Real unemployment over vast regions of Europe and North America is at a post WWII high. Redefinition of unemployment conceals most of the damage. In the US, for example, current unemployment if measured as it was during the Reagan era would be at least equal to the Department of Labor's U6 measure, which now stands at 10%. But that is probably a vast underestimate since we know there are 95 million working-age Americans who are not working, meaning that there are many who would like a job but have given up trying to find one and who are not therefore classified as unemployed. In addition, there are millions who want full-time work but can find only part-time work.
It is now generally agreed that mass unemployment during the Great Depression was caused by a contraction of the money supply due to a failure of central banks to provide monetary easing in a timely fashion. The solution, recognized by Lord Maynard Keynes, and promptly applied, to Keynes delight, by Adolf Hitler, was money printing and deficit government spending.
Since 2008, the Western states have tried endless money printing, easy credit and government deficit spending, but with not much to show for it. Still millions and tens of millions of people in their 20's and now increasingly in their 30's, are living with their parents because they are too poor to move out. Meantime, the US labor force participation rate continues to fall, as it has done ever since 2008.
So why, then, does Keynsianism not work today if it was what worked in the 30's when and where it was tried? The answer is, globalization. In the 30's the US economy, and to a lesser extent that of Europe, was self-contained, whereas today, US exports as a share of GDP are three times greater than in the 30's, and imports as a share of GDP have quadrupled.
A consequence of this opening of the US and other Western economies to the rest of the World is that money printing and deficit spending tends to pull in more imports from the cheap labor areas of the world — car parts and computers, shoes and shirts and just about any other labor-intensive manufactured product you can think of — rather than stimulating home production. Meantime, so far as it supports the labor market at home, the effect of such stimulus is to prop wages up, hence delaying the downward adjustment necessary to achieve parity with the Third-World manufacturing and service centers in China, India and many other countries.
The implication, then, is that what is needed is not looser money and abundant credit, but the exact opposite, this to drive unemployment up in the short-run to achieve price deflation, including deflation in labor costs. In other words, life may be tough for school and college leavers seeking jobs, but they need to be tougher, so tough in fact, that workforce entrants are willing to work for sweatshop wages, as do the illegal immigrants employed in the booming US and European underground economies.
Naturally, no one is going to talk about this solution to the unemployment problem since its a guaranteed loser election platform. Still it's a solution that may be about to be tried. The only alternatives being continued widespread misery due to unemployment, or a return to protectionism, a key feature of Trumponomics, but anathema to the financial elite.
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Good article. The problem with the free trade solution is not that it would not work in practice, but that we didn’t negotiate real free trade agreements as our trade partners don’t follow the same trade rules as we do (i.e. they may have reduced trade duties but they still practice protectionism by other means). Indeed it is hard to understand what induced our politicians to sign some of these agreements.
ReplyDeleteYour comments on Hitler are accurate in so far as they go, but one mustn’t forget that his economic solution would have worked only in the short run and involved very draconian measures, including forced welching on debt and sending dissenters to concentration camps (Dachau etc.). In the end Hitler bankrupted not only Germany but all of Europe as well.
What we have is far too much public sector debt (from Greece to Detroit, etc.) and I believe that that is the main problem. Eventually we will have to write it down either at the expense of the moneyed interest (wealth taxes, etc.), or through high inflation. It seems to me that we have chosen the latter course - with negative real interest rates, etc. As you pointed out in an earlier article, the figures reported for inflation are likely a gross underestimate of the real rate of inflation (just as the unemployment numbers are). As my wife tells me when she goes shopping what she finds is evidence of inflation, not deflation – and evidence of price increases that herald inflation rates far beyond what is reported in the media.
"we have is far too much public sector debt (from Greece to Detroit, etc.) and I believe that that is the main problem. Eventually we will have to write it down either at the expense of the moneyed interest (wealth taxes, etc.), or through high inflation. It seems to me that we have chosen the latter course - with negative real interest rates ..."
DeleteNegative interest rates will drive up inflation, but only by increasing debt-fueled spending, i.e., by increasing the amount of debt.
So what we're headed for with negative interest rates looks like a Weimar-style hyperinflation and currency destruction. And when it takes a barrow-load of million dollar bills to buy a loaf of bread, then the debts really can be written off, since the real value of the obligations will be indistinguishable from zero. .