If the Fed can’t help the long-term unemployed, no one will

via The Brookings Institute
via The Brookings Institute

Via Jordan Weissman at Slate:

There are 3.8 million Americans who have been out of work for 27 weeks or more. These are the country’s long-term unemployed, as defined by the Department of Labor. And right now, they’re the subject of the most important ongoing argument about the state of the job market.

In recent months, a growing chorus of economists and writers have concluded that “the long-term jobless don’t matter to the economy,” as Wonkblog’s Ylan Mui put it in a recent headline. At least, they don’t when it comes to issues such as inflation and pay growth. (I’m guessing most everyone agrees that their personal suffering matters a great deal, and that the world would generally be better off if they were working). The idea is that these unlucky millions are so far from employers’ radars, and so unlikely to ever hold a steady job again, that their presence no longer influences rest of the labor market. Should the economy heat up, businesses will start paying out higher wages to keep or poach workers who already have jobs before they dip into the pool of people who have been out of the game for more than six months. And if wages escalate, so too could inflation…

In other words: The Federal Reserve probably can’t help the long-term unemployed to begin with, nor should it risk trying.

Yesterday, however, the hawks received a big intellectual boost, courtesy of a new paper debuted at Brookings by Princeton economist and Obama advisor Alan Krueger. It is a grim document, to say the least. Krueger and his co-authors, Princeton’s Judd Kramer and David Cho, suggest that many of the long-term unemployed may never work again and “tentatively conclude” that, as a group, they “exert relatively little pressure on the economy.” Wonkblog’s Mui has already written a solid summary, andThe New York Times’ Binyamin Applebaum has a very useful take. But here are three of the key points:

1. The overall unemployment rate doesn’t seem to affect inflation. That depends on the short-term unemployment rateSome economists have argued that the traditional relationship between unemployment and inflation, known as the Phillips Curve, fell apart after the recession. But Krueger and his coauthors find that once you pull the long-term unemployed out of the equation and focus only on the short-term unemployed, it works again like new. The same goes for the relationship between wages and unemployment. But why? That brings us to…

2. The long-term unemployed rarely return to work. Between 2008 and 2012, the authors found that, after 15 months, only 11 percent of the long-term unemployed were back in a full-time, steady job (as shown in the Brookings graphic below). This is in keeping with research that has found employers ignore job applicants who have been out of work for an extended period. But the problem may go deeper. The long-term unemployed, the authors write, seem to be on the margins of the labor market, and have difficulty sustaining employment once they find it. Many ultimately lose interest in work altogether.

3. Worse yet, even a stronger economy might not help their predicament.The paper finds that the long-term unemployed don’t fare much better in states with low overall joblessness than they do in states with high overall joblessness. Regardless of the health of the local economy, they’re about equally likely to find a new job as they are to leave the labor force entirely.

…for now, it’s worth remembering why the stakes of the debate are so high. We can all probably agree that Congress is not going to step in and do something dramatic to help the unemployed find work. That makes the Fed is more or less their last hope. If it can’t help, or decides not to try, nobody will.


Energy Saver 101: Home Heating


Winter is almost over, but you can still save a lot (and make your footprint greener in anticipation of spring making everything else greener) by checking out this cool info graphic on home heating and applying some of it to yours.

Via the DOE:

Space heating is likely the largest energy expense in your home, accounting for about 45 percent of the average American family’s energy bills. That means making smart decisions about your home’s heating system can have a big impact on your energy bills.

Our new Energy Saver 101 infographic lays out everything you need to know about home heating — from how heating systems work and the different types on the market to what to look for when replacing your system and proper maintenance. Throughout the infographic, you’ll find ways to cut your heating costs (like installing and setting a programmable thermostat could save you up to 10 percent on your heating bills) and energy-saving tips for each type of heating system (like cleaning your electric baseboards’ heating coils regularly to maintain your heater’s efficiency). Be sure to take a moment to explore the infographic and visit Energy Saver for more ways to save energy at home.

TED Talks: Invest in social change

Here’s a stat worth knowing: In the UK, 63% of men who finish short-term prison sentences are back inside within a year for another crime. Helping them stay outside involves job training, classes, therapy. And it would pay off handsomely — but the government can’t find the funds. Toby Eccles shares an imaginative idea for how to change that: the Social Impact Bond. It’s an unusual bond that helps fund initiatives with a social goal through private money — with the government paying back the investors (with interest) if the initiatives work.

Toby Eccles has created a radical financial instrument that helps private investors contribute to solving thorny public problems.


