Unemployment

Um, how's about we line the interstates with power poles so we can get Texas' cheap wind and nat. gas power to the rest of the country w/o rolling blackouts? That SanDiego outage was fun. Looking forward to more of the above if we keep letting our infrastructure rot. Far as I can see, the main hangup against new transmission infrastructure is that they always seem to want to run it across the 'bunny rabbit habitat'. Stick it along the interstate, and the extra expense of going farther is offset by the ease of maintenance, no? Plus hard to argue about endangered species when there's a freeway next door. Maybe works better out west than back east...still I think it would be a jumpstart in many places. Here in AZ, the last new line I heard about was getting held up over going thru a refuge - when there's a state highway 5 mi to the west. Kind of like they didn't actually want it to get built...hmmmm...I guess the main advantage of wild places is the paucity of landowners to deal with. Still kind of hard to argue NIMBY next to blacktop. /rant

This unemployment is indeed structural caused by the evolution of blue collar robots and white collar pcs. It is about time to understand better technology and unemployment. This crisis of unemployment looks like the one of the 30s when advances in automated assembly lines - now robotized assembly lines threw millions out of work.
www.economicstruth.com

What, "quality is hard to measure (in health care)"?!?

It may be hard to measure QUANTITATIVELY, but not necessarily QUALITATIVELY. Just have patients (or a statistically significant fraction thereof) do exit/post-intervention interviews. That'll give quality-related data concerning 'customer satisfaction'.

Also, do some post-intervention interviews over a period of time for 'treatment effectiveness' data: for example, call past patients 2-3 days, two weeks, three months, and six months after treatment to find out if they've had a relapse, if they've suffered pain or other complications, etc.

Finance, Real Estate, Education and Health are the only service sector industries you can come up with? How about IT? At least you have it right on Finance. Real Estate is not a service sector job, it is one of those industries where government regulation and other nonsense creates a condition where a buyer and seller are forced to hire services that should not need to exist, such as getting a land survey every time a house sells, as if the thing moves or something.

Healthcare is a service but not only is it tapped out on the massive spending in this sector most of money in this sector are skewed so badly in over pricing and other factors by the government regulation, government subsidies, Government not allowing competition across state lines and the entire insurance part of it as well, which has a similar effect as government. So more money means nothing since it will all end up in the wrong places.
And education what a joke. Not only is the degree a person gets almost valueless it costs about 4 times more than it should. Plus again, with the government skewing prices and arrogant professors who think they know everything plus this total brainwashing agenda to turn everyone liberal, education is simply not worth the price or time. It is a massive bubble that needs to be popped. Then maybe it will have value as education shifts from pointless social degrees and perhaps into continuing education, trades or other areas that make sense.

So big service industries that make sense to expand and enhance... How about Finance, Information Technologies, Construction, Travel, Hospitality, Entertainment and Energy. Any of those can have much higher growth, make a lot of money and have the easiest path out of government interference, regulation and subsidies for the ones that have it. Real Estate has been an issue in nearly every American recession for the last 200 years, mainly government goofing around with real estate. Education and Healthcare are something people either only do once for little value and the other the goal is to avoid the need for it.

Also, considering America is still the largest manufacturing country on the planet, the goal should be to continue and expand it as well. The problem is not people being unable to shift from manufacturing to services it is manufacturing itself is becoming streamlined, enhanced by all the above services, more efficient and the skills needed are simply not the same as they were 30 years ago. The workers of manufacturing in america need to keep up with manufacturing as it evolves into the 21st century, not complain with the pointless jobs go to china. Who wants cheap pointless jobs anyway, lets manufacture more advanced stuff and leave the rest to someone else.

Seems to me that the author misses an important point, one which liberals always miss. The secret of the path to prosperity is not in creating jobs, but in creating wealth. That means farms and factories, not government and health care. The difficulty with that, however, is in finding purchasers for the goods produced, and therein we find the problem. There is currently a huge surplus in goods, and the market is saturated with goods of all kinds, driving down prices and profitability for the producers. They are thus forced to cut production costs, which means either lower pay and benefits for local labor, or moving to somewhere with lower labor costs. Like China or Mexico.

"But we're not happy to let inequality of wealth determine that some people can get Harvard PhD's while others can at best get a high-school degree from a terrible school, or that some people can get dialysis and others just die."

