A Reuter’s report by Nick Carey, Special Report: Is America the sick man of the globe?, is almost painful to read as it tries to extrapolate the problems of unemployment from the Detroit, Michigan area to the entire country.
TURNING A BIG SHIP
America now faces “structural” unemployment. Which means unless the world’s largest economy changes in a fundamental way, millions of unskilled workers will remain jobless and economic growth will be sluggish, at best
“The financial sector and America’s wealthiest classes can help grow the economy, but not enough to bring down unemployment,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
None of this means a death spiral is inevitable. A growing number of economists and investors like PIMCO’s Gross say a fix exists: a comprehensive overhaul of America’s education system and retraining programs for the unskilled.
Instead of seeking a solution to the sector’s woes America’s political class sought a different way out, she added. “We decided as a nation to issue debt and focus on the financial sector to counter what was becoming a major structural issue in the 1980s,” Swonk said….
“This mess has been a long, long time coming,” PIMCO’s Bill Gross said. “We should have been getting people out of the unemployment line, re-educating and retraining them for the future. We failed to do that.”
There’s no counterpoint in this long article.
Quick first: I’m less convinced by the arguments that “We decided as a nation to issue debt and focus on the financial sector to counter what was becoming a major structural issue in the 1980s” than I was at the beginning of the year. We’ll talk about this paper next week, but recent research is leading me to believe that the supply curve on debt shifted out in the past 10 years, not the demand curve.
High-level: If the natural rate of unemployment is 5%, and let’s assume there’s been a high increase in “structural unemployment” of 1.25%, that leaves 3.55% related to demand-side issues. That’s 3.55% of the workforce, well over five million people (not counting those dropping out of the labor force), who are out of work as a result of monetary and fiscal policy choices, not because the of the structural and supply side of our economy. People suffering through unemployment, sitting idle when they could be productive.
That 1.25% is a very controversial number, one I think is exaggerated. The San Francisco Fed has looked at it and concluded the (my underline) “Beveridge curve is consistent with an increase in the NAIRU of about 1¼ percentage points or less…The effects of both of these factors are likely to be transitory rather than permanent.”
Housing Markets, Structural Unemployment
Some of that is skills-mismatch, but most people who look at it conclude that it has something to do with the housing bubble. If it is the result of the spillovers and uncertainty of mass foreclosures then cramdown, short-selling, short-term higher inflation targeting and writing down bad mortgage debt held by bondholders and banks would be a solution.
If it is the result of a lack of mobility from not being able to sell an underwater home then cramdown, short-selling, short-term higher inflation targeting and writing down bad mortgage debt held by bondholders and banks would be a solution.
And if it is the result of people being in a state of debt peonage, where a large portion of their income goes to servicing bad underwater debt, then cramdown, short-selling, short-term higher inflation targeting and writing down bad mortgage debt held by bondholders and banks would be a solution.
From the article, you’ll be happy to know that bondholders, who love disinflation and hate writing down bad debt, believe education reform is the real issue. Don’t worry about the fact that inflation is falling when it needs to go up to a sensible target, go beat up on the teacher’s unions! No doubt education reform is important, and I’ll leave it to smarter people than me to handle figuring that out, but is it really causing our current problems?
The implications of the article is that there are too many people working in the manufacturing sector and they need to be retrained to other industries. Manufacturing needs to shrink. But we can continue this line of thought. Right now the number of people working-part time for economic reasons who are service workers has doubled. Clearly there are too many people working in the service industry, and it needs to shrink.
The same holds for people working in management, people working in information, people working in all industries and all occupations. Is every single industry, and every single occupation, suddenly suffering from a drop in productivity? That every part of the economy needs to shrink? That’s what makes the retraining arguments so funny. Yglesias summarized this well in a great post:
…the year 2008 wasn’t in the distant past, we can remember what happened and didn’t happen. No American cities were destroyed by nuclear weapons. No draught crippled our agriculture. People didn’t suddenly forget job skills they’d had. What happened was a large negative shock to demand not an earthquake or a flood or a plague. I was there and so were you.
People talk about demand during downturns because in a downturn you have an unusually large number of unemployed people. That’s people producing nothing who the year before were producing something. If there were more demand, they’d produce something.
Now if you look around the world, you can find lots of examples of countries with lower unemployment rates than the United States that are nonetheless poorer than the United States. How does that happen? That happens because when you’re not in a downturn, the only way for a country to improve its living standards is to actually get better at producing stuff. When almost everyone who wants a job has one, the only way to get richer is for people to start being more productive. Productive capacity matters—a lot. But when lots of people who want jobs aren’t doing hobs, you’ve got a different problem. A failure to mobilize the productive people you already have. In the scheme of things, that’s a good problem to have since it’s much easier to solve. But it’s also a much more frustrating problem to solve precisely because there’s no good reason it should be lingering like this.
No doubt things are changing in the economy. They always are. But the crisis we have goes above and beyond any specific occupation and any specific industry. And there are sensible options for us to use.