economic experimentation.

Posted by: ShaunP | November 16, 2010 at 01:39 AM

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October 07, 2010

Using TIPS to gauge deflation expectations

In the recent Survey of Professional Forecasters, economists were asked to give their subjective probability of deflation during the next year. Specifically, they were asked about the chances that the quarterly consumer price index excluding food and energy (core CPI) will decline in 2011. According to the respondents, the probability of core CPI deflation in 2011 was only 2 percent.

This rather sanguine view of the probability of deflation is encouraging. But is it a view shared by noneconomists? While there are many sources used to measure inflation expectations, there aren't many that gauge inflation uncertainty or the risk of deflation. However, one might estimate a probability of deflation as seen by investors by exploiting the different deflation safeguards of a pair of Treasury Inflation Protected Securities (TIPS), which have about the same maturity date but different issue dates.

Here's the idea: A TIPS cannot pay less than its face value at maturity, so the principal repayment of a five-year TIPS issued today is not reduced if the five-year rate of inflation is negative over the life of the security. But a 10-year TIPS issued five years ago will have its capital gain from accrued inflation reduced if there is a net decline in the CPI over the next five years. As a result, part of the real yield spread between the 10-year and five-year TIPS issues should reflect the value of the better deflation safeguard of the latter security.

In a comment on a paper by Campbell, Shiller, and Viceira, Jonathan Wright derives a very simple formula for calculating a lower bound on the probability of deflation using this real yield spread. (The lower-bound formula is rm/ln(CPI5yr/CPI10yr), where r is the yield spread between the 10-year and five-year TIPS real yields, m is the number of years until the midpoint of the maturity dates of the two TIPS, and CPI5yr/CPI10yr are the levels of the NSA CPI on the issue dates of the five-year and 10-year year TIPS. These reference CPIs are available here. Deflation is defined as the level of the CPI being lower than its value on the issue date of the five-year TIPS.) Wright's calculation makes a number of simplifying assumptions, some of which are counterfactual, but it is easy to compute—almost literally a back-of-the-envelope calculation if you have two real TIPS yields in hand. The formula also has the advantage that it does not require any assumptions about the probability distribution of inflation.

To get exact probabilities of deflation instead of a lower bound, I developed a simple model for TIPS pricing. The model is an extension of the TIPS pricing model developed by Brian Sack. One has to make a lot of assumptions to derive these estimates—which you can read about in the appendix to this post (link provided in last paragraph)—but let's get to the main results. The figure below plots the probability that the level of the reference CPI on April 15, 2015, is lower than its April 15, 2010, level. (The reference CPI is the nonseasonally adjusted consumer price index interpolated to a daily frequency; it is calculated by taking a weighted average of the CPI two months ago and three months ago.) If the April 2015 reference CPI ended up below this threshold, then the deflation safeguard for the five-year TIPS would kick in. Also included in the graph is the lower bound of this "deflation probability" calculated using Wright's formula.


An alternative way of generating deflation probabilities is to exploit the estimated "confidence interval" from a forecasting model of inflation. When I use a variant of the inflation model proposed by Stock and Watson (for those interested in more detail, the model I am using is the Stock-Watson unobserved components with stochastic volatility, or UC-SV model), it says there is about a 10 percent chance that average CPI inflation over the next five years will be below zero.

Is this the last word on estimating deflation probability? Of course not; there are more than a few pitfalls in this method of calculating a deflation probability, some of which are described in the aforementioned technical appendix posted on the Atlanta Fed's Inflation Project. But this approach does have the advantage of exploiting information from market prices on traded securities. As such, it may prove a valuable addition to our toolkit of indicators. Consequently, we intend to update these estimates and post them on the Inflation Project web page every Thursday afternoon.

By Patrick Higgins, an economist in the Atlanta Fed's research department

October 7, 2010 in Forecasts | Permalink


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Even though point is pretty neat, personally I wouldn't rely on this too much. Liquidity of 5year TIPS markets would be higher now relative to the pre-crisis levels exactly for those same reasons you want to use it gauge deflationary expectations: it's a better hedge against significant medium-term inflation uncertainty.

Posted by: Dan | October 08, 2010 at 01:39 AM

I don't know who is included in the survey of economists, but I would put the probability that we will have deflation in 2011 at substantially above 2%.

Posted by: don | October 12, 2010 at 10:30 PM

I wonder if there's some reason that you don't simply calculate the value of the embedded floors in TIPS, and then use the delta of that option? It's not easy, as you can't use black-scholes and you have to first strip out seasonalities and such...but it's actually a market price rather than a strange economist view of a market price.

For that matter, why not just compute the delta of 0% ZC floors, which are quoted and trade in the market?