China’s Massive Pollution Problem


The current environmental situation in China represents what America may have become without the environmental protections enacted by Congress starting in the 70’s and refreshed in the 90’s. In it mad dash to grow economically, China has relied far to heavily on dirty coal as source of fuel for power production, only weakly regulated fuel economy for vehicles, and obfuscated the growing health and social implications until quite recently, and even now only vowing to cut coal consumption 2%.

The effects of ignoring environmental concerns are serious, material, and widely expensive to solve. China’s policy decisions and their horribly obvious detrimental effects should be clear warning to American policy makers who may consider such legislation trivial or worse.

Via Keith Wagstaff at The Week:

How bad is China’s smog?
Sixteen of the world’s 20 most polluted cities are in China. The air in some cities there is so bad that, at times, visibility drops to 30 feet, traffic slows to a crawl, and nearly everyone wears masks over their noses and mouths. In Harbin, a city of 11 million people, government officials recently shut down roads, schools, and the airport when air pollution levels hit 40 times the safe limit set by the World Health Organization (WHO). During the “airpocalypse” in Beijing earlier this year, the density of small, lung-penetrating particles reached 993 micrograms per cubic meter — a concentration normally not seen outside of forest fires. The U.S. Environmental Protection Agency (EPA) considers anything above 300 dangerous, and maxes out its scale at 500. The smog was so thick in Beijing — which English-speaking residents call “Greyjing” — that a factory building burned for three hours before anyone even noticed that it was in flames.

Why is China’s air so polluted?
It’s the result of two decades of runaway economic development unrestrained by strong air-pollution laws, a dramatic increase in car ownership, and China’s overwhelming reliance on coal. China’s cities were filled with bicycles as recently as the 1990s, but thanks to the explosive growth of the middle class, the Chinese now own more than 120 million cars and another 120 million motor vehicles of other kinds. Fuel standards, set by a government committee stacked with oil industry members, have not kept pace. Auto emissions, however, account for only about 25 percent of the problem. Most of the blame rests on coal. China burns almost as much coal as the rest of the world combined. Despite making large investments in renewable energy, China still depends on coal to meet nearly 70 percent of its power needs. While air pollution is almost always bad in northern China, it really soars after cities turn on their coal-fired collective heating systems for the winter “heating season.” Temperature inversions often trap bad air for days or weeks.

What are the health effects?
They’re widespread and severe. In 2010, air pollution contributed to 1.2 million premature deaths in China, according to a study. Hospitals in Harbin reported a 30 percent increase in patients with respiratory problems after air pollution spiked in the city. Lung cancer rates in China have climbed by 465 percent over the last three decades, despite there being no significant increase in smoking rates. Scientists say the pollution in northern cities is so severe that 500 million people’s lives will be shortened by an average of 5.5 years.

How else is smog hurting China?
It’s damaging the country’s economy. In 2012, smog-related economic losses in four major Chinese cities totaled $1.08 billion, according to a study by Greenpeace and Peking University’s School of Public Health. Largely in response to the “airpocalypse,” tourism in Beijing has dropped by 50 percent this year, the Beijing Youth Daily reported last week. The pollution has also hurt efforts by Beijing-based businesses to recruit top foreign talent. More potential employees are demanding hardship pay for having to deal with the city’s awful air quality. With studies connecting prenatal exposure to air pollutants with autism, depression, and long-term lung damage, many foreign and local parents are “second-guessing their living in Beijing,” said family physician Richard Saint Cyr, who is based there.

Are Chinese citizens angry?
Yes, and they are increasingly willing to show it. Chinese netizens this year defied a government ban and began sharing hourly air quality measurements from the U.S. Embassy in downtown Beijing. Microblogging sites like Sina Weibo have served as forums for citizens to express their frustrations with China’s air quality. “Our requirements aren’t high,” posted radio reporter Guo Yazhou. “We just want clean food, clean water, and clean air.” The dissatisfaction has given rise to a growing environmental movement, with 30,000 to 50,000 “mass incidents” of protest every year, according to former Communist Party official Chen Jiping.

Is the Chinese government listening?
The grumbling has become too loud to ignore. This year, Chinese Premier Li Keqiang claimed that the country’s smog made him “quite upset,” while the state-run China Daily bluntly referred to major cities like Beijing as “barely suitable for living.” That is a big change from 2011, when the state media referred to China’s choking air pollution with the euphemism “heavy fog.” Now, China says it will spend $817 billion on a plan to drastically cut pollution by 2017. While that might sound like real progress, provincial officials and state-owned businesses in China have a history of ignoring policies handed down from the central government. Critics also note that the new air-pollution plan calls for only a 2 percent reduction in coal consumption — the result of the Chinese coal industry’s powerful influence. Tong Zhu, an air pollution specialist who travels between Princeton University and Beijing, sees political infighting in China’s giant bureaucracy as the biggest impediment to progress. “There is technology available” to fix the problem, he told NPR. “I think as long as there is political willingness, the environmental situation can be drastically improved.”

