Sometime last week Tyler Cowen weighed in on the reason behind long term unemployment that, in my interpretation, implied that most are unemployable for reasons other than macroeconomic inefficiencies. I don’t particularly intend to single Cowen out. But he provided the latest example of the rather narcissistic approach to societal problems that appears to be commonplace within the conservative body of ideology with which I happen to disagree; if one is unemployed for more than, say, a year, then there must be something wrong with them at the individual level.
Many of these labor market problems were brought on by the financial crisis and the collapse of market demand. But it would be a mistake to place all the blame on the business cycle. Before the crisis, for example, business executives and owners didn’t always know who their worst workers were, or didn’t want to engage in the disruptive act of rooting out and firing them. So long as sales were brisk, it was easier to let matters lie. But when money ran out, many businesses had to make the tough decisions — and the axes fell. The financial crisis thus accelerated what would have been a much slower process.
Subsequently, some would-be employers seem to have discriminated against workers who were laid off in the crash. These judgments weren’t always fair, but that stigma isn’t easily overcome, because a lot of employers in fact had reason to identify and fire their less productive workers.
For starters, this is a non sequitur that overlooks a very compelling point from the Market Monetarist camp that the US economy has been plagued by a persistence of inadequate demand due to a suboptimal monetary policy framework (inflation targeting with an interest rate peg) that has achieved only very limited success in providing the monetary conditions required to induce an expedited recovery from the financial crisis of 2008. The demand side argument is compelling, at least from my point of view, due to data regarding macro indicators such as slowing inflation, persistent subpar GDP performance, volatile NGDP toward the low side, and stubbornly high headline unemployment that support the thesis of ongoing inadequate demand.
In order to not get caught with incomplete reasoning, looking at a single tree in the forest, the long term unemployment tree, to deduce a particular cause of its condition and pass a value judgment upon it, I take the path of backing into the most likely root cause by looking at the entire macroeconomic forest first which, in this particular case, holds a wealth of information in ordinary data points about what the overall problem might be. After that, it doesn’t take a whole lot of intellectual energy to come to a conclusion that can stand up to scrutiny because it is supported by many other facts that all point in the same direction. Facts about the state of the current US macroeconomic situation are indeed stubborn things.
For my walk on the wild side, certainly Mr. Cowen isn’t the only guilty party in purveying bad information that has the effect of stigmatizing the long term unemployed and obscuring dereliction of duty by the central bank. Certainly if the central bank has not been particularly attendant to maintaining and/or restoring adequate demand, having been distracted by headline inflation, the end result from neglect of the dual mandate is fewer employment opportunities to go around against a backdrop of a growing population. That means that there will be plenty of people who were employable five or ten years ago and new entrants to the labor force that now have nowhere to go regardless of skill set. Fewer opportunities than people who need to work as a matter of survival means long term unemployed and a growing substrate of dire straits for as long as the condition of inadequate demand persists. It’s a simple concept; and such conjecture by Mr. Cowen and others like him that label long term unemployment as some sort of personal problem is not helpful.
At the very least, I wish these people would take the time to validate their conclusions against readily available macroeconomic data before announcing them because while they may match subscribed ideological beliefs, they likely are not, in fact, related to anything pertinent. These are not stupid people by any means, but they are intellectually lazy to the peril of those around them.
And of course nobody should take my word for anything. But a few pictures are worth a thousand words each; and I’ve got plenty as do my Market Monetarist “friends” that show low interest rates are not particularly stimulative to an economy in mini depression. If I can dig these pictures up and create some of my own, like the graph of consumer credit growth vs. the level of the FF rate that clearly shows otherwise, certainly people who are more educated about the topic and smarter than I should be able to tell whether low interest rates are indeed stimulative under the current set of circumstances or if that bit of conjecture is indeed fallacious. I’d ask these more enlightened people what a severe monetary disinflation looks like, perhaps like people rather suddenly going bankrupt here, there and everywhere; and what degree of similarity there is between historical bouts of severe monetary disinflation and deflation and the economic crisis of 2008. If it looks like a severe monetary disinflation and walks like a severe monetary disinflation, the chances that it is one are likely very high. And once we get to a point of common understanding regarding the origin of the Great Recession, I think it will be much easier to find a solution to the problem of long term unemployment as blaming the unemployed for what has happened to them is never going to solve anything.