Monday, September 5, 2011

Is Unemployment Cyclical or Structural?

by Richard Crews
Business cycles come and go. This was called "irrational exuberance" by Alan Greenspan, the former chairman of the Federal Reserve Bank back in the days (or, rather, "the decades") when his ponderous, pedantic pronouncements were considered straight from Mt. Sinai--that was back before the Great Recession--before the collapse of housing markets and their equity derivatives and . . . and . . . pretty nearly the entire global financial system--before Alan Greenspan resigned and returned to the spotlight briefly to repudiate and apologize for a lifetime of flawed thinking.

"Business cycles come and go," the argument went. Whether it is bundling real estate for homes or commercial buildings; inventing electronic gadgetry for communications, factories, and space enterprises; funding high-speed mass-transit systems; developing off-shore tax dodges; out-sourcing clothing manufacturing, toxic recycling, and tech-support to the deprived masses of third-world countries; or any other business fad, a hands-off approach ("deregulation") was to be recommended. "Boys will be boys." If this or that corner of Wall Street makes obscene profits for a few years, never mind--the natural, healthy forces of a robust entrepreneurial capitalism will, pretty soon now, set things aright.

But that was back in "the good old days" when business and finance functioned in "the good old ways." When Darwinian "survival of the fittest" brought the best-managed and most attractive business ideas bubbling to the top; when investors studied the fundamental strengths and weaknesses of an industry; when it was government's job largely to stay out of the way.

Things have changed. Nowadays we have tens of millions of people out of work, and--thanks to automation, new technological demands, and new international market forces--many of their jobs are not coming back.

For sure, there are still cyclical elements--irrational exuberance--in the comings and goings of business ups and downs, but there are increasingly structural elements, too. There are traditional infrastructural needs--roads and bridges and tunnels to be repaired and maintained; pipelines and wires to be patched and mended; schools, hospitals, and fire houses to be fitted and retrofitted. But there are increasingly high-speed rail and mass transit systems to be constructed; fiber-optic cables and microwave towers to be installed; green energy sources and smart energy transmission grids to be designed and maintained. And these require different kinds or training and higher levels of skills. Millions--tens of millions--of the jobs that have been lost are not coming back. They have gone overseas or simply disappeared into the woodwork of the past.

Do not be deceived that the current recession is cyclical like the many that have preceded it. There are important structural changes afoot, and the government needs to fortify education (and retraining) and social safety nets (for the displaced, unemployed, infirm, and elderly), and government needs to keep a closer eye on the exuberances of Wall Street than it did in the past--in the days of Alan Greenspan--or the American Dream will fade into obsolescence.