Fashion-forward protection
Not everybody hates the smog. Companies that make protective face masks are selling millions of them, surpassing records set after the SARS outbreak in 2003. On the streets of Beijing, it’s strange to see someone not wearing a mask, designer Chen Dawei told the South China Morning Post. The result has been a boom in fashion-forward face masks adorned with everything from animal prints to counterfeit designer logos. Wealthy businessmen and government officials are also shelling out for indoor air purifiers, which sometimes sell in upscale showrooms for as much as $3,000. In the first half of 2013, IQAir, a Swiss company, saw sales of its luxury air purifiers triple in China. The trend, however, has bred some resentment from average Chinese families. Their annual income? About $2,100 a year.


Wealth Inequality in America is Much Worse than We Think

Infographics on the distribution of wealth in America, highlighting both the inequality and the difference between our perception of inequality and the actual numbers. The reality is often not what we think it is.






TED Talks: For more wonder, “rewild” the world

Wolves were once native to the US’ Yellowstone National Park — until hunting wiped them out. But when, in 1995, the wolves began to come back (thanks to an aggressive management program), something interesting happened: the rest of the park began to find a new, more healthful balance. In a bold thought experiment, George Monbiot imagines a wilder world in which humans work to restore the complex, lost natural food chains that once surrounded us.

In his book “Feral,” George Monbiot advocates the large-scale restoration of complex natural ecosystems.

Detroit Fight Shows Why Public Pensions Are Bound For Problems

REUTERS/ Rebecca Cook
REUTERS/ Rebecca Cook


The political and economic implications of fuzzy pension accounting.

Via Josh Barro at Business Insider:

One of the many points of contention in Detroit’s bankruptcy is how underfunded the city’s pension systems are.

Kevyn Orr, Detroit’s state-appointed emergency manager, says the pension funds are underfunded by $3.5 billion, out of $18 billion in total city liabilities.

The funds’ managers say they are only short by $650 million, because they use more aggressive assumptions that lead to a higher estimate of fund assets and a lower estimate of liabilities.

Orr is closer to being right. But the dispute between the two sides shows a key reason that governments get into trouble with pensions: Their accounting is very complicated and highly subjective, meaning it’s easy to make promises that are larger than you understand, or larger than voters understand. Politicians make decisions about pension policy all the time without knowing how much their jurisdiction owes.

In most places, these errors won’t lead to insolvency. (Indeed, the pension liability is not the primary driver of Detroit’s insolvency.) But they do lead to taxpayers forking over more for pensions than they ever intended, and governments having a reduced ability to invest in infrastructure, provide public services, or cut taxes.

This post explains why Orr is right, and what’s at stake for Detroit in the calculation.

I should note first a counterintuitive fact about the Detroit situation: a finding that the pension funds are deeply underfunded is likely in the interest of pensioners.

Detroit is seeking, through bankruptcy, to reduce obligations to various creditors. In the case of the pensioners, Detroit’s obligation is the amount by which promised pensions exceed the asset balance in the pension funds.

If Detroit’s restructuring were based on the premise that the pensions were fully funded, pensioners would likely get nothing beyond the pension fund assets. The more underfunded the pensions are deemed to be, the stronger a claim the pensioners have to additional payments from Detroit. They still get the actual pension fund assets either way.

Bondholders, who are competing with pensioners for Detroit’s limited dollars, therefore want the bankruptcy to proceed based on the idea that the pensions are as well-funded as possible.

The pension liability is hard to measure because both sides of the pension funds’ balance sheets are controversial: the value of their asset portfolios, and the cost of the promises they have made to retirees.

Let’s take the asset side first, because it’s simpler. Pension funds invest in a mix of assets, typically principally equities (stocks) and fixed income (bonds). It’s easy to figure out their market value. But when pension funds report how well-funded they are, they don’t actually use the market value. Instead, they use what’s called an actuarial asset value, which relies on a smoothing of asset returns.

