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Why growth will stay too weak to ease unemployment

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by

mwkruse
in

Yahoo! Finance: Why growth will stay too weak to ease unemployment

WASHINGTON (AP) — An economy growing 2 percent a year might be tolerable in normal times. Today, it's a near-disaster.

A growth rate of 5 percent or higher is needed to put a major dent in the nation's 9.6 percent unemployment rate. Two reasons why that's unlikely well into next year and maybe beyond:

— Construction — both residential and commercial — collapsed last year. And it isn't expected to regain its strength for years. Typically after recessions end, construction booms and powers a new economic expansion.

— The recession that began in December 2007, after the housing bubble burst, became the Great Recession once the financial crisis erupted in September 2008. Economic recoveries that follow a financial crisis are typically sluggish. Banks usually take years to resume lending normally.

"To really get 'Morning in America' and get people feeling like jobs are really coming back, I would want to see something close to 5 percent" annual economic growth, says economist Josh Bivens of the Economic Policy Institute, referring to the iconic 1984 Reagan re-election ad.

That isn't likely to happen soon. Macroeconomic Advisers doesn't expect the labor market to recover all the lost jobs until at least 2013. Other economists say it could be 2018 or longer. …

Comments

5 responses to “Why growth will stay too weak to ease unemployment”

  1. Dan Anderson-Little Avatar
    Dan Anderson-Little

    Mike,
    I’d be interested in your thoughts on how we might as a country get out of this unemployment situation in the near future. Government stimulus? (That’s the only one I can think of that has ever worked before, but I am not terribly conversant with economic theory.) Cutting taxes might stimulate some spending, but I haven’t heard anyone claim that it will make much of a dent in employment. If we expect unemployment to stay high for the next number of years, will we have to shift more government spending to welfare, food stamps, housing assistance, health care, etc.?
    Dan

    Reply
  2. Michael W. Kruse Avatar
    Michael W. Kruse

    Sorry I’m slow. I’ve been traveling.
    I don’t have an easy answer to that question and I think this article points to how difficult is going to be.
    If you think of it with an organic metaphor, we don’t grow jobs any more than we grow plants. We create fertile soil from which they can grow, keep out the weeds, and give plenty of water.
    I know this may sound ideological but I think it has truth. The wealthy do not spend most of their wealth. They invest it. The more they invest, the less expensive it is to obtain capital for businesses get started and expand. Higher taxes means less money available for starting and investing in businesses.
    I’m not convinced stimulus has ever sparked job creation in any sustainable sense. It was tried all through the 1930s but what economic historians suggest turned things around was the radical upgrading of industrial capacity during WWII with simultaneous forced saving (not many goods to buy) that got things. That meant at the end of the war, capital was cheap, customers had pent up demand, labor was cheap with returning soldiers, and industrial capacity was radically larger. During the 1930s, industrialists let industrial capacity deteriorate because the top marginal tax rates were above 90%, and that meant you got almost nothing for investing in improved production.
    All that said, we are talking about taxes going up to rates in the Clinton era. It isn’t inconsequential but it isn’t that big. Keep the tax rates low isn’t going to turn it around but it is a minor thing that weakens the soil.
    What is unique about this recession is the unnerving affect the financial market collapse had on business coupled with the expansive health care initiative (and general increase in national debt). The first alone is enough to create timidity. But businesses can’t discern what the future holds in terms of employee benefit costs they will have to incur. Business activity is actually recovering quite well and businesses are sitting on a ton of cash, so making cash more available isn’t going to do much. They don’t want to hire until they can get a better sense of the future.
    Businesses must now insure employees in ways that will radically increase the cost per employee. At some point businesses will simply say it is less expensive to pay an annual $2,000 fine per employee for not offering coverage. The employees move to a less comprehensive government option. The likely counter-move is that government increases the fine to a level that makes it more painful not offer insurance. Meanwhile, those firms who haven’t shifted production to other countries end up paying far more than they are today for inferior insurance coverage.
    The basic point is that businesses can’t figure out how to anticipate costs of new employees for even a fairly short time horizon. That has them balking at hiring right now. The soil isn’t ready for planting.
    I do suspect there will be an ongoing need for some help with welfare support to maintain a safety net. But the long term solution is a stable economy in which businesses can grow. That’s how I see it.

    Reply
  3. vanskaamper Avatar
    vanskaamper

    Michael, what is your take on the announced qualitative easing strategy?

    Reply
  4. Michael W. Kruse Avatar
    Michael W. Kruse

    Van, my take is that we should buy lots of gold and hang on. 😉 Seriously, it sounds like a risky strategy to me.

    Reply
  5. vanskaamper Avatar
    vanskaamper

    “Perhaps to give us a laugh, Bernanke notes that the Fed labors under a dual mandate imposed by Congress “to promote a high level of employment and low, stable inflation.” Funnily enough, on Bernanke’s watch the rate of unemployment has doubled, and while he would correctly point out that the dollar’s exchange value is a Treasury thing, gold has nearly tripled versus the dollar during his tenure. It’s as though he’s begging to be relieved of his duties by noting his failures, but his peers and overseers in Washington are as clueless as he is.
    As a result, Americans and the world will continue to suffer a Fed head that, with every utterance shows how very unequal he is to his job. A self-proclaimed expert on the 1930s, Bernanke continues to intervene in the economy despite clear lessons from that decade showing that government intervention then turned what should have been a brief downturn into a Great Depression.”
    John Tamny @ Real Clear Markets
    http://tinyurl.com/2fzvgob

    Reply

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