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Bad news from the Northern hemisphere

July 9th, 2011

Another really bad employment report from the US Bureau of Labor Statistics. Employment has been essentially static for the last couple of months, and most of the ground gained in 2010 has been lost. Unsurprisingly, public sector job cuts are leading the way downwards, as the stimulus fades into memory and austerity proceeds at the state and local level. In this context, it’s hard to know what outcome of the current negotiations over the debt limit would be worse: unconditional surrender to Republican demands for yet more spending cuts, or a failure to pass any legislation, with consequences that remain unclear[1].It’s hard to see US unemployment falling substantially any time soon. The decline in the participation rate (it’s fallen by about 3 percentage points of the population, equal to about 5 per cent of the labor force) means that the standard measure seriously understates the severity of the problem. If employment growth were to resume, lots of people would re-enter the labor market, so that unemployment would not decline fast.

Turning to the obligatory comparison with Europe[2], the US unemployment rate is almost exactly the same as the average for the EU-15, but both these averages conceal a lot of variation. The US has higher average unemployment than the core EU economies (except France, which is slightly higher) but much lower than the peripheral economies dealing with sovereign debt crises. On the other hand, there is plenty of variation within the US, and of a truly perverse kind. Roughly speaking, the further you were, economically, geographically and socially from the scene of the financial crisis, the worse off you are doing now.

The only question now is which set of policymakers is more likely to do something utterly disastrous. The chance of anything genuinely sensible is close to zero.

fn1. Apparently, it’s constitutionally impossible to default on the debt, and practically impossible to stop the computers sending out Social Security checks.

fn2. In this context, it looks as if 2011 will be another year in which I win my bet with Bryan Caplan that the gap between US and EU unemployment rates will be less than the gap implied by higher US rates of incarceration.

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  1. Sam
    July 9th, 2011 at 19:50 | #1

    Well with voters who electorally punish every attempt to increase spending, it’s hard to know what policy-makers can do in the USA. The Republicans were voted back in for midterm landslide promising precisely the sort of economic lunacy they are now delivering. The Democrats seem to be scrambling to prove that they too have no understanding of demand management. This is a case of a people getting the leadership they deserve.

  2. John Armour
    July 9th, 2011 at 20:42 | #2

    This is a tragedy of Medieval proportions.

    The triumph of ignorance and superstition over reality.

    “Apparently, it’s constitutionally impossible to default on the debt…”

    You betcha.

  3. hc
    July 9th, 2011 at 21:34 | #3

    A sensible policy might be a fiscal expansion to rebuild infrastructure while the labour costs of doing this are restrained and interest rates are low. At the same time a program of fiscal consolidation must be initiated after a year or so.

    It’s a terribly difficult policy situation but tax hikes or spending cuts now would be globally disastrous.

  4. Ikonoclast
    July 10th, 2011 at 06:43 | #4

    @hc

    Why call tax increases to a proper level, “tax hikes”? It’s another piece of emotive language from the media corporates. The US could increase tax by ensuring the many billion dollar corporations who pay little to no tax now, actually paid some tax. There would be nothing wrong with large tax increases for welathy corporations and wealthy individuals in the US. Couple that with a 50% budget cut for the US military, withdrawal from Iraq and Afghanistan and closing half the US bases around the world and the US could fix its budget relatively quickly.

    The increased revenue plus deficit spending could indeed rebuild the US’s decaying infrastructure and prepare it for the Renewables Age. But the US seems committed to strategic overstretch abroad and systemic decay at home.

  5. Scott
    July 10th, 2011 at 07:02 | #5

    There is no sensible policy that the US can take to reverse it’s decay; as far as I can tell they’ve already crossed the ‘event horizon’ and there’s no going back now. It is highly symbolic that this weekend saw the last launch of the US Space Shuttle program; Americans take such pride in it, but the whole ‘NASA’ program was a luxury, and the US government can ill-afford such luxuries. It will be China that lands people on Mars.

    Even if Congress passes legislation to increase the debt ceiling, which I think will happen, a partial default is just a matter of time. I certainly hope that my superannuation fund has minimised it’s exposure to US securities. Expect a slow burn before a rush, as everyone else twigs that they’re stuffed.

  6. Nick R
    July 10th, 2011 at 08:42 | #6

    My feeling is that this is all a consequence of inequality in education. When tea-party types go on about the debt their arguments have a superficial plausibility that would appeal to poorly educated voters. After all these are the same people who reject evolution for creationism (more than half of the country) and believe that the earth is the centre of the universe (almost 20%).

    To quote a line from a NOFX song ‘there’s no point in democracy when ignorance is celebrated’.

  7. July 10th, 2011 at 09:39 | #7

    Did somebody wish that Australia would become the richest country in the world? Like, with a really nasty leprechaun? ‘Cause if so, I don’t like the way the little bugger is going about it.

  8. stockingrate
    July 10th, 2011 at 11:12 | #8

    Americans were not prepared to adjust their standard of living down to the competitive realities of skilled and unskilled external labour in Mexico, China and India. As a substitute they stimulated their economy with foreign debt for years, taking things from bad to worse. Then the bubble popped.

    In their complacency and in thrall to the the American Dream they were not prepared to countenance that mass immigration would lead to greater internal competition for jobs when jobs are scarce. Neither are Australians.
    Americans aren’t special and neither are Australians.

  9. Jeepers Creepers
    July 10th, 2011 at 12:02 | #9

    The US needed a large stimulus but didn’t get one.

    Monetary policy has not been as loose as most people believe.

    In the end Keynes was correctausterity only works in good times. You need to get economic growth going well before embarking correctly to reduce deficits and debt.

  10. July 10th, 2011 at 12:57 | #10

    Stockingrate, I don’t think the competitive realities of skilled and unskilled external labour in Mexico, China and India would require Americans to adjust their living standards downwards. The stagnation of US median worker income and the enrichification of capital holders was something the US chose. Maybe it was a hard choice to avoid given where the power lay, but I don’t know about that. But just because conditions improve in other countries does not make the US worse off.

  11. PeakVT
    July 10th, 2011 at 14:36 | #11

    Scott :Americans take such pride in it, but the whole ‘NASA’ program was a luxury, and the US government can ill-afford such luxuries.

    The total budget of NASA for 2011 is ~19B USD, which amounts to about 0.5% percent of the budget, or 0.125% of GDP. It’s definitely not what is driving the current deficits.

    That said, the STS was an expensive program that should have been ended decades ago. The ISS is another gee-wiz boondoggle, but because it’s an international program, doing the sensible thing and flying it into the Pacific Ocean won’t happen for another decade. I feel that for the time being NASA should concentrate on robotic missions. It’s had more than a little success with that kind of spacecraft.

    Scott :It will be China that lands people on Mars.

    Probably, though at this point I don’t see what the benefit of sending a terribly expensive manned mission to Mars would have over the multiple robotic missions that could be sent for the same cost.

  12. jrbarch
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