Tuesday, May 31, 2011

The unemployment problem - Krugman perspective

On Sunday's op-ed page Paul Krugman discussed the serious unemployment problem in the Western world. That's stubbornly high unemployment rates in the U.S. and destructive levels of joblessness in some European countries. He bemoans the "tragedy" and even more so bemoans the come what may attitude by governments who are letting this issue be tangential to goals for economic growth.

The problem is that the 2008/2009 financial crisis left a gaping hole in the economic structure of many countries. It can't be filled with business as usual, as has happened in "normal" recessions of the past 30 years. Job training programs, tax incentives for hiring, and the pace of economic growth that is possible now will not compensate for the loss of the benefits(and flaws) of securitization markets. There will be less credit, less private stimulus, for several more years. Public stimulus is mostly misspent, and although Krugman might not acknowledge that so openly, he knows it.

The man does offer some solutions, some ways that he thinks will take the unemployment rate lower.

His first is to create W.P.A. type work programs "putting the unemployed to work doing useful things like repairing roads" and creating new and improved infrastucture I might add. What a great idea, one that was highlighted by the government but given almost no funds. The great majority of stimulus money went to allowing the federal, state, and local government to continue doing exactly what they had been doing. It was spent to maintain the status quo when seismic structural changes meant that it was just throwing money into a one off one year solution. If this, the recycled W.P.A. idea, was a serious government effort, it could be beneficial.

Krugman's second idea is a "serious program of mortgage modification, reducing debts of troubled homeowners". This is an extremely complex issue. There has been no effort by the Administration or Congress to understand the role of mortgage servicers, one that is very clear in legal precedent and statutory protocols. This must be sorted out. More importantly, this may be the biggest black hole proposal ever. It is possible that there are many problematic "homeowners" who could not support a home short of it being gifted to them. Krugman's thought is not conducive to a rational price clearing point of the market, which is what must happen to get back on a growth track. That may sound heartless but everyone, the great majority of people I would guess, was not just suckered in by mortgage brokers. They knowingly stretched for the American promise of something for nothing. Loan forgiveness will not give them good jobs, assets, monthly payments, or maintenance costs.

The third idea is just really far-fetched, and oddly I agree to some extent that the goal would be attractive. Krugman wants the Fed to manipulate a 4% rate of inflation so that debts could be repaid with cheaper money. To think that markets can be controlled with any precision is not liberal thinking, it's state planning thinking. There are so many ways this could backfire. Economist be practical, you are looking for answers that are not there.

This of course is a presumptuious commentary in the extreme by yours truly, a little followed blogger commenting on a Nobel prize winner and star NYT columnist's thoughts. This is a difficult time, and our penchant for partisan answers will not solve anything. Reaching for simplicity, be it Paul Krugman or the 15 minute man Paul Ryan, will only complicate things.

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