Pointing to the scariest unemployment graph that Derek Thompson has seen James Joyner observes:
My gut tells me that we’ve got little choice but to expand the safety net. That is, to say the least, not my default position. But, while there are no doubt plenty of unpleasant people with poor work habits out there, as Ben Stein notes, most of these people are simply victims of the worst economy in decades. And, I fear, many of them will be unemployable for a very long time, in that their skills no longer match the job market.
That’s not an adequate explanation. Check out the number of unemployed per number of job openings. It’s a graph that’s been displayed prominently. There may well be a skillset mismatch but the mismatch between the number of people without jobs and the number of jobs being created is dramatic.
Another explanation that’s been proposed is a conventional neo-Keynesian one: jobs aren’t being created because businesses aren’t seeing enough sales and we need to boost aggregate demand. How then does one explain the phlegmatic job growth of the last ten years? Outside of the bubble areas, construction and finance, and areas that have received increasing government subsidies (and which are difficult to off-shore) like healthcare, education, and government itself, both job growth and income growth have been flaccid.
I have proposed an alternative explanation, that we’ve placed the trend lines incorrectly, and the graph linked above illustrates this nicely. Rather than thinking that the decreases in the duration in unemployment in the late 1990s and the mid 2000s were the norm, what if the increases in the duration of unemployment seen from 1976 to 1995 and through the early 2000s were the norm? After all the observed decreases with the direct and indirect results of bubble economies—the dot-com bubble and the real estate bubble, respectively. The very high duration of unemployment right now may simply be the result of compounding, the product of a process that’s been underway for thirty years or more.
There are some ordinary commonplace developments over that period that support why that may well be the case. Over that period we’ve experienced large increases in the number of unskilled workers coming into the country, China abandoned its policy of autarky in favor of a sort of one-way autarky in which it runs major trade surpluses with nearly every country in the world, due to advances in telecommunications distance no longer provides the barrier to certain services it once did, and the cost of education has increased far in excess of its value.
We have increased the protections of intellectual property beyond all reason. This has resulted in reduced economic activity, particularly in technology.
In all but a very few of the intervening years we’ve been practicing ordinary Keynesian stimulus and borrowed a little of tomorrow’s growth for today. It is now tomorrow. The practice along with massive subsidies for healthcare, education, and government have introduced deadweight loss which has further depressed growth.
I could go on but I suspect you can see the pattern: we’ve made decisions over a very long period of time that are returning to haunt us in the form of reduced incomes and reduced growth.
As with most problems prospective solutions are inherent in the statement of the problem.
- We could erect barriers—physical, legal, and tariffs to insulate ourselves from foreign competition. That would result in reduced economic activity (as Ricardo told us 200 years ago), market distortions, and all but certain retaliation from other countries.
- We could reform our approach to government so that we live within our means. This is almost impossible for the local, state, and federal politicans we have now.
- We could impose price caps or introduce Pigouvian taxes to compensate for the market distorting effects of subsidies we feel are absolutely indispensable. This is all but certainly beyond the capabilities of our current politicians and regulators.
- We could expect a lot less, both from government but also in the way of standard of living.
Or we could just keep on doing what we’ve been doing until the whole shebang collapses around our ears.
I think we have a winner.
Note this is prescription of just about everybody. It isn’t a conservative, liberal, Republican, Democrat, or just about anything else. It really is a non-partisan policy. But, I can bet an In-n-Out Double Double that most commenters are going to say,
“If it werne’t for x….”
Where x is Bush, Cheney, Republicans, Democrats, Obama, Mexicans, conservatives, liberals, or whatever one’s favorite target is.
Basically Dave you are asserting that we might very well need a revolution. Not necessarily a military/bloody thing, but a complete re-think/re-evaluation of how things are done.
For example health care reform has to be meaningful, not something that simply extends the current system and increases the governments exposure to runaway costs. When the government is seen as picking up the tab, by and large people see their costs as being shared. It isn’t just me paying for an expensive plan that covers all kinds of services I might otherwise do with out, but its me and everyone else. It is like going out to eat and splitting the check, but not even sitting at the same table or even the same restaurant as the people you are splitting the check with. So people start going to better and better restaurants, ordering more and more expensive items.
Granted not a perfect analogy in that sometimes people are ordering medical procedures they need. But as I like to point out why is a voluntary activity…an activity that people often actively work towrads considered insurable? If a person was to actively go out and seek to get into a car accident it is highly likely that their insurance company would not pay. But when it comes to pregnancy its covered under insurance. Insurance works when you have rare and expensive events that people generally prefer to avoid if possible. Example, a car accident. Having a baby fits only one of those, its expensive.
Same thing for other things such as eye glasses. Having bad eyesight/requiring corrective lenses is not rare nor is it very expensive save perhaps in some of the more extreme cases. Yet insurance plans will cover eye glasses, lasik procedures, contact lenses, etc. Even if one argues the first one is not so bad, the last two are kind of silly when eye glasses will get the job done for most people.
When we look at finance we find that the government is on the verge of making into law a bill that would basically enshrine bailouts like what happened with Long Term Capital Management. I argue that the LTCM incident helped bolster the problems with moral hazard in the financial sector that we are dealing with now. Is this a rational policy? Enshrining as law something that helped get us where we are now?
