Saturday, January 30, 2010

This Could Take Awhile
A little less than a year ago, I had the opportunity to interview economist Anthony Carnevale for CUF. During our conversation, he made a point I hadn't previously thought about: the way recessions work now is that the bulk of job loss isn't cyclical, but rather structural. In other words, you don't grow out of modern economic downturns by hiring back people who've been laid off from their old positions, but rather by creating whole new categories of jobs for them to fill.

A New York Times blog post from a couple days back made much the same point:

Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions.

As a recent Congressional Budget Office report put it, “Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, especially those in declining industries and sectors.”

Think glassmaking. Or clerical work. Or, for that matter, newspapers.
There are multiple ways to explain why permanent job-losers represent a higher share of the unemployed this time around. Maybe, as others have suggested, many of the jobs gained in the boom years were built on phantom wealth. Or maybe the culprit is a corollary of Moore’s Law, the idea of exponential advances in technology over time. That might suggest that innovation and automation displace more and more workers by the time each recession rolls around.

Whatever the underlying cause, the result is disconcerting: compared with previous recessions, many more of the employment gains in this recovery will have to come from new jobs.

That is much easier said than done.

The diagnosis of a structural versus cyclical recession changes the prescription for how to ease the pain and restore growth. In addition to steps like putting more money into programs like unemployment insurance and food stamps, there's much more of an imperative for government to take what actions it can to accelerate the process of new business development and job creation. That means investment in research and development, financial support for post-secondary education of all kinds and at all levels, and steps to make credit more readily available. Obviously, the Obama administration did a good deal of this through the American Reinvestment and Recovery Act passed a year ago in February, but it's now clear that they underestimated just how bad this recession would be and passed a too-small, too-slow measure as a result. (Frustratingly, the truly bright folks like Carnevale didn't--but they weren't "centrist" Republican Senators or "pragmatic" White House insiders, so their views weren't determinative.) And it's arguable that other measures within the ARRA that clearly had a longer-term focus and purpose, while probably justified in and of themselves, exerted an opportunity cost of less "stimulus" per se.

The political problem for the Obama administration and the Democrats in Congress is twofold. One, if they don't see economic gains this year, they're going to get wiped out in November and even the president's reelection in 2012 might be at risk; two, the unprecedented lack of faith in government's ability to do pretty much anything both constrains what they can do in response, particularly with fears of the structural budgetary imbalance now well established in the public mind. (That Republicans are approaching all these challenges with utter cynicism--blasting the president on deficits with a straight face, then turning around and voting en bloc against restoration of pay-as-you-go budgeting, because cutting taxes is more important than moving the budget toward balance--doesn't help either; and that they're counting on the cognitive dissonance of the electorate to shield them from paying for this hypocrisy at the ballot box is additionally depressing.) In December, the president described this as "about as difficult an economic play as possible": trying to goose growth while being prepared to slam on the spending brakes as soon as the recovery is deemed secure. This is the signal they're trying to send by mooting the (substantively quite dumb and ineffectual) freeze on discretionary domestic spending.

Long-term, the problem is that the American public isn't ready to come to grips with the fact that our means--the revenue structure we've created for ourselves--are nowhere near sufficient to pay for our desired ends of generous entitlements, super-aggressive (and by any rational standard wildly and wastefully excessive) international/"defense" posture, and expansive safety net. I think Obama gets this, and he probably has a sensible plan to bring the country toward that realization. But unless we pull out of the worst of this downturn by 2012--with unemployment below 8 percent and real wage gains at the median--he probably won't have the chance to try it. For everyone's sake, other than perhaps the Republicans hoping to ride economic misery back into power, let's hope those new jobs show up sooner than later.

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