US must move beyond financial band-aids

The non-band-aid solution is end outsourcing, offshoring, and illegal immigration and watch Main street boom.  Pass that on to your all of your Congresspersons and to all the candidates.---rng

from The Financial Times

By Mohamed El-Erian

Published: June 3 2011 14:31 |

Last updated: June 3 2011 14:31

        Highly disappointing job creation and stubbornly high unemployment that is becoming more structural in character – this is the most striking conclusion from today’s highly anticipated US employment report. Combine it with this week’s other data releases, be it housing or manufacturing, and the bottom line is clear: the largest economy in the world has again hit a soft patch.

        Analysts are now scrambling to lower their gross domestic product estimates for this quarter, and not by a small amount. Having started as high as 4 per cent (annualised), many now suddenly find themselves heading quickly to the 2 per cent zone. And this is happening at a time when other parts of the globe are also slowing. 

       Rightly so, this will amplify the growth fright that has started circulating in political capitals in advanced economies only a week after the Group of Eight advanced economies congratulated itself on a strengthening recovery. In the process, the critical why/how/what questions will (and should) be raised: why is this happening; how could it occur after America’s huge fiscal and monetary stimulus; and what should be done?

      On the why, there will undoubtedly be mention of “exogenous” causes (eg Japan and the Middle East); and, when it comes to the systemic economic impact, some will even characterise them as “temporary and reversible”. We will thus be encouraged to “look through” these “transitory factors”.     

     We should not.

     Yes, the tragedies in Japan have disrupted global supply chains and reduced spending in the world’s third largest economy; and yes, the Arab spring has added a risk premium to oil prices, undermining both input prices and consumer spending. But the problem of meagre job creation goes well beyond these issues.

     The 2009-11 economic recovery has been unusually sluggish despite unprecedented attempts to stimulate consumer spending and investment, directly and through inflating asset prices. Indeed, outcomes have consistently fallen short of policymakers’ expectations. And, from a global perspective, the mix of policies in individual countries has grown into an increasingly inconsistent and incoherent whole.

     What about the how? In addition to sluggish growth, job creation is inhibited by structural factors. For too many years, the economy relied excessively on inwardly-looking sectors for its employment engines (eg construction, housing, retail and leisure). In the process, it eroded its edge in educating, training and retooling its labour force. This slippage has been extremely costly given national and global realignments.

     So what now? While the temptation is undoubtedly strong, policymakers are less able to engage in additional cash injections. Fiscal stimulus is off the table in the context of an increasingly polarised national debate concerning the country’s debt outlook; and another round of asset purchases by the Federal Reserve (“QE3”) faces political constraints and a worsening trade-off between its expected benefits and the costs and risks.

     The fundamental question today should no longer be whether weak economic data lead to more “active inertia” by policymakers. The numbers indicate that a stimulus-induced cyclical recovery is not sufficient to overcome structural impairments to sustained and large job creation. It is high time to move beyond financial band-aids if the goal is to address properly what is now an unemployment crisis.

     Unless policymakers respond to the obvious implications of the highly disappointing jobs report – that structural problems require a co-ordinated set of structural measures to improve decisively the functioning of the labour market, housing, credit and medium-term fiscal sustainability – the US will experience a series of unsatisfactory and socially-worrisome monthly employment reports of which today’s would unfortunately be just an example.

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