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FYF Unemployment
and revising economic models to the new reality: Krugman: The Dropout Puzzle “Economists who argue
that there's something wrong with the unemployment numbers are buzzing about a
new study by Katharine Bradbury, an economist at the Federal Reserve Bank of
Boston, which suggests that millions of Americans who should be in the labor
force aren't. "The addition of these hypothetical participants," she
writes, "would raise the unemployment rate by one to three-plus percentage
points." (Dr.
Bradbury’s study) “shows that the upbeat view doesn't hold up in the face of a
careful examination of the numbers. In fact, because older Americans,
especially older women, are more likely to work than in the past, labor force
participation should have risen, not fallen, over the past four years. As a
result, she suggests that there may be "considerable slack in the U.S.
labor market": there are at least 1.6 million and possibly as many as 5.1
million people who aren't counted as unemployed but would take jobs if they
were available. There's
both good news and bad news in that assessment. The good news is that the economy probably has
plenty of room to expand before inflation becomes a problem (which implies that
the Fed's decision to start raising interest rates was premature). The bad news is that it's hard to see
where further expansion will come from. We've already had four years of extremely loose fiscal and
monetary policy. Tax cuts have pushed the federal budget deep into the red. Low
interest rates have helped generate a housing bubble that has lifted real
estate prices to ludicrous heights in major parts of the country. If
all that wasn't enough to give us a full economic recovery, what will?” http://www.nytimes.com/2005/07/18/opinion/18krugman.html See Bradbury, Additional Slack in the Economy:
Poor recovery in labor force participation, published by the Boston Fed http://www.bos.frb.org/economic/ppb/2005/ppb052.pdf America's Truth Deficit Commentary by
WILLIAM GREIDER, NYT, July 18, 2005 Washington - During the cold war, as the Soviet economic
system slowly unraveled, internal reform was impossible because highly placed
officials who recognized the systemic disorders could not talk about them
honestly. The United States is now in an equivalent predicament. Its weakening
position in the global trading system is obvious and ominous, yet leaders in
politics, business, finance and the news media are not willing to discuss
candidly what is happening and why. Instead, they recycle the usual bromides
about the benefits of free trade and assurances that everything will work out
for the best. Much
like Soviet leaders, the American establishment is enthralled by utopian
convictions - the market orthodoxy of free trade globalization. The United States is heading for yet
another record trade deficit in 2005, possibly 25 percent larger than last
year's. Our economy's international debt position - accumulated from many years
of tolerating larger and larger trade deficits - began compounding ferociously
in the last five years. Our net foreign indebtedness is now more than 25
percent of gross domestic product and at the current pace will reach 50 percent
in four or five years . For
years, elite opinion dismissed the buildup of foreign indebtedness as a trivial
issue. Now that it is too large to deny, they concede the trend is
"unsustainable." That's an economist's euphemism which means: things
cannot go on like this, not without ugly consequences for American living
standards. But why alarm the public? The authorities assure us timely policy
adjustments will fix the matter. Reporters and editors typically take cues from the same
influential sources and learned experts in business, finance and government. If
the news media decided to cast these facts as the story of the world's only
superpower losing ground in global competition and becoming financially
dependent on strategic rivals like China, the public would take greater notice.
But governing elites would regard such clarity as inflammatory. America's awesome trade problem is instead
portrayed as something else - an esoteric technical dispute about currency
values, the dollar versus the Chinese yuan. The context is guaranteed to baffle
and benumb citizens. The possibility that the United States can no longer afford
globalization, at least not as it now functions, is what opinion leaders do not
wish to discuss. A few brave dissenters have stated the matter plainly and
called for significant policy shifts to stop the hemorrhaging. Warren Buffett,
the legendary investor, says the United States is destined to become not an
"ownership society," but a "sharecropper society." But his
analysis, and others like it, are brushed aside. An
authentic debate might start by asking heretical questions: Ø
Why
is the United States one of the few advanced economies that suffers from
perennial trade deficits? Ø
Why
do new trade agreements, despite official promises, always leave the United
States with a deeper deficit hole, with another wave of jobs moving overseas? Ø
How
do the authorities explain the 30-year stagnation of working-class wages that
is peculiar to America? Are we supposed to believe that everyone else is simply more
competitive or slyly breaking the rules? In the last three decades, American
policymakers have succeeded in closing the trade gap with only one event - a
recession. The American predicament is shaped by operating dynamics
grounded in the global system, singularly embraced by Washington because
Washington originated most of them. At the outset, these practices were both virtuous and
self-interested for the United States - encouraging industrialization in poor
countries, binding cold war allies together with trade and investment,
furthering the global advance of American business and finance. With its
wide-open market, America played - and still plays - buyer of last resort for
world exports.
