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Tags: Diamond | Hassett | infrastructure | employment

Liberal Economists Call for More Intervention

By    |   Wednesday, 11 September 2013 02:24 PM EDT

This is the first of several articles on events held during the Labor Day period to consider why the U.S. economy is continuing to perform poorly five years after the 2008 episode of the ongoing financial crisis and what should be done.

On Sept. 9, the American Enterprise Institute (AEI) assembled a panel of distinguished economists to look at "The labor market today: Is unemployment cyclical or structural?" The Nobel Laureate Peter Diamond, Institute Professor Emeritus at MIT, made the lead presentation, and comments were offered by another liberal economist, Dean Baker, co-director of the Center for Economics and Policy Research, and by Kevin Hassett of the AEI, who has advised defeated Republican presidential candidates John McCain and Mitt Romney and stated forthrightly that he is lining up with the left on this issue.

In his introduction, AEI's Michael Strain stated that persistently high unemployment has raised the question as to whether it is a cyclical or structural phenomenon. While most commentators have described it as cyclical, Strain pointed to the most recent set of jobs numbers as an indicator that something else might be going on. He introduced a theory based on the "Beveridge Curve," a monthly Bureau of Labor Statistics graph that tracks the relationship between unemployment and job vacancies. If the number of vacancies increases as a recession wears on, this is an indication that unemployment is structural.

Diamond declared that unemployment in the United States is a crisis in terms of lost production and what has happened to workers. Therefore, he asserted, it is necessary to think about how to stimulate more aggregate demand. He allowed for the possibility that there are labor market issues, as well, and he reconciled the two issues by arguing that the measures adopted to stimulate demand will have greater effect if labor markets are tight than if they are loose.

Diamond asked whether there is a mismatch between available jobs and job seekers or whether "something else is going on." He cited a finding by the Federal Reserve Bank of St. Louis that showed it is not clear how to alleviate such a mismatch. Diamond insisted that there is a need to continue both monetary and fiscal economic stimulus.

Hassett warned that the economy "may never get back to a low unemployment rate." There are complications, such as the fact that firms don't necessarily hire from the ranks of the unemployed. He added that the current recession is connected to housing and banking crises.

Hassett showed a chart indicating that problems with matching jobs to seekers pre-date the recession. Also, when long-term unemployed workers pile up, it becomes harder for them to get interviews. Philadelphia Fed President Charles Plosser questions whether unemployed carpenters can be trained to serve as nurses.

Diamond took comfort in the fact that 4 million people have been hired; therefore, "This is a very dynamic economy." He repeated that the bottom line is that more monetary and fiscal stimulus is needed, so it is not smart to try to cut spending now. He advocates looking for answers in the area of Social Security reform and investments in infrastructure.

Baker also minimized the issue of the national debt, which he said is not a serious burden given the current low interest rates. The cycle has led to a shortening of the term of unemployment benefits. Therefore, he agreed that there is "plenty of room for stimulus."

Hassett decried the length and depth of the recession that occurred after the 2008 episode of the ongoing financial crisis, and he cited statistics from Vincent Reinhart, his wife Carmen and her co-author Ken Rogoff that recessions caused by financial crises tend to cause higher unemployment than other recessions do. Hassett concluded that this circumstance calls for "non-traditional policies."

He made an impassioned presentation of statistics showing a 50 to 100 percent increase in the death rate, a rise in the suicide rate and a higher incidence of divorce and cancer due to stress.

Therefore, Hassett argued, "Extra aggregate demand is not enough." He proposed that the government hire workers directly, and he takes satisfaction from the fact that the left likes this idea.

Diamond returned to the issue of investment in infrastructure, and he complained that the nation has neglected infrastructure to the detriment of the economy. Other neglected investment areas include basic research and K-12 education, to the detriment of earnings growth during the early years of the careers of young employees.

Baker advocated "work-sharing" programs instituted in 2012 under which states are paid by the federal government out of funds that would otherwise go to unemployment relief. Hassett added that private-sector training programs should be encouraged.

Finally, Diamond reminded the audience that it would be good for the economy to shut down the zombie banks and that the United States benefits from the ability to borrow in its own currency.

I would offer three observations in closing. First, the main purpose in posting this article is to alert readers to the fact that the drumbeat for more programs is being turned up, not only by the usual left-wing groups that always advocate them, but now also by Republican voices like Hassett.

Second, I suspect that academics in this field understate the extent to which the economy is burdened by workers who are nominally employed, but who are engaged in unproductive work. This phenomenon is highly visible in Washington, but is studiously ignored, because government employees represent a powerful, unionized lobby.

Finally, economists should know better than anyone else does that resources are finite, so that if trillions of dollars are diverted to bail out derivative trades and other failed investments by "too big to fail" banks, those resources are not available for investment in infrastructure and other areas academic economists identify as neglected.

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On Sept. 9, the American Enterprise Institute (AEI) assembled a panel of distinguished economists to look at "The labor market today: Is unemployment cyclical or structural?"
Wednesday, 11 September 2013 02:24 PM
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