High Unemployment ~ Is Nine-plus Percent The New Normal?

Making the Bush/Cheney tax cuts permanent, and reducing government spending to 2008 levels isn’t going to fix what’s ailing our economy.

September 15, 2010   No one is happy with the slow recovery from the deepest recession in the U.S. since 1929, not with unemployment levels hovering around 9½ percent. Voters in the upcoming 2010 mid-term elections certainly aren’t, and many blame the party currently in control of the Congress and White House for failing to fix the problem. But what they don’t know, and neither politicians nor economists in any numbers are telling them, is that recovery from declining Gross Domestic Product (GDP) numbers and high unemployment rates are not are not fixed at the hip. They never truly have been.

If everything was as it was prior to NAFTA, the Free Trade Agreements that started in 2001, and ongoing pressure from the World Trade Organization to keep U.S. markets open to foreign-made products, the number of good paying jobs would be growing faster along with the recovery. They might even be growing fast enough to satisfy the demands of an increasing number of immigrants, both legal and il-, new graduates from high school and college, and increasing numbers of seniors who are choosing to work longer rather than retire. But it’s a new world now, and we just haven’t figured out how to adjust.

The traditional level of “normal” unemployment in this country, which economics text books say is around 6 percent, has been reset as a consequence of the recession that started in 2007 and changes in employment dynamics that started with 21st Century free trade agreements. Layoffs from good paying financial, engineering, manufacturing and construction jobs have sent semi-skilled, skilled and professional workers to fill low-wage service industry jobs in groves. The news is filled with stories of college graduates lucky to have found jobs selling cookies or making exotic coffee drinks. I personally know of a masters-prepared engineer working as a substitute teacher.

So, even though official unemployment rates remained relatively low from 2001 until the beginning of the Great Recession (http://www.bls.gov/), the decline in good paying jobs over this period has been dramatic.

Tables prepared by Charles McMillion of MBG Information Services from government data between 2001 and 2004 showed: employment in primary metals down 24 percent; machinery 21.6 percent; computer and peripheral equipment 28 percent; communications equipment 38.8 percent; semiconductors and electronic components 37 percent; electrical equipment and appliances 22.8 percent; textile mills 34.1 percent; apparel 37.3 percent; chemicals 8.3 percent; plastics and rubber products 13.8 percent; Internet publishing and broadcast 40 percent; telecommunications 19.4 percent; ISPs, search portals, data processing 22.6 percent; securities, commodity, investments 6.8 percent; computer systems design and related 17 percent.

This is the “loud sucking sound” that Texas billionaire and Independent candidate for President in 1992 and ’96, H. Ross Perot, predicted. It’s called “off-shoring.” And, no doubt, the resulting transition from a manufacturing-based economy to a service and hospitality-based economy has continued to the present day. But people can eat only so many cookies and drink only so many coffee lattes.

Economists have apologies, but no real explanations, for the loss of jobs in tradable goods and services. They are careful not to blame outsourcing of manufacturing and service jobs, which they claim creates as many new jobs as it loses. But does it? Certainly, the people who are benefiting from outsourcing want us to think it’s good for the economy. But it is not true that free trade benefits both participating parties. It’s more complicated than the simples examples I have taught in macro- economics classrooms to illustrate David Ricardo’s competitive advantage. In all transactions, there are winners and losers. And in today’s world, the United States is losing.

For years, as U.S. multinationals moved manufacturing jobs offshore, Americans have been told that their future was in “knowledge jobs.” Today, however, according to a recent Harvard Economics paper, knowledge jobs are being moved offshore even more rapidly than manufacturing jobs.

So, what are our unemployed computer engineers and information technology workers supposed to do? The answer offered by many economists is:  retrain. But retrain in what? What high value-added job can’t be outsourced?

Without government subsidized construction efforts to modernize our infrastructure, research efforts to reduce our dependency on foreign oil, and tax incentives for businesses that create and keep new jobs here in America, the kinds of things that President Obama is talking about doing, all I can think of are those that happen to be in the nontradable service sector — lawyers, dentists, and surgeons, and such. But if everyone becomes a dentist or a surgeon (we’ve already got too many lawyers in my opinion), the incomes for these professions will only be driven down.

As this trend continues — as decent-paying  jobs with benefits in America become more and more difficult to find, more and more Americans are deciding that it simply doesn’t make any sense to try anymore, not when they can draw unemployment for extended periods and qualify for food stamps and other forms of relief. This drives the unemployment rate up and keeps it up over the long term. So, yes, a nine-plus percent unemployment rate could indeed be the new normal. And it’s not likely to decline much regardless of with political party is in power until the baby-boomers start retiring in greater numbers effectively reducing the civilian workforce.

