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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Obama's Dilemma: Stay in the Middle or Turn Left? What if there's No Way Out?

Barack Hussein Obama takes the oath of office ...                                   Image via Wikipedia


President Obama is a man with a dilemma: should he keep navigating the centre of the political spectrum to try and save whatever congressional seat can be saved from the Republican onslought? Should he veer left instead and do a real, no holds-barred liberal job, in line with what so many of the grassroots Democratic voters expected of him?

So far, he's tried to please both sides. At one end of the spectrum, he's pushed for Social Security for All and at the other he's maintained a war-like military stance in both Iraq and Afghanistan.

I had hoped he would close the Iraq question as soon as he got into office - but Iraq is still there, with a much higher military presence than he had at first promised: 50,000 troops remain to keep order. That's a lot for what should be a non-war! As to Afghanistan...well, he had never said he would pull out of that one, and indeed, far from pulling out, it's become a much larger conflict complete with a "surge". I hate that word "surge", it just means more troops are brought in, more war, more deaths. Another Vietnam. With these contradictory policies he is certainly confusing his grassroots followers.

This is hardly the moment to confuse them. It would seem that Big Business is behind the Republican Tea Party, out to get you-know-who. That's in an op-ed of the New York Times and I believe it. It's not just Murdoch of Fox News who's jumped in the fray but many others, including the Koch Brothers, of famed Texas "oil" wealth. Are you getting a feeling of déjà vu? I sure am. These guys have reportedly financed both the protests around plans to build a mosque in New York near Ground Zero and more recently the huge crowd that rallied in Washington, around the Lincoln Memorial,at the site where the Rev. Martin Luther King Jr. delivered his "I have a Dream" speech 47 years ago.

Summoned by Glenn Beck, a conservative broadcaster who'd like to see "a religious rebirth" in the United States, it was a large turnout, some 300,000 people according to NBC News estimates. Of course, beck himself claimed double that figure. And while it was supposedly religious in spirit, it had a disturbing political halo around it. According to the New York Times, "people in the crowd echoed Mr. Beck's ideas that 'progressives' were moving the United States towards socialism and that entitlement programs like Social Security, Medicare and Medicaid must be ended".

Imagine a meeting like that in any European capital: impossible! You'd never get 300,000 people shouting and calling for the end of Social Security...When reading news like this one realizes how dramatically different the United States are from Europe. And how much Big Business manages to influence the political scene. For example, Italy's prime minister is a hard-headed businessman - the Italian version of Murdoch - and all the parties on the right are governing the country, but the Italian social security system (INPS) is in no danger of disappearing. There are no crowds in the street calling for its demise.

Something like that does not enter the discussion, full stop.But in America it does. And it seems to work.

What is Obama going to do about it? He's in a quandary. What CAN he do, given his image? There is an enormous percentage of Americans who think he's a Moslem, something like 18 or 19 percent. And it's a growing percentage: at the time he was sworn in office it was around 11 or 12 percent! Some go so far as to call him derisively Imam-in-chief Barack Hussein Obama. That certainly ties him down and makes it hard for him to carry out a Democratic liberal agenda, which is really the only thing he ought to do...and perhaps save America from people who do not believe in education, public health or helping the poor. People who'd like to turn America into a capitalistic jungle...

In the week following the Lincoln Memorial rally, Obama has given us an inkling of how he might play it. He's wound down the American presence in Iraq with a well-balanced intelligent speech and sent Biden and Gates to the ceremony in Baghdad. Clever...And within 24 hours, he was hosting at the White House a meeting meant to jumpstart renewed peace negotiations between Israel and Palestine. It seems to have worked somewhat since Abbas and Netanyahu have walked away agreeing to meet again around 15 September and thereafter (perhaps?) every two weeks. Mmmm...Wish something would come out of those talks, even if I'm rather skeptical. We all know the 100 years War lasted...well, one hundred years and this could well be the same. Not to mention the trouble in Ireland that also started nearly one hundred years ago. Humans seem to love long, dragged out wars...

