[Karl Smith]
The political debate in America has become almost
overwhelmed by the merits or faults of Obamacare and the long run challenges of
Americas entitlement system.
As big of an issue as these are in the political realm,
another, at least as large, issue looms in the economic policy realm. That is, whether
our currently elevated unemployment rate is the result of cyclical or
structural forces. To say unemployment is cyclical is to say that it is a part of the cycle of booms and busts
that economists have been studying for hundreds of years.
Witness the structural changes in home building, state governments and manufacturing. Something is afoot.
To say that unemployment is structural is to say that there
is something deeper afoot. The economy is changing in fundamental ways and the
workers of yesterday may simply be unable to compete in the world of today.
They don't have the right skills, the right training, perhaps even the right
temperament for a globalized workforce.
The first problem, cyclical unemployment, has a standard
list of treatments designed to increase the total volume of goods and services
purchased in the economy. The government could buy more things itself. It could cut taxes and allow citizens to buy
more, or the Federal Reserve could drive down interest rates, making it cheaper
to purchase things. The last has been the remedy of choice for decades.
When this recession began I was a die-hard cyclicalist. For
one thing the recession looked like a cyclical disaster in the making.
Collapsing housing prices would make households poorer and more credit
constrained. They would have to cut back on the purchases. The banking system
was teetering on collapse and should it fall money and credit would have been
very hard to come by. All the cyclical alarms were flashing bright red.
Frightening parallels to the Great Depression and the Japanese Depression could
be drawn. Both featured asset price bubbles and collapsing financial
institutions.
Yet as the recession has gone on I have become increasingly
open to the possibility that more structural like issues are taking place and
they cannot be ignored. For starters the United States has been losing
manufacturing jobs a fairly rapid clip since the late 90s. That clip only
accelerated in the downturn. The
manufacturing transition cannot by itself make a recession. It was going on
even doing the mid-2000s.
However, it does provide a headwind against which the entire
rest of the economy must push. Growth in other sectors must be rapid enough to
undue the long lasting dislocations created by closing manufacturing plants.
Cities must restructure and entire regions of the country are struggling to
reinvent themselves. Michigan could be
said to have been in a nearly permanent recession since the Dot-Com bust. In the national statistics that could be
"counterbalanced" by the booms in Nevada and Florida but the adjustment costs
to Michigan were still real and didn't go away.
Then there is construction. I wrote yesterday about how
unprecedented the collapse in home building has been. Home building is the
classic cyclical industry, leading both booms and busts. However, when it has
stayed suppressed for so long it's hard not to describe that as a
structural-esque change in the economy.
Lastly state and local governments have been shedding
workers. In the early days of the recession it was easy to classify this as a
typical cyclical move. Tax revenues go down in a recession and state and local
governments have to balance their budgets. As a result they shed workers during
bad times. A closer look, however, suggests that many governors and state
legislators are taking the recession as an opportunity to make workforce
changes that had long been interested in. That makes this more of a structural
than phenomenon as well. State and local government won't keep shedding
workers, forever, but we don't have any particular reason to think those jobs
will come back once times improve.
In my mind our current downturn still mirrors mostly closely
a cyclical fall; one that could be cushioned by deficit spending, tax cuts or
easier money from the Federal Reserve.
Yet, the structural headwinds appear more salient every day.
Unfortunately, for them there is no easy prescription. Perhaps, no short term remedy
at all.
This article available online at:
http://www.theatlantic.com/business/archive/2011/06/the-unemployment-crisis-is-looking-more-structural-every-day/240836/
