Business Outlook: When Growth Doesn't Pay the Bills
The last time unemployment was this high was in the early 1980s after a quadrupling of oil prices helped drive the world economy into recession. A recovery later in the decade brought some relief, and by the end of the 1980s, joblessness in the U.S. was half what it was at its peak. Europe, though, was not so fortunate. Unemployment throughout much of the region remained stubbornly high even as economic growth resumed. The malaise was so unusual that Herbert Giersch, former president of Germany's Kiel Institute for the World Economy, coined a term for it: eurosclerosis.
Now, there's a real danger that the U.S. will develop its own case of that debilitating disease. Sure, the economy is picking up steam. Growth in the fourth quarter could come in as high as an annualized 4.5%. Yet unemployment looks set to stay at nosebleed levels, averaging 10% in 2010 and 9.2% in 2011, according to 58 forecasters surveyed by Bloomberg. That's well above the 5.6% average of the past 20 years.
Economists have blamed Europe's miasma a quarter century ago on several factors: monetary policies that were too tight; unemployed workers disinclined to search for new jobs; and companies that shied away from hiring new employees in response to government policies. On all three fronts, there's an echo of similar problems in the U.S. today.
European policymakers in the 1980s were, in the words of Johns Hopkins University professor Laurence M. Ball, "anti-inflation zealots" who kept interest rates high even after price pressures had ebbed, strangling the economy in the process. For them, "inflation is like a vampire," he says. "You can't just kill it once."
No one would accuse Fed Chairman Ben Bernanke of being a member of that obsessive crowd. Yet there are limits to what even the leader of the world's most powerful central bank can do to revive a moribund jobs market through conventional monetary policy. The short-term interest rate the Fed controls is already at 0% and can't be cut further.
The Fed chief has tried to compensate by launching programs to spur credit more directly, including the purchase of $1.75 trillion of Treasury debt, housing agency bonds, and mortgage-backed securities. But even Bernanke's fans admit they're not sure what impact those steps have had.
For Italian economists Tito Boeri and Pietro Garibaldi, the root cause of eurosclerosis was microeconomic, not macroeconomic. They say unemployment stayed high because labor mobility was limited. So after European nations reduced jobless benefits and made it easier for companies to hire and fire workers, mobility rose and unemployment fell in the mid-1990s.
But in the U.S., labor mobility is falling, not rising. As measured by the U.S. Census Bureau, it slumped in 2008 to its lowest level since records began in 1948 and likely fell further in 2009.
It's not cushy unemployment benefits that are encouraging the jobless to stay put. It's the 30% plunge in house prices that has left one in four homeowners with mortgages owing more than their houses are worth. That raises the ante for people looking to pull up stakes in search of a job.
What's worse, there may be no place to move because the devastation from the Great Recession has been so widespread. Unemployment has risen in all 50 states, the District of Columbia, and Puerto Rico. States that once had been job-growth engines, like California and Florida, are among the hardest hit.
Unlike Europe in the 1980s, it's not the government-imposed cost of firing workers that's keeping companies from expanding payrolls. It's more the uncertain cost of hiring them as President Barack Obama presses plans to reform health care and stem global warming through new mandates on business.
Perhaps the most disturbing parallel between 1980s Europe and the U.S. today is the rise in long-term joblessness. The longer people are out of work, the harder it is for them to find a job and the more embedded unemployment becomes, making it more likely an American sclerosis could set in.