Long-term unemployment, a national tragedy (bring on the Aliens!)

by pdxblake

Brad DeLong is one of economics’ longest running bloggers and has a capability for putting out posts that far outstrips my own (and sometimes my ability to keep up with his posts).  Today (via Business Insider) he wrote an important post that should be keeping policy makers awake at night (if they had not already come to the same conclusion) about the impacts of long-term unemployment on future economic growth.  I have no doubt that many within the Obama White House do not share the opinion that reducing long-term unemployment is important, but somehow the Republicans by their actions seem to believe that political wins are more important than what Brad DeLong describes in relation to the current Great Recession and the latter-day Great Depression:

But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.

Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.

The important thing to remember is that there is no one cause (like a lack of specific skills, or difficulties of one industry specifically to grow because of government regulation) that can be blamed for widespread long-term unemployment:

Even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.

At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.

The cure, for now as it has been since the recession started has been stimulative monetary and fiscal policy in whatever quantity is needed to spur growth in demand, something which was only tried in small measure (fiscal policy) or in fits and starts (monetary policy).  This, DeLong argues, has been in adequate and warns could have terrible consequences that will be much harder to deal with in the future:

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

It would be a grim legacy for the Republicans if their obstructionism continued to push the country–totally unnecessarily–into a situation where a demand shortfall had permanently scarred a large portion of the employable population in the US.  The obstructionism has been particularly noticeable since the Republicans took over the House in 2010, but was influential earlier when they still held a large enough minority in the Senate to block anything objectionable to their ideology by abusing the filibuster (remember their goal stated by Mitch McConnell in 2010, but evident beginning on November 5, 2008, was to make Obama a one-term president).

It is more than a pity, it is a disgrace, that one political party will push against everything from an adequately sized stimulus in the midst of a crisis to monetary policy stimulus (see, Perry, Rick) in an anemic recovery that was likely to happen in absence of a strong, forceful and long-lasting push from all sectors (public and private) to make the recovery as strong as possible to keep the stalking horse of long-term unemployment at bay.  Maybe we need to put into place Paul Krugman’s Alien Invasion idea (and this clip includes an example of the stupid ideas idea the other side, represented by Art Laffer, are proposing (they only really have one idea) to “incentivize the suppliers”, i.e. give more tax cuts to the rich).