…it seems that way, at least, when I listen to much of the rhetoric coming out of Washington.
But it’s not just Washington, it’s Wall Street, too. In my line of work, finance, market participants grapple with the monthly economic data flow, eyeing each release as if it’s telling a new story about the current prospect for US economic growth – that it isn’t just treading water. ‘Consensus’ economists forecast their expectations for the economic release of the day, the market then trades based on the surprise to which the data beat or disappointed expectations. Day in, day out, that’s what we do.
I have a problem with this automated way of viewing the world. It’s tough to hear Wall Street economists defend their forecasts, stating that ‘oil’ or ‘Europe’ are the primary risks to the outlook; or that the structural unemployment rate has risen markedly so that harmful inflation is right around the corner. Step back, take a look at where 2.7% annual growth (current Consensus for 2011) actually gets the US labor market (see chart below).
The biggest risk to the outlook is not oil, it’s unemployment. The longer that the labor market remains idle – in fact, the labor force is now trending downward – the lower will the average skill level will go. Then you’re going to get something much more structural, the so-called positive feedback loop.
People move to the US for the American Dream – I wonder where they’ll go now…. Germany?
The US labor market, as measured by the unemployment rate, deteriorated much more precipitously than that in any other G7 country. Germany stands out as the sole labor market that’s shown any marked improvement, furthering a trend that started with the the Hartz Concept. (I just did a Google search of the Hartz commission and came across this Economist article written in 2002 – remarkable.)
Policy drives the structural level of unemployment, not the other way around. In the US, there are currently no true boundaries to the supply of labor, rather it’s demand. Congress should be targeting job creation and aggregate demand, not the 2012 elections.
Stephen Gandel is right: there is no upside to high unemployment, just downside. You want to drop the deficit? Create jobs and aggregate demand so that the population ‘can’ pay taxes.