Jobless rate may be new normal if we wait for better

By James McCusker Herald Columnist

It was easier in ancient times. When bad stuff happened, it could be blamed on the gods or the spirits being angry over some real or imagined slight. But that was too easy. Today we always have to know what caused the problem, especially in economics.

In a sense, we still blame it on the spirits. The current, all-purpose cause of our country’s sluggish economy is a modern-day spirit that goes by the name “Uncertainty.”

Uncertainty is an equal opportunity sort — invoked by liberals and conservatives alike. But from an economics standpoint the great thing about uncertainty is its own uncertainty; it can never be measured but can always be blamed. Right now, it is being blamed for employers’ reluctance to hire new workers, as well as for lagging business investment and investors’ reluctance to get back into financial markets.

The most recent example of blaming uncertainty comes from a report by the Organization for Economic Cooperation and Development, which is the economic analysis arm of 34 of the developed countries around the world, including the United States.

The organization’s latest report, “OECD Employment Outlook 2012,” is both revealing and scary.

The report reveals that, “Unemployment across the OECD countries remains just below its post-war peak of 8.5 percent and looks likely to remain high over the next year or so,” blaming the anemic economic recovery.

The actual forecast in the report extends the current level of unemployment of about 8 percent through the end of 2013. Although that is an unhappy picture, it’s not really the scary part. But its description of global labor markets, ends with this warning:

“Beyond the immediate damage to the lives of individuals and families unable to find work, there is a growing possibility that part of the cyclical increase in unemployment may become structural, with permanently higher levels of unemployment in those countries where the increase in unemployment has been worst. This threatens to reduce future labor supply and undermine the very recovery that can deliver jobs.”

That’s scary. And it is what some economists are worried about in the U.S. economy. We were already encountering skills deficit issues in our labor force before the recession. Now, long-term unemployment, where people are out of work for longer than a year, and the rising number of discouraged workers leaving the workforce, has made the problem much worse.

The words the organization uses to describe the situation are “increasing marginalization of the jobless.” The actual deterioration of skills, along with the “sell-by-date” hiring bias of employers, combine to make finding work very difficult for the long-term unemployed.

The idea that there is a window of opportunity for an economic recovery is relatively new in economic theory, but its implications are serious. While economic policy makers are fumbling around, the chances for a robust recovery decline with each passing day.

Economic policy is a powerful tool whose force and direction is guided by beta version software, an imperfect process. The sophisticated mathematical models and the data collection systems of economics have taught us a lot, but when it comes down to the decision level economic policy is often more art, and sometimes more luck, than science.

The report is wisely less than specific about what economic policies would work and what ones would not. There are 34 different countries involved, and what might work in the U.S. might not make things better in, say, Spain. Nine of the OECD countries, for example, have unemployment rates below 5.5 percent while the jobless rate in nine other member countries remains in double digits. The political situation in each of these countries is different also, which plays a role in the development and the success of any economic policy.

The report’s analysis is also very much aware of the financial problems that afflict its member countries, especially in Europe. The report notes that countries simply do not have the money to promote economic growth by traditional methods of stimulating demand. Instead, they recommend addressing the structural unemployment problems so that they don’t strangle the recovery. This involves addressing the skills issue head on, and opening opportunities for part-time work, for example, that will keep those skills current.

We should take that advice. It may be hard to accept the idea that the Keynesian window has closed but it might simply be too late to stimulate our economy with other people’s money. More importantly, we have to accept what and where we are today. We cannot recreate the past by reenacting it with yesterday’s spending or tax policies. That only distracts us from confronting our economic problems.

What is certain in economics is what is certain in life. The future belongs to those who face it.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.