Interesting shorthand approaches, but it seems to me that if economists really wanted the market's view on this, they ought to calculate an actual number.

Posted by: Michael Ashton | August 24, 2012 at 08:23 AM

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October 01, 2010

What does "structural" mean?

On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart summed up one of the hot policy questions of the moment this way:

"A necessary debate is jelling on the diagnosis of our economic troubles and the appropriate prescription. As I think about it, there are three lines of argument. One argument maintains there is not enough spending occurring—in economists' terms, a shortfall of aggregate demand—and that this shortfall can be reduced by further stimulus. A second argument is that the economy is undergoing deep structural adjustments in industry composition, labor markets, and household finances, especially the level of debt, and these adjustments will take considerable time to play out. Finally, it can be argued that much of the uncertainty has to be dealt with in other areas of government, and monetary policy can't do much about this kind of problem. This characterization doesn't do full justice to the complexity of the matter, but it lays out in broad strokes what questions are in play."

In some quarters, the opinion seems to be that the debate is effectively over. On the day of President Lockhart's speech, Mark Whitehouse wrote this piece in the Wall Street Journal:

"In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. By some estimates, if openings were turning into hires at the rate they typically do, the unemployment rate should be about three percentage points lower than the current 9.6%....

"A new paper, though, suggests employers themselves are at least part of the problem. The authors—Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland—take a deep dive into Labor Department data and come up with an estimate of what they call 'recruiting intensity,' a measure of employers' vacancy-filling efforts including advertising, screening and wage offers.

"Their finding: Employers haven't been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate."

Paul Krugman made note of the same issue a few days earlier:

"Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared. Unemployment has surged in every major occupational category."

Whitehouse mentions a solution that comes from the Krugman (and many others') playbook:

"Depressing as it might seem, the finding is in some ways encouraging. It suggests that the trouble with hiring might be more a 'cyclical' function of low business confidence than a chronic, 'structural' ailment that will last for years to come."

The "low business confidence" part sounds right, but does that make the problem "cyclical"? I'm not so sure. Let's say an employer is reluctant to post a job opening because, just for example, the cost of the new employee potentially will expand by an amount that is unknowable until the details of healthcare reform legislation are clarified. Would you call that cyclical or structural? If "low confidence" reduces the search intensity of businesses, wouldn't it be reasonable to describe the resulting drop-off in job openings "structural"?

I think a reasonable answer comes down to whether the reluctance to create a job opening would be overcome by a pickup in business activity. But that may in turn depend on whether or not businesses think they can meet that demand by expanding productivity, something they have shown great aptitude for over the course of the past three years.

Maybe businesses have reached their capacity to grow through productivity gains rather than job creation. So maybe additional policy-induced demand will be enough to overcome the uncertainties that are clearly plaguing private decision makers. But I don't see that the evidence in hand so clearly tips the scales one way or the other.

By Dave Altig, senior vice president and research director at the Atlanta Fed

October 1, 2010 in Economic Growth and Development, Employment, Labor Markets, Productivity | Permalink


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The best way to think about the difference between cyclical and structural is whether unemployment (or demand) is price sensitive or not. A structural mismatch (between worker skills and jobs or productive capacity and good demanded) can not be address by changes in price (or wages in the case of labor.) Cyclical imbalances will correct themselves as prices of goods (and labor) adjust in the marketplace.

By this argument, cyclical problems don't require government intervention, but structural problems can be addressed by government programs. There is evidence that demand has not responded to the disinflation resulting from the large output gap, leading to worries about actual deflation. As I've said elsewhere, our problem seems to be structural underconsumption, that is a drop in consumption that is not sensitive to price adjustment.

Posted by: Rajesh | October 01, 2010 at 09:02 PM

What about the NFIB survey's massive uptick in businesses citing insufficient demand as their most pressing problem?

If you are going to say this is about uncertainty stemming from government policy, shouldn't you have at least a tiny shred of evidence?

Your reluctance to believe the insufficient demand story seems basically religious rather than factual.

Posted by: David | October 02, 2010 at 03:05 AM

It seems fairly obvious that the best standard for judging the differences between 'cyclical' and 'structural' unemployment is that which separates jobs into 2 simple categories: Those which are temporarily lost as a result of contraction, and those which are gone for good (hysteresis). This puts technological unemployment in the 'structural' category, and I recognize that there is some controversy regarding this categorization; but, the simple criteria of 'gone for good', or 'temporarily lost' aligns each category with what would apply in regards to the application of stimulus. One type of unemployment that does respond to counter-cyclical stimulus: 'cyclical unemployment' at least to a degree... while 'structural unemployment' would respond to a Keynesian type of stimulus much less favorably. Consequently, it would follow that this type of categorizing , which would require analysis of individual job markets (not sectors) by occupation, would enable forms of stimulus aimed more at training and relocation assistance etc.