Let’s say a pension fund anticipates an annual return on assets of 8%. But there’s a bad year, and asset values decline by 12%. The pension fund will go ahead and book the 8% return anyway. Then, it will recognize the -20% deviation from expected returns over a period, usually five years. With five year smoothing, a pension fund would actually recognize a 4% gain in the year with a real 12% loss, and then phase in 4% losses over each of the next four years, to reach the 12% decline by the end of the fifth year.

You might say “that’s B.S.” You’d be right. This practice leads to pension funds, including Detroit’s, claiming to hold assets that don’t exist.

Actuarial smoothing does serve a useful fiscal purpose—it prevents wild swings in pension funds’ reported funded status, and therefore prevents wild swings in the amount that actuaries are telling governments they should contribute to pension funds. That helps prevent the need for sudden tax increases or program cuts to accommodate pension funds.

What a smoothed asset value does not do is tell you, accurately, how well-funded a pension system is. Nor does the underlying premise of smoothing (that the sponsoring government can make up for missed payments now with added payments later) apply to Detroit, which is seeking to stop making payments into its pension systems.

So, if you’re trying to figure out how large a gap there is in Detroit’s pension funds for the purpose of its bankruptcy, you shouldn’t use a smoothed asset value.

Detroit is actually a bigger offender than usual on smoothing, using a seven year period instead of five. That means Detroit’s pension funds still haven’t fully recognized losses from the stock market declines of 2008-9. Orr hasn’t disclosed his smoothing assumption, but it’s likely he’s using true market value for assets, as he should be.

The other controversy regards the pension funds’ liabilities, which are a stream of payments to retirees due in the future. The key question here is, if you owe somebody $100 in ten years, what is your liability today?

To calculate this, you apply a “discount rate,” which is like a reverse interest rate, to account for the fact that a payment due in the future is less burdensome than one due now. If you owed $105 in a year and applied a 5% discount rate, you would say that your present-value liability is $100.

Public employee pension funds typically set their discount rates equal to their expected return on assets. And typically, they have used expected returns in the ballpark of 8%. That aligns with this rule of thumb about a pension fund’s portfolio: 70% invested in equities returning 10% a year and 30% in fixed income securities returning 4%.

The use of such high discount rates even for healthy funds is controversial. Financial economists say that pension funds should actually use discount rates that align with the risk experienced by pensioners. That would mean a discount rate aligned with bond yields, probably in the ballpark of 4% or 5%. The lower the discount rate, the higher your reported liability, and the more money you need to set aside to cover your promises.

When pension funds use a higher discount rate, they assume that equity returns are a free lunch, which they’re not—taxpayers provide valuable insurance of those returns, by agreeing to shore up pension funds which underperform when the economy does badly.

The 8% discount rate is also controversial because, even if you do believe discount rates should be tied to expected returns, that figure is likely too high. Low inflation and low real interest rates mean that a 4% return on a fixed income portfolio is no longer realistic.

In the last four years, many pension funds have cut their discount rates into the 7s because of this critique. But Detroit is still using 8% and Orr has said he thinks 7% would be more appropriate.

In Detroit’s case, any discount rate tied to expected asset returns is inappropriate. That’s because the use of an asset-linked discount rate assumes that the pension fund has an infinite time horizon, and can ride out any temporary market dips with the sponsoring government making additional contributions as necessary. Obviously, Detroit isn’t going to do that.

Think of it this way. Let’s say that Detroit’s pension funds were 100% funded based on an 8% discount rate, and Detroit terminated any further obligations to pensioners, leaving them only with the assets in the fund. Would it be true that the pensioners lost nothing of value? Obviously not. Currently, they have an insurance policy: if the 8% return target isn’t met, Detroit taxpayers will backstop their pensions. Losing that insurance policy hurts pensioners.

The only way to make pensioners whole for the loss of the backing guarantee is to give them enough assets to cover all expected pension payments even if the assets are invested in low-risk bonds. To have that much money, you’d have to be 100% funded based on a low discount rate, perhaps below 4%.

All of which is to say, Orr’s figures, if they are based on the 7% discount rate he has voiced support for, likely understate the funding gap in Detroit’s pension funds. They clearly don’t overstate it.

My qualified support for Orr’s position does not necessarily mean that Detroit’s plan for bankruptcy restructuring allocates resources correctly between bondholders and pensioners, or that it ought to allocate more toward pensioners. Chapter 9 municipal bankruptcy is a much more flexible and arbitrary process than corporate or personal bankruptcies, and there might be good reasons for the city to prioritize some obligations over others.

But we shouldn’t conclude that Detroit has made its proposal based on a trumped up claim that its pensions are underfunded. If anything, the city’s assumptions are still too aggressive.