But to get back to Obama. He is obviously playing the foreign affairs card. The trouble is that in America people don't care much about foreign issues, and most people would like to see American involvement in wars around the world come to an end. The issue that matters most is... "the economy, stupid!" It was crucial in Clinton's campaign and made him win the White House. Unfortunately for Obama, with the on-going recession looking like it might get worse before it gets better, it could undo him at the next presidential election. He really ought to concentrate on measures to help turn around the economy. Since what he's proposed so far won't pass muster in Congress, he ought to think of something else. It has been suggested that he should think of fiscal measures such as cutting taxes for businesses that hire people and schemes that support consumption.

Maybe...But I can't help escape the feeling that Obama's real problem is that he is presiding over an American retreat around the world, both political and economic. People in America don't like that and try to fault him. But it's not his fault, it's the way the cookie crumbles. The new powers are rising (China, India...) and America is in the process of joining the old  powers (Europe).

Welcome, dear America, to the old sclerotic club! And you should take consolation, America, in the fact that you are guided by a very, very intelligent man. He could still wield power among the sclerotics...

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The Great Recession will turn into the Great Depression II unless...

Great Depression: man dressed in worn coat lyi...Image via Wikipedia

Yes, it's sure to turn into the Great Depression II unless our governments STOP trying to reduce budget deficits and turn instead to what should be their top priority: job creation. Balanced budgets have become a political mantra, and the unemployed be damned!

And yet, as I blogged last week, the bottomline problem in this crisis is the LACK of jobs, especially among the young.

How could our political class get it so wrong? It's hard to understand. Yet one thing should be obvious: with the retreat of government as an economic agent in an economy that is still weak, economic indicators have but one way to go: DOWN. And that includes the revenue governments get from taxes. Which means that overtime budget deficits will grow larger rather than smaller. Politicians will have obtained exactly the reverse of what they had hoped for from their hallowed austerity measures. If you have any doubts, take a trip to Greece or Ireland.

Paul Krugman has recently published (see link below) a wonderful piece, entitled "Appeasing the Bond Gods: What will it take to break the hold of this cruel cult on the minds of the political elite?" Indeed, what will it take to make Cameron and Osborne see the light? There's no denying that the UK welfare state needed a lot of fat-trimming - but the diet shouldn't be so strong that it leads to waste and death. There's a need to realize that the State has a role to play in the economy, particularly when jobs have to be created.The animal spirits of entrepreneurs cannot and will not come to the rescue when they don't see any market wherever they look. So the State must step in.

A fiscal stimulus package? The last one didn't work too well in the States, probably because it was applied in a half-hearted manner. Too little and too late. But it seems to have worked wonders in China where the package was huge. Now the Chinese have even had to put on the brakes because of a looming real estate bubble and financial hubris. There's no doubt such packages, if applied in the right dosage, do work. But I would argue that what is needed is a more pointed type of policy, one that is clearly aimed at job CREATION.

We all know that unemployment has been with us for a much longer time than this crisis. It was there before and it is making this crisis worse. So unemployment is the one thing that must be tackled. And it's not just cyclical (and therefore amenable to classic monetary and fiscal policies) but also structural. That means more innovative policies are required - things like programmes to encourage investments in inventions, innovations and new areas like clean energy and more.

The "more" here is the key.

For example - and this is very encouraging - the US is investing heavily to find more efficient ways to fuel automobiles, as was recently reported by Matthew L.Wald in the New York Times. It has set up a new Advanced Research Projects Agency-Energy or ARPA-E meant to finance high-risk, high reward projects in the United States with a budget of US$400 million for two years.

Fine and good but compare that to the billions China plans to invest on electric and hybrid vehicles (as reported by David Barboza). It seems (according to official sources) that China could invest as much as...US$ 15 billion! Extravagent. That's more that thirty times the US Government is envisaging. As I've said before, China is really another planet. With that kind of money, the Chinese government is announcing that over the next three years it will have some 500,000 new energy vehicles reaching the market every year and they would soon account for 5 percent of all passenger sales (already totalling some 17 million vehicles). A small percentage perhaps, but larger than what is expected anywhere else on this planet...

