Remedying recession, reducing debt

August 12, 2011

We all know there are three important things about real estate: location, location, location. That double repetition, which the late and great word sleuth William Safire traced back to a 1926 Chicago Tribune classified ad, is still with us because it is succinct and true.

You can think about the economic and political woes of the Western world today in the same way. It’s all about jobs, jobs, jobs.

But over the past two weeks the political battles over government debt in Washington and Frankfurt, the street battles in Britain, and the volatility of markets everywhere have obscured that reality. The talk instead has been about share prices, credit ratings, police tactics and political dysfunction.

That’s why Pinched, a book about unemployment published this week by the American journalist Don Peck is so timely and important. Mr. Peck’s central message is that all recessions are not the same. Prolonged slowdowns, like the one the Western world is experiencing today, make their mark not only through the pain they cause while we are in the middle of them. They have a permanent, and largely malignant, impact.

As Mr. Peck argues: “When jobs are scarce, incomes flat, and debts heavy for protracted periods, people, communities and even whole generations can be left permanently scarred.”

Mr. Peck’s warning, which is based on the lingering effects of previous deep recessions, runs counter to the intuitions of the postwar generations in Western Europe and North America whose lives have been a story of fairly steady economic growth.

“The problems that we face are even bigger than we think right now,” Mr. Peck told me. “People assume that, ‘Well, it will be bad for a while, but then it will get better.”’

The sort of metaphors we tend to reach for, to borrow one from the White House, are of the car that was driven into the ditch. It is unpleasant to be stuck in the mud, and pushing it out is hard work, but once we are back on the road it will be full speed ahead.

The better, but grimmer, comparison is to infant malnutrition. Even if that child grows into a well-fed adult, her early experience of deprivation will do lasting damage.

That ugly image is particularly apt because the hardest hit will probably be young people. Mr. Peck spoke to Lisa Kahn, a Yale economist, who found that getting your first job during a deep recession meant a starting salary 25 percent lower than during a boom, and an income 10 percent less 17 years later. Even mid-career, the recession generation not only takes home a thinner paycheck, it is lower down the corporate hierarchy and more professionally timorous.

Mr. Peck’s second key point is that deep downturns don’t just — though no human life is a “just” — blight individual lives or even the lifetime job prospects of a single generation. Living through a lot of lean years changes the entire culture, and not for the best.

Most of his book was written last year and it is largely about the United States, but Mr. Peck’s prediction of societies turned nasty and brutish by hard times will have particular resonance this week in Britain.

“What we know for sure is that politics will become more contentious and life will become more mean-spirited,” Mr. Peck said. “The great risk, I think, is a poisoning of politics, which will create a foreshortening of political action, where any sort of bold plan simply becomes impossible.”

What is important about Mr. Peck’s analysis is that he puts what happens in people’s lives — their job prospects, their lifetime earnings, the shift in family dynamics when one parent is unemployed — at the center of his thinking about economic policy. He really does think the urgent issue today is jobs, jobs, jobs, because the personal catastrophe of unemployment, multiplied a millionfold, becomes a national catastrophe.

All of which may make you assume that Mr. Peck is a deficit dove. While it is true that in the short term he is worried that premature austerity is the greatest danger, he thinks that too much government debt matters as well: “To restore confidence in the federal government without undermining the recovery, we must tie current deficits to binding measures that will close the budget gap and stabilize the national debt in the near future.”

That is the real tragedy of the poisoned political debate Mr. Peck predicts — and which is already paralyzing so much of the developed world. We argue bitterly about jobs versus deficits. But the best — and probably only — way to solve both problems is with a double-barreled strategic approach.

Robert E. Rubin, a former secretary of the Treasury and currently the co-chairman of the Council on Foreign Relations, told me: “A lot of the commentary distinguishes between addressing the deficit and addressing jobs. I think they are actually one issue.”

Like Mr. Peck, Mr. Rubin believes that an agreed plan to close the deficit in the medium term would actually make a job-creating stimulus program in the short term both more feasible and more effective.

“You can put in place a serious fiscal program, which would generate job-creating confidence, but defer the implementation date,” he said. “In that context you could do a fiscal stimulus, and at much less risk of it being materially offset by an adverse effect on confidence.”

