Wednesday, September 01, 2010

Structural versus Cyclical Unemployment

Is the current recession a mere cyclical downturn, or is there some structural problem with our economic system? Strucs vs Cycs, from Slate, is an excellent way to think about what type of stimulus (if any) is the answer to this recession. Why is the unemployment situation harder to fix than Obama thought? Maybe we have a structural economic problem and simply increasing demand won't solve this crisis. Fed governor Kocherlakota "invoked the concept of "mismatch" and said: "Firms have jobs, but can't find appropriate workers. The workers want to work, but can't find appropriate jobs." "

Nobody "wants" to be an HVAC installer, but not everyone can live the fulfilled life of a celebrity personal chef. My take is that it's going to take years of structural unemployment, until all the unemployment benefits are exhausted and these folks *finally* go back to get trained in something useful. Do you know how many unit clerks at the hospital were studying Massage Therapy the last several years no matter how many times I recommended Nuclear Technology ? I suffered from Oculomotor Neuritis from all the eye-rolling. Bottom-line: they are still all unit clerks and we still have a nation-wide shortage of Nuclear technologists.

The opposing view, from the eloquent Robert Reich, says that we should extend unemployment benefits. The question is how long do we extend benefits, and would this dissuade individuals from getting training in jobs that are necessary? Reich presents the classic cyclical case, we just stumulate consumer spending and the economy eventually comes back to life. I realize that Reich's view is more nuanced than this one post, but it presents the cyclical thesis well. How long do we pay people to stay home and eat potato chips without getting job training?

The Republican view is even more counterproductive. They submit that we should just give rich folks more tax cuts and the wealth will trickle down into the general economy. Even if this were ever true, it certainly is not true at our present relatively flat tax rates, as evidenced by the massive wealth concentration that has occurred over this generation. The top quartile controls 87% of the wealth in the United States. In 2001, the wealthy got their tax cuts and bought villas in France, German sports cars and Korean televisions. Multiplier data show that tax cuts to the wealthy give the least bang for the buck to stimulate a domestic economy.

My thought is that we are currently in a deflationary recession, unlike all the other recessions since 1929-1941, so Reich's thesis, while humane, may not be applicable to this particular situation. The economic lore says that FDR's massive New Deal stimulus got us out of that Depression. But was it just a garden variety stimulus? And did it end the Depression? Answers: no and yes, but it took a long time. Roosevelt took office in 1933 and did not just extend unemployment benefits, rather he built dams and roads and universities and power grids, a lot more than just extending unemployment benefits. But notice that while GDP started a nice upward trajectory in 1933, the unemployment rate remained oppressively high for a few more years, until WW2 sent everyone overseas. Such is the nature of that deflationary recession, and it's our only similar recession for which we have information; a one-dog study.

World War 2 is useful milestone, but really the Depression was ended before 1941. GDP had a steady upward slope and unemployment was trending downward (although still high) years before Pearl Harbor. Perhaps the seminal occurrence in the 1930's was merely tincture of time and it took a generation to burn off off all the profligate debt accumulated in the 1920's. The next generation grew up saving money and taking school seriously and getting trained in useful vocations. Of course, during the war we had full employment, but remember most of those young men and women were government workers, either in the military or defense industries.

A New New Deal? green technologies, re-train workers, stress math and science, increase taxes on carbon consumption, Build-America bonds... Nobody says it better than Barry Ritholtz:

With the GOP sure to gain seats in Congress, you can kiss any huge stimulus good-bye, and even under optimal conditions we have many more years (at least) of structural unemployment, so get used to it.

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