The reason there were 8 million additional jobs back in 2007 is that demand for goods and services was artificially – and unsustainably – inflated by cheap, plentiful credit. Between 2002 and 2007, household debt was increasing at the torrid pace of more than 10 percent annually, while business debt and the debt of state and local governments was growing at an average of 9 percent. Much of that money was used to finance present consumption.
Now all that has reversed. Household debt is shrinking at a rate of 2.4 percent per year as the savings rate has risen from nearly zero to more than 5 percent. Meanwhile, business debt declined 2.5 percent last year and is now flat, as is the case for state and local governments.
All that deleveraging and living within our means is obviously a good thing in the long run. But what it means for the economy in the short run is that neither the excess consumption nor the jobs it supported are coming back. During the past two years, the federal government has been actively trying to take up some of the slack by going on a borrowing-and-spending binge of its own. But continuing on that path is also unsustainable – certainly politically, and probably economically as well. And once federal deficits begin to decline next year, we’ll have yet another drag on economic growth and employment.
At this point, there is only one clear path out of the unemployment box we have created for ourselves.
Right now, the United States is running a trade deficit that is likely to reach $450 billion this year. That’s down considerably from the $750 billion at the height of the economic bubble, but still more than a wealthy advanced economy should have. Bringing it down – either by producing more of what we consume (fewer imports) or more of what other countries consume (more exports) – represents the path toward sustainable, long-term job creation.
The problem with that strategy is that for the past two decades we have allowed our industrial and technological base to deteriorate as talent and capital were grossly misallocated toward other sectors of the economy, even as other countries were able to attract the investment, the technology and the know-how to serve the U.S. and global markets.
For a time, none of this seemed to matter because we were consuming so much that we were able to support job creation at home as well as overseas. But now that the debt-fueled consumption binge is over, we find that we don’t have the companies, the workers or the competitive products to replace the stuff we now import or expand our share of export markets. Even when we do, our companies are disadvantaged by an overvalued currency or unfair trading practices.
via Steven Pearlstein – The bleak truth about unemployment.
So the previous decades of spending beyond our means cannot be made up for by the government spending beyond its means. Prediction: Someone will propose policies of protectionism. It may be a Democrat or it may be a Republican, since both labor and big business tend to want government protection for their industries. The thinking may be that America cannot compete in a global economy as it used to. Instead of the current bipartisan commitment to free trade, we will start putting tariffs on foreign imports to give an advantage to American-made products. Prices will go up for consumers, but more of them will have jobs. Do you think this is likely, a good idea, or a potential disaster? Meanwhile, what policies might help create jobs? Or do we just need to hunker down until our new thrifty lifestyles create an economic equilibrium?
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