We need to create jobs today — and commit to tightening our belts when the economy starts to recover. It is a simple plan that makes sense to a lot of us. But in the scared, beggar-thy-neighbor world Mr. Peck describes, the public-spirited middle ground this approach embodies may no longer exist.


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I have a solution for creating jobs: how about huge import duties on imported products, has anyone ever thought about this? You will see how quickly jobs will come back. I realize that this is idea no one wants to contemplate, as this will really hit well offshoring companies that have hired our politicians to maximize their profits. But open your eyes: which are the best performing economies in this Depression? Protectionist. China, India, Brazil, Russia. Every country that protects its jobs is doing quite well. How do you explain it? Blinded by greed, we keep offshoring our jobs, and then we complain about unemployment? Try time proven simple solutions, if only there would be political will to do so. But don’t expect this to happen any time soon. The people who make the most money also happen to own our politicians. We want to eat a cake and have it too. It ain’t gonna happen. These discussions about deficits are just side distraction, sand in our eyes. Things going wrong in this country are by design, these are not accidents. We have let uncontrolled greed rule this country. If all the products we consume were manufactured here, we would have 2% unemployment.

Posted by contrarianview | Report as abusive

the recession is due to a wrong monetory system. after the 2nd world war the dollar has been the de facto currency for trade which is utterly wrong and due to this our world today is running on a system which is fundamentally incorrect. US is sitting on a huge debt but it largely cushioned because other countries try and devalue their own respt currencies vis a vis the dollar to promote their own exports to US. Today we are living in a Global village, the world has shrunk, except for perishables commodities today command almost the same price anywhere in the world. Now if you look at jobs as a commodity, a person say in Pakistan whose education is almost as good as say someone is US, should command similar wages as well. So there is bound to be a lot of turmoil is US and also the whole world, firstly because of the wrong monetory system and secondly because of the increase in the number of qualified people elsewhere ready to work at a much lesser pay than a US citizen.

Posted by prashanter | Report as abusive

All of what you point out is true, but concludes with us supposedly being helpless.

You have missed the broader context of what has been happening. Not only is the divide between rich and poor in the Unitded States been growing for many years (long before the Third Depression), but the rich have become richer. The endless controversial distractions from politicians and the complicit media have kept us from discussing this fundamental issue. How long is Congress under the influence of K Street going to keep funneling the nation’s resources to the rich and super rich while systematically demolishing the middle class and sending the poor to the destitute?

Posted by ptiffany | Report as abusive

I agree with the third comment… it really is funny that we have rich people sitting on their assets as if nothing is wrong (and I don’t say this in a judgmental sense, only in a purely practical sense) while others are starving, struggling, and stressing out because they don’t have jobs. It is the global poverty crisis coming to haunt us in our own streets – even in rich suburbs people are now jobless who used to be well employed. No one seems to look at how many loopholes in tax code there are for the rich – both individuals and businesses. We hear a little TINY amount of talk about tax code reform, but politicians are so hesitant to do it because of the influence the rich have on their campaign contributions, that they really don’t do anything about the problem. It is just greed gone wild. Taxing imports may help temporarily, but we would face consequences in other areas – higher costs of products, etc – and get away from the global economy that the world has been working towards for a while now… really a more structural approach looking at the actual cause of the problem would be best.

Posted by nicoleluvs2dnc | Report as abusive

I believe you are correct Ms. Freeland. The problem won’t get solved. Your op-ed piece is spot on, and shows its just one more step for the US to be a third-world, banana republic, facist state…. It’s the next stop… we’re almost there.

Posted by edgyinchina | Report as abusive

As always Ms Freeland, you’re right on the money – no pun intended. The income and wage problems facing the incoming generations, if they’re able to get jobs at all, are serious, though not dismal. I think a serious overhaul of the private sector, especially small business, is the best way to get jobs going as we’ve seen over the past decade that small business generates the most jobs.
In response to another commentator, I don’t think levying higher import taxes will help at all. There is nothing, or very little, stopping big American companies from moving to the BRIC countries today. Domestic consumption in places like China and Russia is steadily rising with little sign of stopping; whatever gets taxed too highly on American shores will simply end up staying in the BRIC countries where the new yuppies will gladly buy them up.

Posted by NewsAddict | Report as abusive