http://www.commondreams.org/view/2011/01/15-2
Published on Saturday, January 15, 2011 by the Guardian/UK
The 'New Normal' of Unemployment
by Dean Baker
The American Economics Association held its annual meeting in Denver
last weekend. Most attendees appeared to be in a very forgiving mood.
While the economists in Denver recognized the severity of the economic
slump hitting the United States and much of the world, there were few
who seemed to view this as a serious failure of the economics
profession.
The fact that the overwhelming majority of economists in policy
positions failed to see the signs of this disaster coming, and
supported the policies that brought it on, did not seem to be a major
concern for most of the economists at the convention. Instead, they
seemed more intent on finding ways in which they could get ordinary
workers to accept lower pay and reduced public benefits in the years
ahead. This would lead to better outcomes in their models.
The conventional wisdom among economists is that the economy will be
forced to go through a long adjustment process before it can get back
to more normal rates of unemployment. The optimists put the return to
normal at 2015, while the pessimists would put the year as 2018, and
possibly, even later.
Furthermore, many economists believe that the new normal will be worse
than the old normal. The unemployment rate bottomed out at 4.5% before
the housing bubble began to burst. If we go back to 2000, the United
States had a year-round average unemployment rate of just 4.0%. The
optimists now envision that normal would be 5.0% unemployment, while
the pessimists put the new normal at 6.0% unemployment and perhaps
higher. As a point of reference, every percentage point rise in the
unemployment corresponds to more than 2 million additional people
without jobs.
The willingness of economists to so quickly embrace this darker future
is striking. After all, one of the reasons that we have economists is,
ostensibly, so that we don't get such unpleasant news about a "new
normal". This is like a football team calmly accepting the sports
writers' prediction that they would have a winless season, and
deciding that their new goal was to minimize the margin of defeat.
The prospect of an extended period of higher unemployment would be
easier to accept if there was a good argument as to why the economy
cannot achieve the same levels of employment as it had in the recent
past. Economists really don't have much basis for this lowering of
expectations of their own and the economy's performance.
The main argument seems to stem from the work of two economists,
Carmen Reinhart and Ken Rogoff, who have examined financial crises
around the world. Their analysis finds that, in most cases, it has
taken countries roughly a decade to recover from the effects of a
financial crisis and return to a more normal growth path.
There is an important limitation in the Reinhart and Rogoff analysis.
Most of the crises they examine were in the distant past, before the
development of modern economics and its bag of tools. If the thousands
of economists gathered in Denver know anything more about economics
than those not educated in the field, then it would be reasonable to
expect better outcomes than in prior centuries.
After all, through most of human history a large portion of children
died in their first years of life. However, with modern medicine and
good nutrition, infant mortality is a rare event in wealthy countries.
By the Reinhart and Rogoff extrapolation, we would still expect most
children to be dying before the age of five, based on the historical
experience.
The methods for generating demand are not a mystery. It basically
amounts to the government spending more money until the private sector
is again in a position to fuel demand. The fears of deficits and debt
that the pessimists promote stem from a misunderstanding of basic
economics. Deficits can be a problem when they crowd out private
economic activity. In a severe slump like the current one, this
crowding-out is not a realistic fear; there are vast amounts of idle
resources. Furthermore, there is no reason that the debt needs to pose
an interest burden on taxpayers in the future. The Fed and other
central banks can simply buy and hold the debt, refunding the interest
payments to the government.
If economists did their job, they would be pushing policies to get the
economy quickly back to full employment. Instead, they just repeat
lines about how "we" will just have to accept some rough times.
Unfortunately, no one ever asks the economists who preach austerity
how much time they expect to spend in the unemployment lines.
If they don't know anything, then why should we listen to them?
© 2011 Guardian/UK
Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of The Conservative Nanny State: How
the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org
) and the more recently published Plunder and Blunder: The Rise and
Fall of The Bubble Economy. He also has a blog, "Beat the Press,"
where he discusses the media's coverage of economic issues.
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