What Worries Me About the Economic Downturn (Updated)

As I read the Wall Street Journal’s report on the status of the economies of the OECD countries two things leapt out at me. First, it appears that the size of the contraction in the United States will be somewhat less than was predicted:

The U.S. economy is expected to recover later this year due to its powerful stimulus plan and massive recapitalization of its banking sector, while the euro-zone’s economy will continue to suffer due to the smaller scope of fiscal stimulus packages put in place by governments across the 27-nation bloc and a less thorough cleansing of its financial sector to date, Gurria said. The U.S. economy will continue to benefit from the impact of fiscal stimulus well into 2010, he added.

“The U.S. fiscal stimulus is relatively backloaded, while in Europe there has been a scattered mosaic of fiscal packages of smaller sizes,” he said.

The OECD has upgraded this year’s forecast for the U.S. to a 2.8% contraction in GDP from a 4% drop previously. However, it has cut its projections for the euro zone and now expects a 4.8% contraction in GDP compared with a 4.1% fall previously.

I don’t think I’m alone in wondering whether the backloaded character of the fiscal stimulus enacted into law earlier this year will result in continued stimulus through 2010 or resource contention that slows the pace of recovery.

But the second thing is what really worries me:

Despite recent signs of improvement, the OECD warned the unprecedented scope of the economic downturn will have a long-lasting impact.

Elmeskov said that the current financial and economic crisis is expected to permanently reduce the level of trend output in the OECD area by almost 3%.

“This is partly because we expect the crisis to permanently increase the cost of capital which again will lead to a less capital-intensive production,” Elmeskov said.

“It is also because we expect structural unemployment to go up,” he also said. Structural unemployment in the euro zone will rise by 2 percentage points as a result of the crisis, he added.

That’s what worries me: structural unemployment. Over the period of the last ten years job growth has barely kept pace with the natural increase in the population. Unless some means is found of reversing that a hefty proportion of those who’ve lost their jobs in the last year or so will stay unemployed.

And given the increased financial regulation that’s all but certain, resource contention, the deadweight loss of all of the increased government spending, and the adverse environment for capital investment I just can’t imagine what would reverse that.

Update

More in a similar vein from Michael Mandel at BusinessWeek. The executive summary: all of the net job growth over the last ten years has been in government, healthcare, and education or, said in other words, largely funded by tax dollars.