To escape the Great Recession, embrace contradiction

October 18, 2012

Where will jobs and growth come from? As we enter the fifth year of the Great Recession, people all over the world are asking this question, but their political leaders are not providing any convincing answers, as has been made obvious in the U.S. presidential debate and the European Union summit this week.

The second presidential debate started with Jeremy Epstein, a 20-year old college student, pointing out that he had “little chance to get employment” and asking the two candidates for some reassurance and an explanation of how this would change. Mitt Romney offered lots of reassurance but not much explanation:

“I want you to be able to get a job. I know what it takes to get this economy going. I know what it takes to create good jobs again. I know what it takes to make sure that you have the kind of opportunity you deserve. When you graduate … in 2014, I presume I’m going to be president. I’m going to make sure you get a job. Thanks, Jeremy. Yeah, you bet.”

President Obama was more specific but hardly more convincing:

“No. 1, I want to build manufacturing jobs in this country again. That means we change our tax code so we’re giving incentives to companies that are investing here in the United States. It also means we’re helping them and small businesses to export all around the world. No. 2, we’ve got to make sure that we have the best education system in the world. No. 3, we’ve got to control our own energy.  We’ve got to reduce our deficit, but we’ve got to do it in a balanced way. And let’s take the money that we’ve been spending on war … to rebuild roads, bridges, schools. We do those things, not only is your future going to be bright but America’s future is going to be bright as well.”

Tinkering with taxes and investing in education, energy and roads may be good ideas, but does anyone believe such measures would resolve the deepest and most intractable unemployment problem that the U.S. and the world have faced since the 1930s?

Actually, somebody does seem to share Obama’s optimism: the European Union. Here are the takeaways from the “Compact on Growth and Jobs” prepared for this week’s EU summit: Investing in Infrastructure; Deepening the Single Market; Connecting Europe; Promoting Research and Innovation; Enhancing Competitiveness; Creating the Right Regulatory Framework; Developing a Tax Policy for Growth; Boosting Social Inclusion; Harnessing the Potential for Trade.

These are all worthy aims, just as the goals in Obama’s laundry list are, but they are exactly the policies that Europe has been trying to implement for the past four years, while unemployment has relentlessly risen. Why should they suddenly answer the desperate need for new jobs?

This question actually has a clear answer. But it is an answer that seems difficult for policymakers to articulate, not because it is too complicated but because it cuts across ideological divisions.

The challenge of job creation demands a two-part answer — and unfortunately these two parts appeal to opposite ends of the political spectrum. Creating new jobs and economic activity depends on private enterprise, and it is unclear whether government policy can do anything much to inspire the next Google or Starbucks. But just as important as creating jobs is restoring the old jobs destroyed by recession – and this job recovery depends primarily on the actions of governments and central banks.

The tens of millions of jobs lost globally in construction, retailing, hospitality, autos, household goods and other traditional industries since 2008 were not destroyed by a sudden breakdown in entrepreneurial zeal. They disappeared mainly because of collapsing consumer incomes, asset prices, credit and other macroeconomic dislocations.

To overcome the global crisis of unemployment, new jobs in new industries have to be created, just as old ones must be restored. But because job creation is associated with conservative deregulation, while job recovery points to Keynesian demand stimulus, the policies required to achieve these two objectives often seem to be in contradiction. The starkest case is in Europe. Greece and Spain are promised development through structural growth policies that encourage competition and deregulate labor. At the same time they are forced to impose deflationary fiscal policies that guarantee permanent recession and ever-rising unemployment. The result is a disillusioned populace, as both structural and macroeconomic policies are seen to fail.

Yet if not for ideology, structural and macroeconomic employment policies could be viewed as mutually reinforcing. If macroeconomic stimulus pulls the economy out of recession and preserves jobs in existing industries, that helps strengthen new businesses – at least until the economy approaches full employment and further stimulus starts to push up inflation or interest rates. At that point, old industries start to compete with new ones for workers and government spending “crowds out” private enterprise. That is when reductions in public spending and budget deficits become important to allow the private sector enough leeway for growth. When the economy is still in recession, by contrast, cuts in government spending and efforts to narrow deficits do not liberate private enterprise; they merely starve new business of incomes and demand.

