2 May 2012
Unemployment is structural, not cyclical
When people look at unemployment at the moment, they are disheartened by the fact that it remains so high in the face of such low interest rates. I think this is because the jobs which have recently been lost are not going to be replaced if the economy recovers, but have been lost for good as part of a structural change. Policy makers should therefore not look to stimulate the economy so that it grows as before, but stimulate those who have lost their jobs so that they can find new jobs and create new enterprises.
Here's an illustration:
After the 2nd World War, the United States went into a depression which was very short lived as the returning soldiers were made unemployed and the economy had to rebalance away from producing guns to butter, to use the classic comparison. However, this blow was cushioned by a public pension for the soldiers, retraining into new skills and businesses which shifted their production.
What was not done in any shape or form was to keep the country on a war footing to maintain employment or output.
Now where does this matter in relation to the recent crisis? Well, I think that the current interest rates and monetary policies are effectively structured in a way to keep the Western economies on a full scale FIRE (Finance, Insurance and Real Estate) footing. Policies are designed to favour banks, house prices and the financial economy to the detriment of other sectors of the economy and a rebalancing towards them. The world economy grew significantly from 2000 to 2007 as a result of higher house prices, increased lending and lower lending standards and yet policymakers, instead of cushioning the blow and allowing these sectors to shrink, are doubling down and encouraging even further (mal)investment in these sectors.
But there is a structural change, the internet, which is threatening to destroy the very basis of these sectors. Since it reduces the cost of information and these sectors based their profits on the insiders having more information than outsiders, they are likely to suffer diminishing overall revenues. An example:
When I went to rent a house in 2000, I had to go round a number of different agencies, give them my details, ask what was available, arrange a viewing, etc.. When I came to do the same thing last year, I went onto the internet and had narrowed my choices down to 5 suitable flats within about 2 hours. A massive saving on my time. But then I still had to pay the agent the same fee as I had paid 10 years, even though the work he performed was distinctly lower. Now sometime fairly soon that cost is going to drop precipitously because people are going to realise that the internet does the work, not the agent. Same with banking where trading fees and the cost of obtaining information ($24,000 a year for Bloomberg, say) has been dramaticly reduced due to the internet. And where price comparison websites make banking an increasingly commoditised product.
What should be happening, but is not, is that the subsidies being given to banks and the housing sector should be redirected to allow people to choose to retrain in different skills. Which ones will be useful, I have no idea, but, if enough people try enough different things, some will come out with the next big thing and employ the rest. What does seem obvious is that continuing with the same plan as before and thinking that it will work if only we do more of it will end in failure.