Unemployment line in Newark, New Jersey |
By David Leonhardt, The New York Times, October 8, 2011
UNDERNEATH the misery of the Great Depression, the United States
economy was quietly making enormous strides during the 1930s. Television and
nylon stockings were invented. Refrigerators and washing machines turned into
mass-market products. Railroads became faster and roads smoother and wider. As the
economic historian Alexander J. Field has said, the 1930s
constituted “the most technologically progressive decade of the century.”
Economists often distinguish between cyclical trends and secular
trends — which is to say, between short-term fluctuations and long-term changes
in the basic structure of the economy. No decade points to the difference quite
like the 1930s: cyclically, the worst decade of the 20th century, and yet,
secularly, one of the best.
It would clearly be nice if we could take some comfort from this bit
of history. If anything, though, the lesson of the 1930s may be the opposite
one. The most worrisome aspect about our current slump is that it combines
obvious short-term problems — from the financial crisis — with less obvious
long-term problems. Those long-term problems include a decade-long slowdown in
new-business formation, the stagnation of educational gains and the rapid
growth of industries with mixed blessings, including finance and health care.
Together, these problems raise the possibility that the United States
is not merely suffering through a normal, if severe, downturn. Instead, it may
have entered a phase in which high unemployment is the norm.
On Friday, the Labor Department reported that job
growth was mediocre in September and that unemployment remained at
9.1 percent. In a recent survey by the Federal Reserve Bank of Philadelphia,
forecasters said the rate was not likely to fall below 7 percent until at least
2015. After that, they predicted, it would rarely fall below 6 percent, even in
good times.
Not so long ago, 6 percent was considered a disappointingly high
unemployment rate. From 1995 to 2007, the jobless rate exceeded 6 percent for
only a single five-month period in 2003 — and it never topped 7 percent.
“We’ve got a double-whammy effect,” says John C. Haltiwanger, an
economics professor at the University of Maryland. The cyclical crisis has come
on top of the secular one, and the two are now feeding off each other.
In the most likely case, the United States has fallen into a period
somewhat similar to the one that Europe has endured for parts of the last
generation; it is rich but struggling. A high unemployment rate will feed fears
of national decline. The political scene may be tumultuous, as it already is.
Many people will find themselves shut out of the work force.
Almost 6.5 million people have been officially unemployed for at least
six months, and another few million have dropped out of the labor force — that
is, they are no longer looking for work — since 2008. These hard-core
unemployed highlight the nexus between long-term and short-term economic
problems. Most lost their jobs because of the recession. But many will remain without work
long after the economy begins growing again.
Indeed, they will themselves become a force weighing on the economy.
Fairly or not, employers will be reluctant to hire them. Many with
borderline health problems will end up in the federal disability program, which has become a
shadow welfare program that most beneficiaries never leave.
For now, the main cause of the economic funk remains the financial
crisis. The bursting of a generation-long, debt-enabled consumer bubble has
left households rebuilding their balance sheets and businesses wary of hiring
until they are confident that consumer spending will pick up. Even now, sales
of many big-ticket items — houses, cars, appliances, many services — remain far below their pre-crisis peaks.
Although the details of every financial crisis differ, the broad
patterns are similar. The typical crisis leads to almost a decade of elevated
unemployment, according to oft-cited academic research by Carmen M.
Reinhart and Kenneth S. Rogoff. Ms. Reinhart and Mr. Rogoff date the recent
crisis from the summer of 2007, which would mean our economy was not even
halfway through its decade of high unemployment.
Of course, making dark forecasts about the American economy,
especially after a recession, can be dangerous. In just the last 50 years,
doomsayers claimed that the United States was falling behind the Soviet Union,
Japan and Germany, only to be proved wrong each time.
This country continues to have advantages that no other country,
including China, does: the world’s best venture-capital network, a
well-established rule of law, a culture that celebrates risk taking, an
unmatched appeal to immigrants. These strengths often give rise to the next
great industry, even when the strengths are less salient than the country’s
problems.
THAT’S part of what happened in the 1930s. It’s also happened in the
1990s, when many people were worrying about a jobless recovery and economic
decline. At a 1992 conference Bill Clinton convened shortly after his election
to talk about the economy, participants recall, no one mentioned the Internet.
Still, the reasons for concern today are serious. Even before the
financial crisis began, the American economy was not healthy. Job growth was so
weak during the economic expansion from 2001 to 2007 that employment failed to
keep pace with the growing population, and the share of working adults
declined. For the average person with a job, income growth barely exceeded
inflation.
The closest thing
to a unified explanation for these problems is a mirror image of what made the
1930s so important. Then, the United States was vastly increasing its
productive capacity, as Mr. Field argued in his recent book, “A Great Leap
Forward.” Partly because the Depression was eliminating inefficiencies but
mostly because of the emergence of new technologies, the economy was adding
muscle and shedding fat. Those changes, combined with the vast
industrialization for World War II, made possible the postwar boom.