Many politicians seem to think such ambiguities are too complicated to explain to voters. Nobody seems to advocate job-creation plans that combine conservative policies to promote competition and enterprise with Keynesian fiscal stimulus to boost demand. But this combination is plain commonsense. Driving a car requires a gas pedal, a brake and steering wheel, and these must be used in different combinations at different times. Voters are surely capable of understanding this; the question is whether politicians can understand it, too.

PHOTO: U.S. Republican presidential nominee Mitt Romney (L) and U.S. President Barack Obama speak directly to each other during the second U.S. presidential debate in Hempstead, New York, October 16, 2012.  REUTERS/Mike Segar


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In the last 15 years we overindulged in asset price inflation, like residential housing, to prop up job creations, neglecting however, domestic manufacturing jobs.

Globally competitive corporate fiscal policies, to support export and manufacturing, should be favored now for a solid recovery.

Seems like both candidates are sensitive to this subject… let’s just hope…

Posted by robb1 | Report as abusive

You can shape any society by what your tax code rewards and punishes. Obviously today our government wants more of the “poor”. It rewards them with ever-increasing direct subsidies (by the head) and so the result in such “family friendly” policy is more and more of the unmotivated, the uneducated, the unskilled, the undesirable single-parent lifestyle who prey on our society in so many, many ways.

It no longer deports illegal border jumpers who prey on our hospitals, schools, and job market by taking but never paying for medical services, causing more and more schools to be built, more and more classrooms for classes in Spanish, more and more “free meals” so “the children” don’t go hungry” that grow up and disrupt those same classrooms and put so little effort into their academic achievement that they drag the achievement record of entire schools down farther and farther even as curriculum is “dumbed down” more and more to get dropout rates down and achieve at least an illusion of success in number of “graduates”.

Obviously it wants less of the innovative and successful, because it is by penalizing and demonizing success that government of leftward tilt always try to finance Socialist policies and dreams. Why do they do this? So it LOOKS like they are doing the job that needs to be done.

Government isn’t smart enough to identify, pursue, capture and prosecute the rogues of our financial “system” whose business model is deception, fraud, fast feet and expensive lawyers. So, like Willie Nelson, who robbed banks because “that’s where the money is”, governments today “go after” the middle class because “that’s where the money is”. They can’t hide their houses from exploding property tax rates any more than they can move them out of plunging local economies. They can’t materially increase tax deductions is their income is from a salary.

Sure, they get some benefit from their mortgage deductions; but all that does is encourage them to “invest” in houses ever larger that have to be furnished, kept up, cleaned,, heated and cooled…space really not needed. What a waste. And in seeking a decent low-crime environment to raise families, young couples must buy homes further and further from work, increasing commuting time, wear and tear on family vehicles, polluting the air, wearing out roads, etc. What could possibly go wrong?

Sure, they get another deduction for each child; at a time when our society increasingly has more and more mouths to feed and needs fewer and fewer workers to function. And the “middle and upper class” percentage of American population is dwarfed by the birth rate of minorities and muslim households that tend to take more from society than return back.

Some day, if western civilization survives, scholars will look back and ask of our political “representatives”, “What were they thinking”. And the obvious answers will be “They weren’t” or “They didn’t.”

As Walt Kelly said in his “Pogo” comic strip some time ago: “We has met the enemy and he is us”.

Posted by OneOfTheSheep | Report as abusive

“Private enterprise” — that is, the present system of free trade without restraint, banking without regulations, and taxes that benefit only the wealthy class — IS THE PROBLEM, NOT THE SOLUTION.

Posted by Gordon2352 | Report as abusive

Regarding my comment above:

You state, “Many politicians seem to think such ambiguities are too complicated to explain to voters.”

Perhaps if the politicians explained it to the American people in those terms, they could understand it.

But then they would have to justify their own greed and violations of oath of public office.

THAT might be a bit hard for people to understand.

Posted by Gordon2352 | Report as abusive