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Bruce Greenwald on Structural Problems in the Economy and Unemployment

November 10, 2009

by Robert Huebscher

So we are left with unsustainable consumer demand in the US and an imbalance in global trade.  What is the solution?

You’ll notice that we basically fixed the banks, but the underlying imbalances are in no way fixed.  Those who suffered the worst, in international terms, are the Japanese and the other big manufacturers.  So what you’ve got is this fundamental economic imbalance that hasn’t gone away, which is going to mean slow growth. 

We can resolve this by just directing tariffs.  But Obama plays nice with others, and he’s not going to do that, which would harm the rest of the world.  We can’t try to control our currency, because if we sell dollars we would drive the price of the dollar down, and Japan and China would just buy them and sell Yen or Yuan, and there’s no percentage gain in doing that. 

So the actual way we could relieve the pressure is to have the IMF just print money and give it to Korea and the other countries so that they could buy Chinese and the other exporting countries’ goods without having to incur foreign debt.  That is the Stiglitz plan and that’s the plan that the Chinese are talking about.

At the same time, you’d like to tax the surplus countries to force them to adjust.  That’s a short-term solution.  The long-term solution is you have to get people out of manufacturing – and governments have to cooperate in this effort – and get them into industries like health care.  Cutting health care is not a good idea at this point.  They have to work in education, housing, and financial services.  But if all those industries are under attack globally, you are not going to get the jobs that you need to replace the manufacturing jobs. 

There is this huge structural problem taking place.  The governments can offset it to some extent.  I think what you are going to see in the US is what you saw in Japan for years, which is stagnant demand.  We will grow a little bit, imports will flood in, purchasing power will go out of the US economy, and we will stop growing, and then the government will do something and the dollar will fall a little.  All these things will happen sequentially, but ultimately you are going to have slow growth. 

What does this mean for unemployment?

The next phenomenon that people are not aware of explicitly but ought to be is that productivity growth doesn’t come from innovation.  It comes from people taking tried-and-true methods and actually applying them better.  The reason I say “tried-and-true methods” is because, if you look at the most productive firms in an industry, they typically have costs that are a half to a third of the industry average.  It’s the same technology that everyone else has available to them.  There’s a huge opportunity for productivity and cost cutting. 

Imagine that you’ve got basically 1% or 0% GDP growth and productivity growth of 2% to 3% per year.  Employment is going to be decreasing by 2% to 3% per year.  That means unemployment is going from 10%, where it is now, to 12% to 14%.  I don’t think there’s a natural stopping place for that much below 15%. 

That’s the potential unemployment picture you are looking at.  You are already seeing the political strains that is causing, which are that companies are going to make a lot of money, because they will drastically cut costs and their revenues are going to be constant.  The stock market is going to go up.  It happens every reporting season; they all exceed expectations.  The unemployment situation is going to be a disaster. 

We’ve seen this in Europe, and basically what it means is that people under 30 can’t get jobs unless they are from the absolute elite universities.  That’s the sort of forecast you have to think about, and it’s very hard to do that based on short-term movements in consumption.  The savings rate has got go to somewhere above 4%, and it’s not there yet.  It was up to 3.8%, and then went down to approximately 2.9% because of “cash for clunkers” and people buying furniture for their houses.

Other that then Stiglitz plan, is there any other solution?

This is the problem for the Republicans, even though they are going to win because it’s going to be such a disaster for Obama.  The Democrats are not going to improve things unless they get lucky.  The services people have to buy are lots of health care, custodial services for old people, college education and graduate education, and housing.  They are big lumpy expenditures, and the government has to help finance them.  So, in the meantime, while you are making this transition out of manufacturing and you are getting these institutions and the private methods of payment in place, the government is going to have to borrow a lot of money and do a lot of support.  That’s going to be the hardest, because nobody has faced up to that.

We are actually in pretty good shape, because we don’t have much of a manufacturing employment base left.  To give you an example, we have more professional athletes and referees, including tennis pros and golf pros, than we have extractive workers, which include coal miners and oil platform workers.  We have approximately 200,000 professional athletes and 180,000 extractive workers.  It’s just unbelievable what’s happened to productivity in these areas. 

You have a long-term solution, which is to do the transition, which the War did for us to end the Depression of the 1930s, which it never did in Argentina.  Then you need a short-term way to relieve the pressure and generate the demand, and that’s basically the Stiglitz plan, which is described in the last chapter of my book.