WASHINGTON POST - 'I don't think there's a solution to the employment problem in the short run' E-mail
Friday, 19 August 2011 06:25

By Ezra Klein

Michael Spence is a Nobel laureate in economics and a professor of economics at New York University’s Stern School of Business. His latest book is The Next Convergence: The Future of Economic Growth in a Multispeed World, and it brings a global perspective to an economy we too often think about primarily in national terms. I reached him last week in Milan, Italy, where he shared his frankly depressing, but quite realistic take on where the economy is going. An edited transcript of our conversation follows. If you read only one part of it, read the final question.

 

Ezra Klein: One of the reasons I was looking forward to talking with you is that your take on the economy is quite global in perspective, which I think is a useful corrective to those of us in Washington who can get caught in thinking this is all about what we do here. So what do you think we’re missing?

Michael Spence: I think in America in particular, probably because we’ve been dominant for so long, we have very deeply embedded habits of thought, economists included, that pay very little attention to the international linkages that affect our economy. In this situation, it will be a lot easier for us to solve a very difficult economic problem if the rest of the world is growing. The same should be said about Europe and even Japan. It could also become easier if we could manage to agree on the importance of fairly simultaneous, coordinated growth strategies. Growth is going to be pretty important to dig ourselves out of the fiscal hole.

E.K.: And what should those strategies be? What can we do that would actually work to get, say, unemployment down?

M.S.: I don’t think there’s a solution to the employment problem in the short run. If you look at the situation, the domestic economy is demand short. That neutralizes the non-tradable part of the economy [Note: by non-tradable, Spence means things that don’t get traded across borders, such as education and health care. You can read more on the distinction here — E.K.], which is 70 percent of what we do, and neutralizes the domestic component of the tradable part. And the tradable part, even if it’s growing, won’t generate much employment. So we’re just not positioned to solve this unless the non-tradable sector starts to grow again.

So I may be missing something, but I can’t figure out a short-term fix. If somebody in the administration asked me what we should do with the unemployed, I’d say treat them well in terms of access to basic services and income supports, and then we need to have an argument about how to get to work on growth.

E.K.: You’ve argued before that what the crisis has really done is uncover problems we’ve had for a long time, but managed to paper over through consumption and credit bubbles. Can you expand on that a bit?

M.S.: We had all these productivity improvements and all this outsourcing in the economy, but we still managed to employ those people. That was the critical thing that happened. Instead of outsourcing and productivity improvements creating an instantaneous employment or wage problem, those people managed to find employment in the non-tradable side of the economy. A lot of them were employed in government, in health care, and many of them were employed in industries, like construction and retail, fueled by a consumption bubble. But we were just delaying the adjustment. Some things looked wrong during this period: The middle incomes were stagnating and the jobs didn’t look very challenging. But these are big industries, so when they’re humming along, they employ a lot of people.

E.K.: So what happens now?

M.S.: Some leader is going to have to stand up at some point and say we really need to spend money putting people back to work, period. And that’s going to mean sacrifices on the part of the people who are working. We’re trying right now to keep our lifestyles going, and it’s not really working, but the way we’re doing it is putting all the burden on the unemployed while trying to leave the employed untouched. Eventually, this is going to require a redistribution of that burden.

 

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