And yet people still complain about too big too fail. But what role do bailouts like this play? Were financial firms able to get so big because if they did get into shakey ground they realized a bailout would be forth coming? Like for Chrysler before even LTCM? In reading Robert Higg’s book Depression, War, and Cold War he points out that mondern day defense spending is indeed a case of public risks and private profits. If a defense contractor gets into trouble they’d often land a nice contract to help get them out of trouble. He notes the revolving door between the pentagon and top positions at defense contractors. Starting to sound familiar? Rahm Emmanuel sitting on the board of Fannie or Freddie? Mel Martinez being hired by JPMorgan Chase. Treasury secretaries usually come from a large financial firm. These guys go to Washington and often get rich, then when they leave they get even richer. If it isn’t in the defense industry its finance, if not finance health care, and of course just all around rent seeking…errr…lobbying.
Not really. China actually runs sizeable trade deficits with a number of the Southeast Asian countries in the region, as well as most of its trading partners (particularly the natural resource exporters).
Moreover, calling it a “one-way autarky” misses the fact that China exports a lot of capital, much of it to the US. It only seems strange because we’re not used to thinking of capital as a trade good.
That would explain part of it, since major reforms in immigration law were undertook in the 1960s that opened the US up to more immigrants from Asia and Latin America.
I would also add increasing workplace integration, particularly in the form of weakening segregation for blacks and increasing female participation in the workplace. The latter alone drastically increased the potential labor pool, and the former increased the labor poor for an increasing number of positions (since blacks, along with women, tended to be segregated into certain kinds of employment before desegregation).
Not all pregnancies are planned. That said, this sounds like a good argument for subsidizing abortion and birth control.
Ask the insurance companies, since they cover it.
It’s not enshrining bailouts – what it does is provide a way to gradually dissolve an insolvent bank, so that instead of Lehman Brothers-style incidents that more or less tear out a huge chunk of the US economy with them, we get a steady draw-down.
Perhaps that does increase moral hazard, but moral hazard isn’t an “either-or” proposition. A little bit of moral hazard is acceptable if it prevents certain collapsing companies from devastating the economy on their way down.
I bet it wouldn’t be if it weren’t for the way insurance is provided in this country. Providing those kinds of bells and whistles to a policy, especially for a large firm that can self-insure, works out becuase of the tax treatment of insurance.
You aren’t in possession of all the facts. LTCM was destroyed during its bailout…what or more precisely who was bailed out were the creditors to LTCM, that is what the current bill will enshrine in law. Once those guys are relatively sure that there is drastically reduced downside risk, then risk taking will go up.
So risk taking goes up, then you get that somewhat rare event where all the crap happens at once and you have the various creditors clamoring for relief or the entire financial network will collapse….kind of like what we went through to long ago and are still dealing with the after effects.
It is a stupid law written, IMO, by Wall Street. But by all means support because the guy sponsoring it has the appropriate letter after his name.
I’ve been mulling over this post & your previous one on the topic for a while now, trying to decide what I think. While I’m about 75% in agreement with you about the need to change some of our longstanding economic policies, something’s been bothering me about your analysis, but it took until now to figure out what.
I think you’re overemphasizing the impact of the last few years. If you look at a graph of US GDP, we had 3% real growth in the 70’s, 3% in the 80’s, 3% in the 90’s, then 2% in the aughts. While that may constitute a decline, its an awfully slow one, and relies very heavily on what’s happened since 2007.
The labor market offers a similar if somewhat grimmer picture. It was about 6% average in the 70’s and 80’s, declined to a 5% average in the 90’s, before bouncing back up the past decade – and that despite significant government intervention. Obviously, it’s significantly higher right now, and if private, non-handmaiden employment doesn’t rebound in the next few years that will be a serious concern.
But if that does turn out to be the case, it tells a somewhat different story – one where the demand for labor, especially low-skill labor, has separated significantly from GDP growth. Some of the causes you identify above could well lead to that situation.
Maxwell,
GDP prior to 1989 averged around 3.13%, after 1989 2.55% on an annual basis. Even if we omitt 2009 GDP growth in the latter years is still 2.8%. You might scoff at a difference of 0.33%, but consider this, if we have a GDP of $14 trillion now and we have an option of growth at 3.13% or 2.8% over 10 years the differences is over $525 billion and that is with just compounding annually. In reality the difference would likely be even larger. If you were to take the annual growth rates for GDP and look at the peaks you’d see that growth does not peak at the same levels it did before.
Additionally, we’ve had job growth just at or below the level required to deal with the natural increase for ten years now. Ten years is a long time.
Another reason to be concerned is that the economic assumptions behind certain spending levels, e.g. Social Security, assume growth and employment levels above what we’ve been seeing for quite some little time. Where is that trustees report anyway?
Perhaps I’m not making myself clear. I’m not trying to say that there has been no decline in GDP growth or that we shouldn’t take that decline seriously. Nor am I saying that the increase in government spending has nothing to do with that decline – I think it probably does have something to do with it.
But I don’t think it is nearly enough to explain the stagnation in employment – especially private, non “handmaiden” employment – since 2000. Even when we’ve had economic growth in the past decade employment growth was typically disappointing. Mediocre job growth and median income growth haunted the Bush administration throughout both of its terms – and then of course dropped off a cliff with the recession.
I suspect that even if we cut spending and cut taxes and ran a balanced budget, the jobs picture would still stink. Some of that may be a result of the factors you list above, but I don’t think they’re enough, even in total, to explain it. I think Tyler Cowen is probably right that market dynamics have led to a large number of zero marginal product workers, but I’m more pessimistic than he is that the picture will change. Jobs training could theoretically address the problem, or part of it, but it’s well known that our jobs training programs stink. And even though I’m aware of a few such programs that don’t stink, they’re nowhere near the scale or the maturity needed right now.
I hope I’m wrong, because otherwise we may have to get used to much higher levels of unemployment, not just for years but for decades.