Its leading companies and banks gained access to developing new markets, often
by sharing jobs, production and technology with others. American policymakers
also got to run the world. The utopian expectations behind this arrangement turned out
to be wrong, judging by empirical evidence rather than theory. But why wrong? American political debate
is enveloped by the ideology of free trade, but "free trade" does not
actually describe the global economic system. A more accurate description would be "managed trade" - a dense web of bargaining and
deal-making among governments and multinational corporations, all with
self-interested objectives that the marketplace doesn't determine or deliver.
Every sovereign nation, the United States included, uses its vast arsenal of
policies to pursue its national interest. But on the crucial question of how policy makers define
"national interest," Washington stands alone. Western Europe,
whatever its problems, manages economic policy to maintain modest trade
surpluses. Japan manages to insure far larger surpluses in recessions (its
export income subsidizes inefficient domestic employers). China strives to
acquire a larger, more advanced industrial base at the expense of worker
incomes and bank profits. Germany and Japan, despite vast differences, both
manage to keep advanced manufacturing sectors anchored at home and to defend
domestic wage levels and social guarantees. When they do disperse production
and jobs overseas, as they must, they do so strategically. By contrast, Washington defines "national
interest" primarily in terms of advancing the global reach of our
multinational enterprises. Elites are persuaded by the reigning orthodoxy that
subsidiary domestic interests will ultimately benefit too. The distinctive
power of America's globalized companies is reflected in trade patterns. Nearly half of
American exports and imports are not traded in open markets - the price auction
idealized by neoclassical economics - but within the companies themselves,
moving materials and components back and forth among their far-flung factories.
A trade deficit
does not show on the company's balance sheet, only on the nation's. In recent
years, much of the trade deficit has reflected the value-added production and
jobs that companies moved elsewhere. The United States is thus especially vulnerable to the
downward pressures on working-class wages that exist on both ends of the global
system. American producers are generally free - and even encouraged by
Washington - to shift production to low-wage locations. Companies regularly use this cost-cutting
technique as a competitive weapon without regard to the domestic consequences. The practice works for
companies and investors, but not so well for a nation. Indeed, the cumulative effects of retarding labor incomes
worldwide repeatedly threatens stagnation or worse for the entire system.
Workers, to put it crudely, cannot buy what the world can make. Too much
capital leads to the speculative "bubbles" that bounce around the
world, visiting financial crisis on rich and poor alike. At a different moment in history, American leadership might
have stepped up to these disorders and led the way to solutions. If
globalization is to continue without encountering more crisis and random
destruction, governments must together shift the balance of power so labor
incomes can rise in step with rising productivity and profits. If the United States is to avert its own
reckoning, it must take decisive action to draw firm limits on its exposure to
trade deficits, that is, resign its position as the open-armed buyer of last
resort. In effect, Washington would also reform its own national interest
imperatives so that they more closely resemble what other nations already
embrace. Ultimately, American remedial action may protect the global system
from its own crisis - the moment when trading partners discover they have just
lost their best customer. But to describe plausible remedies is to explain why none
are likely. The webs of mutual interests connecting government, corporate
boardrooms and Wall Street are too deeply woven, as are habits of thought among
policy makers and politicians. So I do not expect anything fundamental will be
altered in time. We are going to find out if the dissenters are right. William Greider, the national affairs
columnist of The Nation, is the author of "One World, Ready or Not." http://www.nytimes.com/2005/07/18/opinion/18greider.html |
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