Getting Past the Paralysis on Jobs

June 16, 2011 by · Leave a Comment 

By Fareed Zakaria

TV CNN ZakariaEvery week brings fresh evidence that America’s unemployment crisis is much deeper and more systemic than predicted — yet Washington seems unwilling or unable to do anything about it. Fears of the budget deficit and a dysfunctional political climate have paralyzed people on both sides of the political aisle. The result is that America is “sleepwalking” through its biggest crisis, writes Mohamed El-Erian, the low-key co-CEO of PIMCO.

Around 24 million Americans are unemployed or underemployed (the latter in part-time jobs that average $19,000, half the median wage). If these people don’t find jobs soon, they will lose skills and work habits and become permanently unemployable, with grim consequences for their families, communities and the country. And if employment growth does not pick up significantly, tax revenue will stay depressed, unemployment costs will rise and the deficit will balloon well beyond current projections.

We still seem to be hoping that somehow this problem will resolve itself, but it won’t. Federal Reserve Chairman Ben Bernanke explained this week that the economy has gone through the worst financial crisis and the deepest housing collapse since the Great Depression. In fact, the problem is even worse. Employment growth has been stalled since 2000. If not for the housing and credit bubble, this jobs crisis would have revealed itself much earlier.

We’re in a new world for the American worker. Technological change and globalization allow companies to get more output with fewer workers. Emerging markets provide millions of skilled workers who can produce the same products at a fraction of the price that Americans can. The Bureau of Labor Statistics notes that from 1947 till 2000, productivity growth was correlated with employment growth. Since 2000, they have diverged. Productivity has risen while employment has fallen. The Nobel Prize-winning economist Michael Spence has concluded that in America, growth and employment will diverge in the future.

Does this mean that we are stuck in a low-growth, low-employment future? No, but the crisis is structural, and we have to recognize its scope and urgency. “Shutting off the alarm and pulling the blanket over one’s head is not a solution,” says El-Erian.

Republican concerns about government spending over the long term are understandable, but cutting spending in the short run will result in more unemployment and slower growth. President Obama talks about jobs but seems too paralyzed to do something ambitious to help create them. Even Bernanke said this week that there isn’t much he could do about the slow-growth, high-unemployment trajectory we are on. Have we all become fatalists?

In fact, we could enact some measures that would spur job creation, many with a limited effect on the deficit. Most immediately, Washington needs to find ways to employ the millions of workers whose jobs disappeared with the housing bust. The simplest way to help them, and the country, would be to create a national infrastructure bank to repair and rebuild America’s infrastructure — which is in a shambles and ranks 23rd globally, according to the World Economic Forum — down from sixth only a decade ago.

House Majority Leader Eric Cantor has played down this proposal as just more stimulus, but if Republicans set aside ideology they would see it is actually an opportunity to push for two of their favorite ideas: privatization and the elimination of earmarks.

The United States builds infrastructure in a remarkably socialist manner; the government funds, builds and operates almost all American infrastructure. In many countries in Europe and Asia, the private sector plays a large role in financing and operation of roads, highways, railroads and airports, as well as other public resources. An infrastructure bank would create a mechanism by which such private-sector participation would become possible here as well. Yes, some public money would be involved, mostly through issuing bonds, but with interest rates at historic lows, this is the time to rebuild. Such projects, with huge long-term payoffs, could genuinely be called investments, not expenditures.

A national infrastructure bank would also address a legitimate complaint of the Tea Party — earmarks. One of the reasons federal spending has been inefficient is that Congress wants to spread money around in ways that make political sense but are economically inefficient. An infrastructure bank would make these decisions using cost-benefit analysis, in a meritocratic system, rather than basing decisions on patronage and whimsy.

The country needs much more: a revival of manufacturing, emphasizing technical training and apprenticeship programs; aggressive measures to promote those industries that are booming, such as entertainment and tourism; an expansion of retraining; streamlining the patent process; more visas for skilled immigrants to stay and create companies and jobs in America. These should be part of a national plan for jobs that President Obama must lay out soon. But start with something that would have an immediate impact and put people back to work — the rebuilding of America.

comments@fareedzakaria.com

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Bernanke Glum on Growth–But No stimulus Hints

June 9, 2011 by · Leave a Comment 

By Matt Bigg (Reuters) –

Federal Reserve Chairman Ben Bernanke on Tuesday acknowledged the economy has slowed but offered no hint the U.S. central bank is considering any more stimulus to accelerate growth.

He also warned members of Congress who might be planning aggressive budget cuts that they have the potential to derail the recovery if cuts in government spending take hold too soon.

A recent spate of weak economic data, capped by Friday’s report showing anemic job creation last month, had renewed speculation the Fed might again come to the economy’s aid.

Bernanke gave no such indication but did say the recovery was fragile enough to warrant keeping in place the extraordinary monetary support the Fed has already provided.

Speaking to a banking conference, the Fed chairman said that while he expects the economy to strengthen in the second half of the year, the job market bears close monitoring.

“The economy is still producing at levels well below its potential,” he said. “Consequently, accommodative monetary policies are still needed.”

Richard Gilhooly, an interest rate strategist at TD Securities in New York, called the speech “pretty downbeat.”

“It means that the Fed’s on hold for longer,” he said.

Stocks closed lower after Bernanke’s sober assessment, while longer-term bonds erased losses.

Bernanke repeated his view that a spike in U.S. inflation, while worrisome, should prove fleeting as commodity prices moderate. In addition, weak wage growth and stable inflation expectations should help keep prices down, he said.

On the budget, Bernanke repeated his call for a long-term plan for a sustainable fiscal path but warned politicians against massive short-term cuts in spending.
“A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,” he said.

“By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk,” he said.

All Tapped Out

The central bank has already slashed overnight interest rates to near zero and purchased more than $2 trillion in government bonds to pull the economy from a deep recession and spur a recovery.

With the central bank’s balance sheet already bloated, officials have suggested there would be a high bar for any further Fed easing. The Fed’s current $600 billion round of government bond buying, known as QE2, is due to end this month.

Sharp criticism in the wake of QE2 is one factor likely to make policymakers reluctant to push the limits of unconventional policy.

“QE3 is still not an option right now, more because of the political ramifications,” said Kathy Lien, director of currency research at GFT in New York. “We need to see much more significant deterioration in the economy and consistent weakness in non-farm payrolls before that can happen.”

In a Reuters poll of U.S. primary dealer banks conducted after the employment data, analysts saw only a 10 percent chance for more government bond purchases by the Fed. They also pushed back the timing of an eventual rate hike further into 2012.

Hurdles to better economic health have emerged overseas as well. Europe is struggling with a debt crisis, while Japan still reels from the effects of the earthquake and tsunami.

In emerging markets, China is trying to rein in red-hot growth to prevent inflation.

Fed policymakers have admitted to being surprised by how weak the economy appears, but none have yet called for more stimulus.

In an interview with the Wall Street Journal, Chicago Federal Reserve Bank President Charles Evans, a noted policy dove, said he was not yet ready to support a third round of so-called quantitative easing. His counterpart in Atlanta, Dennis Lockhart, also said the economy was not weak enough to warrant further support.

While Boston Fed President Eric Rosengren told CNBC on Monday the economy’s weakness might delay the timing of an eventual monetary tightening, the head of the Dallas Federal Reserve Bank, Richard Fisher, said the Fed may have already done too much.

Evans and Fisher have a policy vote on the Fed this year while Rosengren and Lockhart do not.

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