Unless you are a NeoAristocracist, also known as a Republican.

"Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. ... This seems like a contention that needs a whole lot more fleshing-out."

Yes, indeed it does. A service sector requires a population with disposable income to spend on it, or to invest with and that means you need a substantial population producing a living from feeding, clothing, and manufacturing for itself and earning decent living from those activities.

All the named services are not exportable, in the sense that the developing nations can supply those services internally for less money. In turn, those services are readily exportable to the US in one form or another, with the exception of real estate. 

From where is the base going to come from, DOD contractors?

Economists need to go back to the drawing board on this one. They've been drinking the Kool Aid of the post WWII boom, thinking it's some magic perpetual motion vitruous circle thing.

I think we tend to look for easy answers for problems which have been diagnosed incorrectly.

We have been on a 30 year borrowing spree.
We are still around 350% Debt/GPD, as of 9/30/11.
(counting Public Debt, not total debt of the US gov't)

Households 87.0%
Business 73.5%
State & local Gov't 16.1% (note 1)
Federal Gov't 66.7% (Public Debt only)
Domestic Financial 90.5%
Foreign 15.0%
-----------------
Total 348.7% Debt/GDP

note 1: The latest Flow of Funds revised state and local gov't from $2,421.5 Billion of debt in 2011 Q2 to $3,013.9 in Q3 2011 as well as previous quarters and years, back to 2004. I used the previous numbers I downloaded.

Q3 Flow of Funds - page 9
http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Q2 Flow of Funds - page 9
http://www.federalreserve.gov/releases/z1/20110916/z1.pdf

Someone needs to ask the Fed about the discrepency.(unless they updated that and previous reports, I'm having trouble getting the old report to check.)

The last time Total Debt/GPD was over 300% was going into the Great Depression.

Regards

Pure distraction.

The depression is caused by deleveraging - there was a massive bubble (housing), lots of bad debt was created. The bubble collapsed, banks had to write off bad assets, now they don't have enough capital to support their asset risk - so they have to restrict new lending. This inevitably stops investment and limits consumer spending.

This depression (as with the great depression) is all the worse because of the scale of the bubble that led up to it, and because banks today had more than twice the leverage of the late 1920s. The hit to capital was so severe, that banks have refused to write down all their bad assets (even worse in Japan 1990 and Europe today) - this has frozen up interbank lending, forcing even faster deleveraging. Capital losses have been so large that government has handed out subsidies - definitely bad for long run productivity and living standards.

Sure, the US economy (or rather, various state and local economies within the US) has structural problems. At any given time, there are always some structural problems and some opportunities - declining industries and regions alongside growing ones. A largely free economy, given good institutions, will innovate, invest, move resources to increase productivity, and create jobs.

It isn't the structural problems that are to blame. Nor is it the (mostly pretty good) condition of the interstates, freight rail, airports or broadband networks. The trouble is that the financial sector has increased the rents it takes for providing transaction liquidity, has ceased consumer finance, and has largely stopped the finance of private sector investment.

This depression is caused by massive deleveraging!!! And government borrowing won't redress this.

The best solution I have seen is limited purpose banking (look it up).

Less good long term alternatives (in that they involve some sacrifice of competition and productivity) are higher capital buffers, equity-convertible bonds, and perhaps some regulation pertaining to asset risk and systemic risk.

There are two quick fixes to a deleveraging crisis:
1) set up new investment banks with hundreds of billions in government capital, lending to business, consumers, and investing in sound local banks
2) order the Fed to produce high inflation ( 7 - 15%) for two or three years, effectively writing down bank liabilities, followed by a short monitory recession as normal rates are restored.

Neither of those is pretty, so we're faced with more than a decade of depressed economic activity in the US (economy performing way below potential; per capita incomes more than 12% below where they should be).

The US is a fundamentally different place than it was fifty or even thirty years ago, when the average citizen was able to earn a comfortable living, provide for his family, and put the kids through college, all on an "average" job obtainable without highly specialized training and advanced degrees.

On top of that, job security was provided by unions, retirement security came from pensions, and years of service were often rewarded with pay rises and perks.

Some time later -- (when? the 50s? the 60s? the 70s? later?) these jobs which had been the backbone of the American family for years were gone. Downsized, rightsized, outsourced, made redundant (by technology or otherwise), or simply rendered obsolete due to changing markets. Meanwhile, a relentless pursuit of deficit reduction and productivity maximization has resulted in fewer people doing more work and working longer hours; this leads to fewer job openings, raising unemployment.

