Unemployment, a Misunderstood Beast and How to Fight it

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Obama has just announced a 50 billion dollar programme to fight unemployment, and Barroso has immediately followed suit in a speech to the European Parliament, calling for a bond programme to finance big construction projects. Infrastructure is "key to the recovery". What they're both talking about is really the old Keynesian recipe of throwing funds on big infrastructure project to kick start the economy.

Kick start? A big word. It might help the construction industry but it won't go very much further than that.

Why not? Because this recession may not be a double-dipped one but it is nevertheless a DEEP one. Unemployment is not just the result of fiscal or monetary policy flaws (nor can it be corrected with such tools). The main thing to understand is that a very large portion of it is STRUCTURAL and it has preceded the Big Recession.

Let me note in passing that even if jobs were to become suddenly plentiful in the construction industry, that would still leave out scores of people unable to find a job, even though they have university degrees. For that's the latest (and most disturbing) dimension of unemployment: high tech industries in the United States are no longer hiring. Engineers who have been laid off in this recession cannot find another job in their specialty. They find themselves "left behind" and there aren't enough new graduates to fill the vacancies
For manufacturing however, the problem has been going on for decades now. So from where, from what sector will recovery come? Fifty billion dollars sound like a lot but actually they aren't - think of how big the TARP was...750 billions to save Wall Street from itself. As to Barroso's proposal, it's not likely to go anywhere: who's going to float bonds, tied to which projects and who's going to buy these bonds?

Of course, Obama hasn't stopped at infrastructure. He's also talking (quite rightly) about education, research and clean energy - all excellent targets for measures aimed at boosting the recovery. He is pushing for $200 billion in tax breaks for businesses investing in new facilities and equipment and a $100 billion extension to a research-and-development business tax credit. All this however is likely to take TIME before showing results. So the recovery is certainly not for tomorrow morning.

In the meantime, the Chinese have forged ahead with extensive support for their clean energy industry - production of solar panels and wind turbines - taking advantage of the fact that (a) they blithely disregard WTO rules regarding government subsidies to export industries (they are prohibited) and give their traders all the help they need, (b) they manipulate currency exchanges to ensure that the renmimbi doesn't rise unduly, and (c) they are the only ones mining the rare earths needed for solar panels and other advanced technology products. Small wonder that they have become the world's number one producer and trader in solar technology! And small wonder that the recovery is booming along in China!

So what should we do? I would propose we approach the problem of unemployment as clinically as one approaches the problem of under-development in the Third World, i.e. as follows:
(1) we accept that the problem is structural and we don't hide behind unrealistic economic models (some economists still don't, see Mr. Blanchard's report for the IMF): in other words, jobs need to be created in new industries to balance out the jobs lost in established manufacturing and high tech industries;
(2) we adopt a policy for searching and identifying these new jobs. That means combing through research results in all sectors, looking for innovations that can readily be turned into active projects, the shorter the road from innovation to application the better.
(3) To implement this policy, we set up a commission or some sort of institution bringing together, sector by sector, researchers and businessmen, both venture capitalists and business managers with a long experience in the sector, plus of course, marketing experts capable of quickly assessing potential demand. Their task would be to come up with a series of quickly do-able projects.
(4) We set up public-private partnerships to encourage investment into the said "do-able projects" - starting first with pilot experiments that could be financed wholly by the public sector, in the case the private sector investors are shy and dragging their feet. It's in those pilot experiments that the Government would have a real role to play, to jump start the process...

I guess what I'm suggesting is a NEW STRATEGY to fight unemployment - one that would mobilize the best in the private sector, venture capitalists and business managers and marketeers, and give an ice-breaking role to the Government. If new experiments fail, it would not be at the expense of private business but if, and whenever they succeed, it would reinforce the concept of a State at the service of its citizens. Which is the proper role of the State.

How does it sound to you? Let me know...All ideas welcome!
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