The American private sector has taken note: for example, a Chinese company called BYD, in which Warren E. Buffett, the American billionaire and founder of Berskshire Hathaway has an interest, is into the development of battery-powered vehicles.

Great! So why isn't the American private sector pairing with its own government to invest in innovation? Why hasn't Warren E. Buffet an interest in ARPA-E?

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Unemployment, a Hydra that keeps growing

Dorothea Lange's "Migrant Mother," a...Image via Wikipedia

Unemployment is the one feature that distinguishes the current crisis from past ones. It just won't go away.Why?

A hard question to answer. It's been haunting economists since the Great Depression - the last time unemployment would NOT go away. To cure unemployment, Keynes came up with a solution that was deceptively simple: replace the shortfall in private investment with government spending. Pump money in through paying out salaries even for useless activities like digging holes. That will strengthen consumption and jump-start the economy. Industries will be encouraged to expand employment as they see a renewed demand for their products.

That was back in the 1930s. And we all know how it played out in the end. President Roosevelt didn't dare keep up with the Keynesian recipe because of the political upcry over the ballooning deficits. So, in 1937 he went back to old-fashioned deficit cutting and budget balancing. With the result that the economy immediately dipped back into a Depression mode, and it took World War II expenditures to come out of it.

Now it looks like we're doing the same. The political class in Europe and America, supported by old-fashioned central bankers like Trichet, the head of the European Central Bank, is meddling with austerity programmes and cut-backs, just like in 1937. Moreover, the growth engine that's kept us afloat in the last few months - demand from emerging countries, especially India and China - is showing signs of slowing down. And that's scary: it means the Great Recession could turn into another Great Depression.

We've had World War II, are we going to get Great Depression II?

According to Bob Herbert in his recent and very interesting article (see New York Times August 9,2010), if you add to the official statistics the number of people who have stopped looking for a job but say they want to work and those working part time, "you end up with nearly 30 million Americans who cannot find the work they want and desperately need."

If you think 30 million is a staggering number, you haven't heard the half of it. From the UN, a new report on youth unemployment - always a sticky issue - has just come out (the ILO report on Global Employment Trends for Youth 2010) and it points to a 2 percent increase since 2007, to a level of 81 million people. Actually, the figures are put together in a rather unconvincing way and unemployment is likely to be much, much higher. The ILO includes in their analysis only those between the age of 15 and 24 and that doesn't make much sense. In developing countries, the young go to work much younger (at best after finishing elementary school when they're 11 or 12) and in developed countries, the young often stay home much longer, attending the university rather than working.

Historically, unemployment among the young has always been the worst: they're the first laid off and the last hired back. And in any case, even when there's no crisis, they have a hard time finding a job. Why? Many reasons are adduced:  vested interests as trade unions defend their members from young job-seekers; advances in technology that displace labour; mismatch between training/education and job availability. The last is probably the most serious. It stems partly from the conviction that a university education automatically leads to employment - a conviction prevalent in the lower and middle classes. Let's not forget that every blue-collar worker's dream is to see his children wear white collars. And since universities are enterprises like any other business, they respond by producing as many graduates as they can, regardless of whether there are any jobs out there.

The disconnect between education and the labour market is total. Governments have tried to remedy with fiscal stimulus of all kinds from tax holidays to business incentives and have set up training programmes to recycle the old and prepare the young for specific jobs.All to no avail, or at least with only moderate, temporary results.

The unemployment hydra always grows back other limbs. It's like running on a treadmill, with the mill being pushed along by demographic growth. To keep employment even, in the US alone, some 200,000 jobs have to be created every month. From that standpoint, "Old Europe" with its diminishing birth rate (except for France) has it easier. But it is harder from another point of view:  European labour markets tend to be rigid and inflexible(except for Germany that has made it easier to hire and fire).