However, the US educational system has been slow to get on with it and equip students with the tools they need to succeed in a modern, global economy with all the benefits (and drawbacks) of free trade and advanced technology.

The outcome of this has been the division of the labor market between highly-skilled, high-income jobs requiring significant education and specialized training (doctor, lawyer, physicist, finance wizard, engineer, architect) and lower-skilled, lower-income jobs requiring less training (fast food worker, retail sales clerk.) The remaining "middle class" jobs such as firefighters, policemen, teachers, etc. tend to be government positions and the current belt-tightening trend is squeezing them as well; they offer job security, and therefore positions tend to become infrequently available for new hires.

The high costs of education combined with the high cost of living and depressed wages for lower-skilled jobs: all these things are adding up to prevent people from moving "up the ladder" as they used to do. The lack of job security discourages risk (or opportunity) seekers from attempting to improve their lot in life via changing positions, since most often without the necessary education and training the jobs which are available are not substantially better.

Entrepreneurs have been hurt by this as well; draconian tax codes, health and safety regulations, spiralling insurance costs, and decreased availability of credit lines and small-business loans have discouraged workers from forging new enterprise.

Increasing not only education funding but education grants would allow universities to train and educate a new generation of workers with the skillset and depth to compete in the global economy, opening up their access to greater incomes and filling the needs of employers desperate for suitably-trained workers. The increased money would bolster consumption, as well.

In short, the combination of self-destruction of our own labor market combined with the failure of the education system to adapt has greatly contributed to rising unemployment, structural and otherwise.

1. It is clear from the above that their are two distinct "sciences" called Economics - the Leftists (Keynesians) and rightists (Austrians) and there is no common ground by which problems can be analyzed. Identifying a common ground through which the two sides can communicate would be a useful goal for the academics.

2. There are common assumptions, though, such as (a) wealth and consumption are good in and of themselves, (b) the higher the proportion of citizens in the work force, the better and (c) the higher the level of education generally, the stronger the economy will be. I think each of these assumptions needs examining. The following are me (very) preliminary thoughts:

a) Is consumerism good in and of itself? It seems to me that, as wealth increases, the price (but not necessarily the value or even the cost) of what is purchased or consumed goes up, but this does not result in enhanced happiness for the consumer (apart from signaling enhanced status) and involves only marginally more work for the supplier. The law of diminishing returns applies. If that is right, then beyond a certain point there is only a very marginal economic - or other - benefit from each additional dollar/pound/euro spent on consumption. I would contend that many of us in the West are near or at that point, in which case we can easily adapt to reduced spending power without significantly reducing our standard of living. But it would need a change in culture. (Don't forget that many people have always made this choice, using their talents to follow economically sub-optimal professions like nursing, teaching, writing, and so on.)

b) Do additional workers improve the economy? Economic theory says that the greater the competition for jobs, the more efficiently work is priced and that therefore the economy runs more efficiently. This makes sense but, again, competition is not increased if the additional worker does not have applicable skills or if there is a shrinking demand for labour, as in a depression or if automation/enhanced productivity/foreign competition kicks in. Most people do not want to work; what they want are the fruits of labour - buying power, social interaction, status and a sense of self-worth. The real challenge is to find/create/design occupations - not necessarily jobs - which satisfy these needs.

c) Education as an investment in the economy. Higher education is assumed to be Good. The higher the better. But I am not sure this is true. Most entrepreneurs I have known were not overly educated; until the Personnel/Human Relations professionals put a stop to it, most project and middle managers had few applicable academic skills. What these people did have was breadth of experience and the judgement which comes with it. Very bright students with an entrepreneurial spark have a tendency to drop out - Silicon Valley is full of them. So, while too much education may not be a bad thing, it does not follow that it is a good thing in every instance. I don't know whether any research has been done on this (I think it would be risky field to enter for an academic!) but my suspicion is that we are already spending too much money on higher education.

In a post-industrial world where manufactured goods are remarkably inexpensive and of constantly improving quality, there is a diminishing demand for manufacturing jobs and even for manufactured (tradable) goods. Additionally, at least in the developed world, the demand for manufactured goods is going down as electronics takes over. In terms of services, there is a natural limit to how many restaurant meals can be eaten, medicines consumed, fashions bought, sites seen, and so on. A new culture and social theory is needed for this now world.