Ralph E. Gomory and William J. Baumol have written an important new work in trade theory (Global Trade and Conflicting National Interests, MIT Press). They argue that it matters very much which industries and occupations countries retain, and they challenge the assumption that free trade always produces mutual gains. They establish that, in many cases, perhaps a majority of cases, gains for countries come at the expense of other countries.

Accordingly, just making the Bush/Cheney tax cuts permanent and reducing government spending to 2008 levels isn’t going to fix what’s ailing our economy. Sorry Mr. Boehner, you’re wrong. Making the rich even richer won’t magically create jobs for the middle class; Trickle-down economics is still Voodoo economics. The recovery has been slow, according to the Fed Chairman, because Americans who are still working aren’t spending as they did before the recession. They learned a hard lesson. They are Cutting-up their credit cards, paying off their debts and saving to hedge against fears of a double-dip recession. No, to put Americans back to work in good paying jobs, jobs that will provide sufficient incomes so that demand for goods and services will increase (the only thing that will motivate the expansion of production), will take more than just trusting the Invisible Hand of free trade.

Wouldn’t it be nice if things really were that simple?

Please feel free to post a comment whether or not you agree.

Published in: on September 15, 2010 at 8:10 am  Comments (7)  

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7 CommentsLeave a comment

  1. Too many lawyers is too true…I have 4 in my family!

    I miss living in a country that made good quality products…like refrigerators and furniture and televisions…I wish we could figure out a way to bring some of those industries back.


  2. Me too, Carol. But it’s not going to happen, not without Americans being willing to pay more for things. With quality products being made in Japan, Korea and even China now, it’s impossible for American companies to compete when having to pay many times the cost for foreign labor. We can only compensate by making things here that cannot be imported or by inventing new products with proprietary technologies. Unfortunately, countries like China have no respect for intellectual property and will reverse engineer a new product in a heartbeat.

  3. As I look at my students (elementary) I just worry worry worry….what are they going to do for a living? Not everyone is cut out for college or teaching or computers etc…what are they going to do? At some point I think we are going to have look beyone the true cost of a refrigerator made in China and look at it as a way to make our country productive. It seems like all we do in Texas is build houses! But we can’t do that forever!

  4. I think 10% unemployment is going to be the “new normal”. I believe we are in for a lost decade (or two) similar to Japan. MANY jobs are NEVER coming back, and for many Americans, the Age of Prosperity
    is OVER. Permanently. I’m middle-aged, but have long ago given up on the idea of living better than my parents did. Heck, I’ve long ago given up on the idea of living anywhere NEAR as well as they did. The crash of `08 reinforced that notion with a vengeance. I feel really bad for today’s younger generation, who increasingly, graduate college with a mountain of debt and no job prospects in the fields for which they studied and invested so much time, effort and money. I wish I had a solution to this mess, but I don’t.

  5. I have a friend who, even before the crash of ’08, agreed with me that things were headed this way. I remember he said at a meeting of our book club maybe three years ago that the American Dream was fading fast and that, for him, the solution would be to learn German and move to Bavaria. He wasn’t joking either.

  6. I’m originally from Germany, and can still speak and read a bit of German, but I haven’t been back there to visit since the 70s. Been here in NY too long, I think, to go back and start a new life there. Might have been an option 25 years ago, but at this point, I’m probably going to stay in the US. I AM getting out of NY, though, ASAP, LOL! Germany is doing reasonably well in the economic crisis, but with all the financial trouble in some of the EU countries, I have to wonder wether Germany will detach itself from the Euro and go back to the Deutschmark. I’m not so sure the grass is any greener in Europe than it is here. It’s brown all over, right about now, IMO. Might as well stay put where you have familiarity and some connections on your side, rather than risk a move to somewhere else with an economy this bad. Back in the 70’s, I spent the summer in Germany 3 times, and being young and ambitious, worked TWO jobs over there each of those summers – no problem finding work, even for a kid from NY. But that was then…a lot of changes have surely taken place since.

  7. I’m not usually an optimist, but I think America can still do it, we can still recover from this and have brighter tomorrows. All we need to do is to come together with a common purpose like we did during the Second World War and be willing as one people to make necessary changes. We need to stop the fierce political rivalry and in-fighting. We need to start listening to the better angles. Someone once said, “If you keep doing what you’re doing you’re going to keep getting the same results.”

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