And keep the young out.

Actually, there are many problems adversely affecting the labour market. Keynes was the first to come up with a serious "disconnect" in his savings-investment function: the self-fulfilling effect of negative expectations. Businessmen who feel glum and don't see a growing demand  for their products, will stop investing. Consumers who wish to save because they're afraid of bad times, will stop consuming. More recently, economists have pointed to lack of information and uncertainty.No doubt these are all very serious problems that at one time or another prevent the market from clearing.

But to find a solution, we need to understand exactly what causes unemployment and why it persists through economic cycles.  We all know since ECO 101 that an economy's savings go into investment and that leads to employment. Investment is however dependent on expected returns - which can turn to the better when there's a wave of innovations, like the dot.com boom in the late 1990s. Actually, innovations are the key, or to use Schumpeter's famous term: creative destruction : jobs in old industries are destroyed, new jobs are created in the technologically advanced.  The trouble is that the  numbers created don't necessarily match the lost ones (that's what's meant by the term "structural unemployment"). Old industries die before the new ones are born or come out of diapers. And it takes time and effort (more training) to move from the old to the new. But it can be done.

Another source of job creation is trade. That's what Germany's 2.2 percent growth in the last quarter is all about: the Germans have been bragging about their "model", but there's nothing new or special about it. They've just been selling cars (and other luxury, niche items) to the Chinese and other developing countries. And, incidentally, unemployment in Germany is still at excessive levels in all other areas of the economy not tied to exports.  Developing countries are juicy markets - as long as they keep growing, which means selling their wares and services to developed countries. But we all know how people in the West feel about outsourcing to India and being flooded with cheap Chinese goods...So you kill trade and cut off your own nose.

But are innovations and trade the ultimate solutions? I'd love to believe that but unfortunately, even at the best of times and at the height of economic booms, we still have unemployment, especially among the young. So there has to be another explanation for persisting unemployment.  And I'd like to submit an unlikely candidate: income inequality. Don't scream! I know it's not politically correct to talk about it. Those who do are immediately tagged as throwback communists (btw, I'm not! I lived in Russia in the 1950s and 1970s and I got to know the system very well and I thoroughly dislike it).  Still, one has to recognize that  Soviet-style communism is probably the only type of government that has managed to neatly do away with the problem of unemployment: it simply decreed that unemployment couldn't exist. Every soviet citizen was ensured a paying job, whether he/she produced anything or not...and productivity be damned!

That is obviously not a solution.

Stay with the idea of income inequality for a minute. Imagine it keeps growing, and you don't need to imagine it because we know that in the real world it does. There are over 10 million millionaires around the world and their number is still rising, as does the amount of wealth they command, and all this in spite of the current Great Recession. So how are the ultra rich going to spend their money? Even the most outrageous, lavish lifestyle won't make much of a dent in their income, percentagewise. There's a limit to how many luxury yachts and conspicuous castles you can enjoy. The ultra rich obviously place their savings in banks and hedge funds. This is where the well-known hubris in financial markets comes in. New instruments were invented to attract "investors". We've seen with what results since December 2007. Wall Street has been turned into a gambling casino, quite literally, and it means that money was kept churning inside rather than allowed to go outside, into productive investments on Main Street. In a way savings have been sterilized, or, if you prefer a less extreme view, the flux into productive investment has been slowed down. Causing unemployment.

Does this mean we should tax the ultra rich? I don't think so. In any case, it's politically unfeasible, they'd always run to another country that would offer them a tax refuge.What it does mean however is that we should regulate Wall Street in such a way that it is encouraged to develop instruments tied to innovations. Venture capitalists are too few and far between. They should receive strong incentives and tax breaks, particularly for innovations that demonstrably work. And tied to support training for the jobs created by the said innovations. And also, why not while we're at it, support international trade?

In short, everything should be done to move money out of Wall Street into constructive ventures on Main Steet.

Do you agree?

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