"Mr Stiglitz already acknowledges this. Like other Keynesians, he thinks part of the answer is a big government push to build better infrastructure, where America has underspent for decades (and where Mr Luce says the country is in some areas starting to feel "second-world")."

What exactly does this mean? And this is a serious question, not just a criticism. Decades ago, the U.S. was the most advanced economy on earth. It makes perfect sense that other countries would spend more just to come up to the same level. And if you're building new infrastructure, it makes sense that you're going to build it to the latest standards. It doesn't follow from any of that, that the U.S. has all that much to gain from upgrading our existing infrastructure. Maybe we do have a lot to gain, but I almost never see this argument made with any quantitative support. It's always some variation of "Europe/China/Japan has cooler trains than us." If you want to convince people to spend money on cooler trains, how about giving us some cost-benefit analysis?

"Can we really spend enough on these kinds of things to get an economy moving?"

There's no limit to how much we can spend on education and health care. Free college and aromatherapy for all! But as you stated, it's not obvious that we're underinvesting in these areas. If we aren't, Stigliz wants to create two more bubbles.

The US isn't an emerging economy that can follow an industrial policy made possible by the path already paved by developed economies. The fix to structural unemployment in developed economies with efficient labor markets can't be effectively planned centrally. Trying would, more often than not, further misallocate resources. The best we can do is provide sufficient capital and broad-based stimuli (tax cuts) for the free market to allocate accordingly.

I think Mr. Stiglitz referred to finance, real estate, health, and education as four major service sectors, not as the four major service sectors. Which makes sense, since it misses one very large service sector: IT. (Yes, IT also involves manufacturing, at least outside the US. But American IT companies generally either produce software or, like IBM, make their big money on services.)

If I've interpreted Stiglitz correctly, the 4th and 5th paragraphs rather miss the point. It isn't a matter of which of these 4 sectors to expand -- which is just as well, for all the reasons MS notes. Rather, it is a matter of looking at which other service sectors should expand and provide those middle class jobs.

@M.S.: "Mr Stiglitz mentions "increased investment in education" and more government-funded basic research. Can we really spend enough on these kinds of things to get an economy moving?"

No. A sensible plan to increase investment in education might mean paying teachers more to attract greater talent, but would not necessarily mean vastly greater numbers of teachers. Therefore, it would take people out of other, presumably productive, value-creating, jobs to provide a service that will not create value for 20 years.

As for increased funding of basic research, again, the payoff won't come for decades. Furthermore, those with the talent to perform such research are currently doing just that, and more scientists cannot be created overnight.

Education and healthcare can absorb the extra money, no doubt. But the main issue we are facing is lack of jobs, and the recipes (especially from the left) address job creation first, and economic growth after. But how can we massively increase employment in education and healthcare? After all, there are only that many sick people and so many students to teach... Sure we can reduce class sizes and treat the healthy ones too, but that just sounds a bit, hmm, irrational.

Dear M.S.

"So finance and real estate are already bloated; if we want more spending on services, we should be looking at health and education, unless we can invent some other major category of services capable of powering the economy. (I nominate blogging.)"

I nominate commenting on blogs.

With Regards and No Regrets
Top Hat 001

This is likely a false dilemma, but to turn closing thoughts over, we could ask, "Can we really save enough on these kind of things to get an economy moving?" If the government pays down its debt in lieu of spending borrowed money on goods and services, how many jobs and how much economic activity does it generate?

"We're happy to let the manufacturing economy run along...[b]ut we're not happy to let inequality of wealth determine that some people can get Harvard PhD's..."

Reading this was almost a religious experience for me. Excellent work!

M.S. are you arguing against government intervention?

If you spend on something like infrastructure, you make a world where it becomes easier for the private sector to do things. The theory is that this creates more private sector jobs, not just the jobs that were needed to fix the infrastructure. A one-time government expenditure leads to a permanent (other than maintenance) improvement.

Education and health care aren't going to be like that. If the government starts pouring additional large sums of money into health care, then politically, they're pretty much going to have to keep doing it. Ditto with education.

One could even argue that, given how much we are paying compared to how much we are getting, both education and health care are currently in a bubble. Pouring more money into them is not the answer; making them more efficient is.