Let's Be Real About Unemployment

Our politicians can't grasp structural issues -- they are always hoping for a fast cyclical fix before the next election. Let's acknowledge the real cause of high unemployment and get to work addressing it.
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Let's acknowledge the real cause of high unemployment... and get to work addressing it.

It's probably not wise for a candidate to pick a fight with a noted economist, but I had a strong reaction to a post this week from by Professor J. Bradford DeLong titled, "The Varieties of Unemployment" that I came across via Ezra Klein.

Prof. DeLong's post is a bit technical. It addresses an academic debate among economists over whether our current state of high unemployment is "cyclical" or "structural." In a nutshell, some smart people are arguing the issue is supply (not enough of a type of worker), a problem with the structure of the economy itself. Other smart people are arguing that the issue is demand (not enough employers seeking those skilled workers), which is a problem that comes and goes in cycles.

The big difference is the latter problem can be solved by pumping taxpayer-funded "stimulus" into the economy, essentially creating the missing demand. Prof. DeLong appears to be in the camp that thinks this would be an effective remedy.

Here is the key example Prof. DeLong uses to prove our 10% unemployment rate is not structural:

[S]uppose that you have many workers qualified and skilled to work in construction, but households have decided that their houses are more than large enough, and wish to fill them with manufactured goods...

In that case, we would expect to see construction depressed: firms closed, capital goods idle, and workers unemployed. But we would also expect to see manufacturing plants running at double shifts -- the money not spent on construction has to go somewhere... We would expect to see manufacturers holding job fairs, and when not enough workers showed up, we would expect to see manufacturers offering higher wages to attract workers into their plants, and then raising prices to cover their higher costs.

The size and duration of the excess unemployment of ex-construction workers might be substantial and long lasting. It might require significant time to retrain construction workers and plug them into social networks in which they become good manufacturing workers. We might see prolonged and high unemployment in the construction sector, and in regions that had seen the biggest previous construction booms.

But depression in the construction sector and unemployment among its ex-workers would be balanced by exuberance in the manufacturing sector, rising prices for manufactured goods, and long hours and high wages for manufacturing workers.

He goes on to argue that since employment is down in almost every sector, the problem is clearly aggregate demand, which is cyclical, and not something structural.

My problem with Prof. DeLong's argument is that while I'm sure it's theoretically correct, it does not take into account the reality of our economy. That is, he only considers domestic production and employment. In our global economy, the collapse of demand in one country is often complemented by an increase of demand in another country and demand of certain types of goods in one country might be filled by production from another country.

By now, everyone gets that the American consumer is tapped out. In the past year, it has been the other economies of the world that have stepped up and are growing. In China, India, Brazil, Germany, etc. consumers are buying once again. These consumers didn't gorge themselves on easy credit and artificial home equity like we did, so they don't have the same need for a crash diet. In these economies, consumption is on the rise. There is an increasing need for products and services, and that need is being met -- but not by Americans.

Of course, it's no secret that American manufacturing has been declining over the past few decades. The secret is we are no longer talking about the loss of low-skill jobs. Politicians were quick to tell us not to worry when it started happening. We would always be high on the value chain, they said, because a country like China could never build high-quality technology products. But if you've purchased an Apple iPhone, Dell Laptop or HP printer lately, you purchased a product made at Foxconn in China. There, hundreds of thousands of people are hard at work right at this very moment.

This is our issue. Structurally we lost millions of manufacturing jobs and ended up replacing them with "service" industry jobs in retail and real estate that were fueled by the credit bubble or construction-type jobs fueled by the housing bubble. As our credit/housing bubbles exploded and these jobs disappeared, we were left with unemployment figures not seen in decades. As world economies recovered and spending returned, countries with strong manufacturing (and export-driven) economies also have recovered. However, structurally, we're not making what the world wants and we haven't really felt this recovery.

In my opinion, this is our most pressing national issue, and we continue to ignore it and move in the wrong direction. That's why when I first heard President Obama speak rosily of our economic recovery in terms of quarters instead of years, I was shocked. At the time, I figured I must be missing something since all the D.C. "experts" were agreeing with him and talking about a coming "economic recovery" and "return to near full-employment."

Now, after having been a candidate for Congress for almost a year, I think I understand. Our politicians can't grasp "structural" issues. They are always hoping for a fast "cyclical" fix before the next election.

Unfortunately, there are no short-term solutions to this long-term problem. We need to get to work in a hurry on the tax, regulatory, educational and industrial policies that will finally turn this trend around. My next post will give an overview of the specific policies I'm recommending.

This is the second in the series "A Business Plan for America" that will outline critical public policy proposals that are free of partisan politics, ideology and dead ideas. http://votechili.com/

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