What this simple categorizing does though is to bring immigration into the issue on the side structural unemployment. This of course has very significant political implications, but these implications, should not be allowed to distort the economic analysis,… but that of course is easier said than done.

I live near Killeen/Ft. Hood in Central Texas. This area has no shortage of jobs, relatively speaking. The classifieds throughout central Texas list a long and varied assortment of low-paying jobs.

However, by example, I know journeyman carpenters who are unable to find jobs at half of their previous wages in capacities ranging from janitorial to maintenance etc. What little work that is available to construction workers in this area is being done by Hispanic crews, mostly by contract. These crews do not consist of undocumented workers exclusively, but fluent Spanish is a must and racially mixed crews are rare.

Part 1

Posted by: rayllove | October 04, 2010 at 11:02 AM


So, immigration, both illegal and otherwise, is causing a significant amount of 'structural' unemployment that seems to be ignored in the macro-assessments. This type of structural unemployment, which clearly qualifies using the standard of hysteresis, would also be much worse if it were not for military recruitment. In our rural areas those coming out of high-school but choosing not to attend college have very few opportunities as things are, and if those being recruited were added to the existing labor surplus the shortfall would be similar to that during The Great Depression. The graduating class that included my son two years ago had about 15% to 20% of the males recruited into the military 'before' they graduated. How many others who either joined after graduating or after dropping out I don't know, but... of all of my son's immediate friends (12), 4 of them are currently serving. My son and 3 others out of that 12 are still in school and the remaining 4 are still at home, unemployed, but of course not being counted as unemployed. These young people 'are' however structurally unemployed at least to a degree, or as compared to when I was their age and living in commensurable circumstances (hysteresis), and... it may well be that the economic framework has left us with a choice between a militaristic culture or increased levels of structural unemployment. But if we were to see structural unemployment as it actually exists... it could be minimized. If the US were for example to put as much emphasis into influencing improvements in Mexico, as it has in Iraq etc., perhaps just stop flooding Mexican markets with subsidized ag goods, at the least; then at some point the US could create more demand for its exports while also doing what is morally justifiable.

(It may have been hypocritical for me to have brought politics into this, but... I could not stop myself. Sorry) Ray L Love

Posted by: rayllove | October 04, 2010 at 11:04 AM

The principal uncertainty these days is monetary policy and its underwhelming support for the economy.

Posted by: Lord | October 04, 2010 at 05:13 PM

Not to put too abstract a point on it, but in my stable suburban neighborhood there are more for sale signs on houses than there have been at any time in the past two years. There's one new house going up, too, but it still doesn't look good for construction workers. At the same time the newspaper continues to be full of stories about the shortage of nurses. Now if the inability of one type of worker where there's a surplus to become retrained for a job category where there's a prolonged shortage doesn't spell "structural", I don't know what does. Not to mention the neighborhood swimming pool that stayed closed all summer with a "lifeguard wanted" sign on its gate.

Posted by: Jeff | October 04, 2010 at 10:12 PM

For years, companies have been moving manufacturing operations to cheaper labor markets like China. If everything we consume is manufactured elsewhere, no amount of stimulus, or any other attempt to increase consumption will result in jobs here at home. The US has been running an ever increasing trade deficit since 1976, peeking recently at $700 billion or roughly 5% of GDP. This has been going on for so long that what should have been a cyclical problem appears structural. The good news is that imbalances are never sustainable and sooner or latter countries that are hording huge amounts of US currency (like China) will have to trade it in for something produced here.

Posted by: John Cardillo | October 05, 2010 at 10:09 PM


What would keep the Chinese from trading T-bills for commodities or some other non-US-related asset? Slowly, over time, of course.

Posted by: rayllove | October 06, 2010 at 01:04 PM

Rather than hiring, what if companies that import components choose to ask foreign manufacturers to provide administrative, advertising, and other product management activities in return for say, a 2% increase in the price of the components?

The economists, reviewing the numbers, would believe the price of imports was rising while they were not; firms were both acquiring perfectly variable labor cost while avoiding future domestic regulation costs.

And that would be structural.

Posted by: WhiskeyJim | October 06, 2010 at 11:04 PM

"Trouble with hiring might be more a 'cyclical' function of low business confidence than a chronic, 'structural' ailment that will last for years to come."

It is within the realm of possibility that we, the US, will soon enter another boom. Productivity (what you economists like to measure) is about to soar. I can hold the entire library of congress in my hands. I can find South American organic beef while booking a flight. It's now moving so fast, we can't catch it.

Posted by: FprmerSSresident | October 09, 2010 at 01:06 AM

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