The idea of gloom over the economy is slowly receding and getting the unemployment rate back to 5 percent will be considered normal, said Alan Krueger, former Chairman at the Council of Economic Advisers. Washington needs to focus on targeted efforts to the economy’s most severe problems, which now is long-term unemployment, rather than adding more stimuli, he noted.
Asked if it was okay for the Fed to drop the unemployment threshold of 6.5 percent before initiating tightening, Alan said it was not prudent because the unemployment rate is still one of the best economic indicators. However, market participants also need to look at the whole picture; i.e. what’s happening to labor participation rate and work hours etc.
The headline unemployment rate will still remain supreme, despite being incomplete, because all other indicators like GDP readings and so on contain tremendous amount of noise and get revised by wide margins. That is considered normal because they all run simulations where they draw the data points from the same distribution and show how different patterns emerge even with the same numbers. Everyone should consider those numbers with the appropriate grain of salt; they all indicate where the economy is going but one should not overreact to them, he observed.
Asked how the U-6 unemployment rate, which counts the number of people working part-time but want to work full-time and currently stands at 12.6 percent – could be brought down, Alan said it is elevated partly because the long-time unemployment rate is high and partly because there’s a lot of people working part-time who would like to work full-time. A stronger economy will help bring it down.
The problems of long-term unemployed are going to be difficult to affect with overall macro-economic policy. A more targeted approach like tax-credit, to encourage companies to hire people who have exhausted their unemployment benefits, will be money well-spent in terms of lowering the unemployment rate in the economy, he argued.
Asked if there’s pent-up demand from employers on hiring, Alan said companies are still lean and until they see more customers, they will be slow on hiring, he said. If the economy is anywhere close to the ‘escape velocity’ that could drive the unemployment rate down to 5 percent, Alan said the economy is nowhere close to the escape velocity. The US can’t afford to grow at 2 percent annually, and it’s likely that the unemployment rate will drop to 5 percent in the next three years, he observed.
Asked if it was possible to force cash-rich companies like Apple to repatriate a part of their profits for investments that could lead to job creation, Alan said the US corporate tax code is a total mess. One simple idea is to have a minimum tax for companies that earn profits abroad. However, there are difficulties in effecting them, in part because companies profit from them – the effective tax-rate in the S&P 500 is about 27 percent against the official 35 percent.
Some companies can take advantage of it because of the loopholes in the tax-code, they park money overseas and then shift it around, while others find it more difficult (exploit the loopholes). The beneficiaries oppose any attempt to change them, he concluded.
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