Permanently High Unemployment

Little by little, one step at a time, the mainstream press is beginning to understand. There was no ordinary recession. There will be no ordinary recovery. And something is very wrong.

A Great Depression? We should be so lucky, writes David Leonhardt in The New York Times:

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.”

The 1930s was a tough time to earn a living. But great things were happening. Much of the technology that would later become ubiquitous…and which would power the post-WWII consumer boom…was developed in the ’30s. But what new technology is coming along now? Do you see anything that will later cause a boom? We don’t. Leonhardt continues:

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.

Yes, dear reader, welcome to the Great Correction. It will probably be long. It will probably be slow. It will probably be like Japan over the last 20 years.

Even the Fed is managing expectations downward. It says we’ll have unemployment over 7% until after 2015. Leonhardt thinks we’re following Europe’s pattern — with high unemployment as a more or less permanent feature of the US economy.

He’s probably right about that. Price inflation is giving way to price deflation. That means, labor rates — which are generally less flexible — tend to be too high.

‘Wait a minute, Bill. Are you saying that the American working stiff, who you say hasn’t had a raise since 1974, is still earning too much money?’

Well, yes…that’s what it looks like. But just look at the average American worker. Is he smarter than a Chinese worker? Does he work harder than an Indian? Is he better trained or more skilled than a Brazilian?

We’re not talking about people who are really educated. If you’re a good engineer or a clever marketer, you probably are earning more than ever. But most people aren’t. Most people don’t have any real skills — including those who went to college. You get a degree in communications. Or in psychology. Or sociology. Or politics. What do you really know? Not much. If you’ve got some luck and some pluck, you can use your skill at reading and writing to leverage yourself into a real job. But not everybody can do that.

The typical person doesn’t have any real skill. When the economy was booming, it didn’t matter. He didn’t need any skills. Anybody could get a job. And a credit card. And a house.

But now, he’s struggling. The house is underwater. The job has disappeared. And he still has no skills. How much can a person like that expect to make? About as much as the average unskilled person in other countries…which is a lot less than he intended to make.

The emerging markets are gaining on us. We read last week that wages in Russia have gone up 12 fold since the early ’90s. In India, they double every 10 years. In Shanghai, college educated people earn nearly as much as they do in the US.

But while some economies emerge…others submerge. Some go up. Some go down. And the working classes are bound to run into each other somewhere in the middle. How long will it be before an unskilled laborer in Tennessee earns about as much as an unskilled laborer in Turkey, Russia or Indonesia? We don’t know.

In the meantime, getting paid as much as an illegal immigrant is not a very attractive prospect. Millions would rather not work at all. Get food stamps. Take it easy. Watch TV. That’s why unemployment is high, at least in a theoretical way. People are unwilling to work for what they are really worth.

You want to put people back to work? Just cut wages in half. Presto, mission accomplished. Seriously, it would be easy to fix the unemployment problem. Just eliminate all the safety nets, welfare, unemployment, disability, minimum wages and other employment legislation. Let price and demand get together on their own. Anyone who really wanted to work would lower his wage to the point where an employer was willing to pay him. The economy would boom. But that’s another story. And no one — other than Ron Paul — is going to mention it in Congress.

A French economist — Jacques Rueff — was way ahead on this. He realized that you would never be able to fix unemployment by rolling back labor laws. So he figured another way of lowering wages — create inflation! That, he said, was the real genius of ‘Keynesian counter-cyclical stimulus spending.’ It created inflation, which lowered real wages…thus putting people back to work.

It defrauded the working class; but it was for their own damned good!

The mainstream press is also coming around to seeing things our way on other matters. Leonhardt again:

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.

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.

Of course, these were themes we were talking about 5 years ago. The finance industry was largely a scam…but so is education and health too. Trillions are invested, with no real payback.

The same could be said for the US military. It’s the largest single capital consumer in the world.

In the 1930s America was developing new technologies and building new industries. Today, she is subsidizing her zombie industries of the past — and getting nothing from it.

But at least the Pentagon is entertaining. It is like a huge football franchise with 300 million fans, every one of whom is forced to buy season tickets!


Bill Bonner
for The Daily Reckoning

The Daily Reckoning