The Bigger Bang Theory

An important finding from Credit Suisse:

One way to look at the US job market is to break it up into two components: jobs generated by structurally “impaired” and “non-impaired” sectors. Credit Suisse defines structurally impaired sectors to “include real estate related industries, finance, manufacturing, and the state and local government sector.” These are the sectors that at least in part rode the “bubble” economy wave. Many of these jobs were credit dependent, with growth beyond what the economy could sustain naturally.

Hat tip: Tyler Cowen

As the chart illustrates job creation in “non-impaired” sectors has nearly returned to pre-recession levels while job creation in “impaired” sectors continues to lag. Additional federal fiscal stimulus, defined as something resembling the ARRA, the last large stimulus package, is only likely to address the problems in the “impaired” sectors marginally. I don’t recall who said it but it’s apt: fiscal stimulus is the “trickle down” of the left.

Another implication of the finding is that states most dependent on “impaired” sectors, particularly real estate and home construction, are the last to recover which to my eye is what is, indeed, happening.

What options are there for addressing this problem more directly? I think they’re few and politically difficult (read: ain’t gonna happen, particularly given the present Congress, flatteringly described in comments recently as “cretins and poltroons” which I think is an injustice to cretins and poltroons). We could subsidize housing construction directly. Presumably, that would lower the value of the “overhang” of unsold properties and put additional strain on the banks, still reeling from the financial crisis and another of the “impaired” sectors.

We could subsidize credit directly in any number of ways but I can already hear the howls of anguish. Welfare for the 1%!

Additionally, if there is such a thing as a credit load-bearing limit, such subsidies would provide no permanent solution but only set the stage for an even bigger financial crisis down the road.

The federal government could subsidize state and local governments directly. I think it should be noted that the problems of state and local governments are two-fold. Revenues are tapped out and their employee contracts don’t allow them the flexibility in compensation for employees present and past that they need. If they attempt to increase revenues, it will incentivize flight (and rent-seeking as we’ve seen here in Illinois). That’s a spiral to the bottom.

The federal government is the only instrumentality with the tools necessary to address the states’ problems. But imagine the moral hazard!

My opinion is what it has always been: gradually reduce the subsidies granted to the “non-impaired” sectors, do what we can to mitigate the suffering of those most affected by the necessary restructuring of the economy, and allow that restructuring to take place. The malinvestment and distortion of the economy has been going on for a very long time so we should expect a return to economic health to be lengthy as well.