06 June 2011

The American Job Market - A Self Inflicted Wound

Excerpts from The Economist.  Government policy to reduce the deficit and move towards fiscal responsibility is proving economically reckless. It is now costing us jobs and putting us at risk for a double-dip recession.

After producing job gains averaging 220,000 per month in the three months to April, the economy added just 54,000 in May, below expectations. The private sector did a bit better, adding 83,000 jobs, but that was well off the healthy rate of hiring enjoyed earlier in the year. The unemployment rate rose to 9.1%, from 9.0% in April.
America's job woes have also been self-inflicted. Private firms have added over 1.7m jobs in the past 12 months, but the government has shed nearly half a million over the same period (not counting the loss of temporary Census jobs last year). Local governments alone have cut 446,000 positions since September of 2008. Some of those government jobs losses reflect a sensible rationalisation of workforces. Too many of them reflect the damaging effect of pro-cyclical budget cutting due to balanced-budget rules in cash-strapped states. More federal aid to states might have dampened the reductions, easing the drag on national growth.
The ongoing debt-ceiling battle is an additional source of uncertainty. Legislators continue to bicker over how and how much to trim from the federal budget in exchange for an agreement to raise the nation's statutory limit on borrowing. Failure to raise the ceiling by August will trigger default. Just yesterday Moody's, a ratings agency,threatened to downgrade America's debt rating if a deal on the ceiling weren't reached by next month.
In a global economy this volatile, the American economy is going to have a rocky month here and there. But American government officials are doing themselves no favours. Federal Reserve officials are overly concerned with inflation given the outlook for slowing global growth. Now is no time for policy tightening. And elected representatives in Washington are playing with fire. By cutting too much spending in the short-term and turning the debt-ceiling fight into a political battle, Congress risks making a large unforced error. The economy is simply too vulnerable at the moment for politicians to make those kinds of mistakes.

1 comment:

Lifehiker said...

I agree with you and the Economist, mostly, Ron. It took us 40 years to build the debt, and we need to reduce it over a long period as well. That will require changes in Social Security, Medicare, and defense spending - all politically difficult, but these will ultimately happen, one way or the other, because without change we will some day run out of money.

In the short term we have to deal with the deficit while also getting a lot of people back to work. Although I'd hate to be labeled a conspiracy theorist, one can't help but notice that the pay of CEO's continues to rise, there are more millionaires now than ever before, and corporations are sitting on record levels of cash. Whether in concert or not, it seems like those capable of hiring are not doing it. At the same time, the U.S. is lagging in innovation, especially in energy creation, conservation, and transmission. I'd also say that the cost of education has gotten out of control, and innovation is needed here as well.

It seems to me that one solution for the economy would be to re-allocate existing resources toward projects that would have long term, rather than short term,benefits. It may be that regulatory reform is necessary to make this happen, since our economy is very much hamstrung by laws that make the approval process for large projects almost interminable. Combining regulatory reform with heavy-duty jawboning of corporate leaders to make investments might just provide the impetus to prime the economic pump. The problem is finding politicians who could reach a consensus on such an approach. However, one can dream.