"We Dare Not Let This Happen" (But Don't Support Doing Anything About It)
Dean Baker is frustrated with a Washington Post editorial telling the public there's nothing we can do about the unemployment problem, a problem it cannot even characterize correctly (see Dean on this point). Me too.
The editorial starts by noting that:
unemployment remains well above what it should be; the longer this persists, the more we risk a “new normal” of structural unemployment, which is a fancy term for elevated human suffering and snowballing economic waste. We dare not let this happen. The question, though, is how to generate the new jobs.
We dare not let that happen! We need to do something! Unless, according to the editorial, fear of what might happen if we try to help the unemployed gets in the way.
First, fiscal policy is ruled out as a solution to this urgent problem. As Dean Baker notes, "The Post tells readers that we can't try to create jobs through fiscal stimulus" because bond vigilantes might drive interest rates up. However, the "interest rate on 10-year Treasury notes is now 3.14 percent, much lower than it was in the budget surplus days of the late 90s" even though we've heard these warnings for some time now.
Well, if the problem is so urgent, certainly the editorial will support money policy instead? Nope. Here, the worry is inflation. But, as Greg Mankiw notes this morning, he agrees with Paul Krugman that "the price of labor does not show any significant inflationary pressures right now," and hence there is little to worry about in terms of inflation (and other signs of inflation are absent as well).
So what should we do about the unemployment problem given that (according to the Post, not me) both monetary and fiscal policy are off the table? The editorial concludes that businesses aren't the answer because of "a lack of attractive business opportunities" (without quite understanding how monetary and fiscal policy could help here). The only thing that is supported is increasing exports -- it's describes this as a "promising strategy." The editorial notes that lowering the value of the dollar would help, but gives no indication of how policy might achieve this goal (especially given its position against using monetary policy to try to help with the unemployment problem).
So, given that we "dare not let this happen," where "this" is high and persistent unemployment, what should we do?
"The costs, human and economic, of high unemployment are heartbreaking. But it will take a measure of patience as well as a sense of urgency to prevent it from becoming a permanent feature of the U.S. economic landscape."
A sense of urgency to do what? With both fiscal and monetary policy off the table, what, exactly, is the government supposed to do? Apparently, the millions and millions of people who are unemployed, some of whom won't be reemployed until years from now if we do nothing to help, are supposed to be patient because people with power over policy are worried about inflation and higher interest rates. But there's no evidence of these problems in the data, and if the problem is truly urgent -- and I agree it is -- then we need to take action. Yes, there are risks. I don't think they are large, but both inflation and interest rates could go higher as a result of more active policy. However, our willingness to take those risks depends upon who will be hurt if these problems do emerge (hint, it's not the unemployed) versus how much we care -- how much urgency there is -- about the unemployment problem. I think the potential benefits of trying to do something exceed the costs by a safe margin. But unfortunately for those who are told to be patient for a few more years why the economy works this out, the people with the power to set policy do not agree.
Posted by Mark Thoma on Saturday, May 7, 2011 at 10:17 AM in Economics, Policy, Politics, Unemployment |
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