Structural Economic Problems More Worrying than Cyclical Ones
12:00 AM, Aug 13, 2011 • By IRWIN M. STELZER
President Obama blames the recent turmoil in financial markets on floods in Japan and Republicans who won’t raise taxes. Republicans blame roiling markets on the president and Democrats who won’t cut spending. The Europeans blame short-sellers. Stock traders blame the problem variously on Standard & Poor’s decision to downgrade America’s credit rating, the unsafe condition of French banks, the Federal Reserve Bank’s failure to give the economy a boost, the Fed’s insistence on giving the economy a boost by announcing that near-zero interest rates will be maintained past the presidential elections in November of 2012, and the fact that this week contains a Friday, a day on which traders shun risk lest their weekends be fraught. And if it rains on Monday….
You get the idea. The economic news mucks around in an attempt to explain short-term share price movements, ignoring the longer-term phenomena that will dictate the future course of the American and, because of linkage, European and world economies.
I don’t mean to imply that these matters are trivial: When a plunge in share prices wipes out some $3 trillion in assets in a few days, businesses and households get hurt. But there is little that policymakers can durably do about these shifts in investor sentiment, short of passing the baton to others, and much they can do to affect the underlying trends that are there for the discerning eye to find.
The first relates to the labor market. All eyes are focused on the 9.1 percent unemployment rate. That focus leads to calls for monetary easing, infrastructure construction, and other Keynesian solutions, few of which can have any affect so long as consumers and businesses are retrenching in the face of news that economic growth is likely to be somewhere between zero and negative in the near future. The longer-term problem is revealed not in the figure for the unemployment rate, or even in the far higher figure that includes workers too discouraged to continue pounding the pavements in search of work, and those involuntarily working short hours. It is revealed in the fact that over 6.5 million workers, 44 percent of those counted as unemployed, have been out of work for more than 27 weeks. At the end of the last recession in November 2001 that figure was 13.9 percent.
Even if the economy starts to grow at an acceptable rate, many of those long-term unemployed will not find work or, if they do, only at jobs paying far less than the ones that disappeared. Skills atrophy, or become obsolete in the face of technological change; traditional American jobs migrate overseas; increased efficiencies discovered in the recession-induced hiring clampdown enable manufacturers to produce more with smaller staffs; a large pool of unemployed available workers permits subtle discrimination against older workers, reducing their chance of being rehired.
Edmund Phelps, a Columbia University professor and Nobel laureate, says that the so-called natural rate of unemployment—the rate prevailing when the economy is growing at a rate unaffected by a cyclical downturn—has jumped to about 7% from 5.5% in the mid-1990s. That means that two million more workers will be out of work when times are good than would have been the case a decade or so ago, barring any change in a host of economic variables. Unfortunately, the hunt for quick fixes by the Fed and the administration is ignoring this structural change in the work force, perhaps best revealed by the pleas of many employers to ease restrictions on the granting of visas to skilled immigrant workers, despite the millions of American workers looking for jobs.
A second long-term problem left unattended is the massive debt burden that will sooner or later have to be addressed. No, not the mere $14 trillion-and-rising debt recorded on the books of the U.S. Treasury. The trillions more that are not reflected on the nation’s ledgers. Economists Carmen Reinhart and Kenneth Rogoff, who have studied what they call “eight centuries of financial folly,” note: “public obligations are often ‘hidden’ and significantly larger than official figures suggest. In addition, off-balance-sheet guarantees and other creative accounting devices make it even harder to assess the true nature of a country’s debt until a crisis forces everything out into the open.” Think of the massive debt burden that came with recognizing that the federal government is the guarantor of the debt of mortgage lenders Freddie Mac and Fannie Mae, and of the viability of banks that are too big to fail.