Tuesday, April 2, 2013

Stiglitz on Jobs and a Revolution in the Real Economy

Serge Melki/Wikimedia Commons
While going through a stack of old magazines, I found this Vanity Fair article, The Book of Jobs, by Joseph Stiglitz, economist and Nobel Prize winner. Stiglitz argues here that the economic downturn is  not "just" due to the financial crisis, but caused by a revolutionary shift in the real economy from industry to services. As so often with fundamental analysis, even though it was released in January 2012, it's equally relevant in today's economy. This is what Stiglitz said:

 "It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997."

The continued dismal unemployment situation was confirmed by The Wall Street Journal when stating last week that "only 14 of the country’s 100 biggest cities have more jobs than they did pre-2008/2009 recession."
Stiglitz continues:

"The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems................

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

..........A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression. For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

.......... the parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs."

See also what Charles Hugh Smith says in his blog oftwominds.com about the structural loss of jobs:

"Many observers (including myself) have noted that robotics and networked software are replacing both unskilled and skilled labor at a faster clip than technology is creating jobs."

 Back to Stiglitz' two final conclusions:

".......The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people....................The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality.

The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery................. A banking system is supposed to serve society, not the other way around."

A year later, it appears that nothing has fundamentally improved: banks still are not lending - see Why the Fed is failing to boost lending - and another noted economist and Director of the Earth Institute at Columbia Univeristy, Jeffrey Sachs echoes Stiglitz in a recent op-ed in The New York Times saying "Our underlying economic problems are chronic, not temporary; structural, not cyclical. To solve them, we need a systematic long-term approach." Sachs calls for strategies focusing on three areas: infrastructure, energy and job skills, clearly implying that those strategies do not exist.

It's time for action whether it's in the banks' lending offices, companies' board rooms or in the corridors of Washington DC, if we don't want Stiglitz's last year's article to be still describing next year's economic situation.

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