In recent years, on the other hand, the economy has not done an
especially good job of building its productive capacity. Yes, innovations like
the iPad and Twitter have altered daily life. And,
yes, companies have figured out how to produce just as many goods and services
with fewer workers. But the country has not developed any major new industries
that employ large and growing numbers of workers.
There is no contemporary version of the 1870s railroads, the 1920s
auto industry or even the 1990s Internet sector. Total economic output over the
last decade, as measured by the gross domestic product, has grown more slowly
than in any 10-year period during the 1950s, ’60s, ’70s, ’80s or ’90s.
Perhaps the most important reason, beyond the financial crisis, is the
overall skill level of the work force. The United States is the only
rich country in the world that has not substantially increased the
share of young adults with the equivalent of a bachelor’s degree over the past
three decades. Some less technical measures of human capital, like the
percentage of children living with two parents, have deteriorated. The country
has also chosen not to welcome many scientists and entrepreneurs who would like
to move here.
The relationship between skills and economic success is not an exact
one, yet it is certainly strong enough to notice, and not just in the reams of
peer-reviewed studies on the subject. Australia, New Zealand, Canada and much
of Northern Europe have made considerable educational progress since the 1980s,
for instance. Their unemployment rates, which were once higher than ours, are
now lower. Within this country, the 50 most educated metropolitan areas have an
average jobless rate of 7.3 percent, according to Moody’s Analytics; in the 50
least educated, the average rate is 11.4 percent.
Despite the media’s focus on those college graduates who
are struggling, it’s not much of an exaggeration to say that people with a
four-year degree — who have an unemployment rate of just 4.3 percent — are
barely experiencing an economic downturn.
Economic downturns do often send people streaming back to school, and
this one is no exception. So there is a chance that it will lead to a surge in
skill formation. Yet it seems unlikely to do nearly as much on that score as
the Great Depression, which helped make high school universal. High school, of
course, is free. Today’s educational frontier, college, is not. In fact, it has
become more expensive lately, as state cutbacks have led to tuition increases.
Beyond education, the American economy seems to be suffering from a
misallocation of resources. Some of this is beyond our control. China’s
artificially low currency has nudged us toward consuming too much and producing
too little. But much of the misallocation is homegrown.
In particular, three giant industries — finance, health care and
housing — now include large amounts of unproductive capacity. Housing may have
shrunk, but it is still a bigger, more subsidized sector in this country than
in many others.
Health care is far larger, with the United States spending at least 50
percent more per person on medical care than any other country, without getting
vastly better results. (Some aspects of our care, like certain cancer
treatments, are better, while others, like medical error rates, are worse.) The
contrast suggests that a significant portion of medical spending is wasted, be
it on approaches that do not make people healthier or on insurance-company
bureaucracy.
In finance, trading volumes have boomed in recent decades, yet it is
unclear how much all the activity has lifted living standards. Paul A. Volcker,
the former Fed chairman, has mischievously said that the only useful recent
financial innovation was the automated teller machine. Critics like Mr. Volcker
argue that much of modern finance amounts to arbitrage, in which technology and
globalization have allowed traders to profit from being the first to notice
small price differences.
IN the process, Wall Street has captured a growing share of the
world’s economic pie — thereby increasing inequality — without doing much to
expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found
that higher inequality leads to slower economic growth.
The common question with these industries is whether they are using
resources that could do more economic good elsewhere. “The health care problem
is very similar to the finance problem,” says Lawrence F. Katz, a Harvard
economist, “in that incredibly talented people are wasting their talent on
something that is essentially a zero-sum game.”
In the short term, finance, health care and housing provide jobs, as
their lobbyists are quick to point out. But it is hard to see how the jobs of
the future will spring from unnecessary back surgery and garden-variety
arbitrage. They differ from the growth engines of the past, which delivered
fundamental value — faster transportation or new knowledge — and let other
industries then build off those advances.
The United States has long overcome its less dynamic industries by
replacing them with more dynamic ones. The decline of the horse and buggy,
difficult as it may have been for people in the business, created no
macroeconomic problems. The trouble today is that those new industries don’t
seem to be arriving very quickly.
The rate at which new companies are created has been falling for most
of the last decade. So has the pace at which existing companies add positions.
“The current problem is not that we have tons of layoffs,” Mr. Katz says. “It’s
that we don’t have much hiring.”
If history repeats itself, this situation will eventually turn around.
Maybe some American scientist in a laboratory somewhere is about to make a
breakthrough. Maybe an entrepreneur is on the verge of creating a great new
product. Maybe the recent health care and financial-regulation laws will
squeeze the bloat.
For now, the evidence for such optimism remains scant. And the economy
remains millions of jobs away from being even moderately healthy.
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