Big new fiscal and monetary stimulus is probably not the answer. Federal spending and tax cuts over the past three years, coupled with the Federal Reserve’s easy money policy — including the controversial $600 billion second phase of balance sheet expansion known as QE2 — kept unemployment from rising out of control. The government’s support was truly massive: Even before QE2 and the December 2010 payroll tax cut, the economy had received four times more fiscal and monetary stimulus (as a share of gross domestic product) than in all nine post-1953 recessions combined, according to a J.P. Morgan analysis. But the federal deficit is already huge at 10 percent of GDP, and increasing it substantially could trigger a bond market revolt that would abort the recovery. Indeed, fiscal consolidation is probably necessary to long-term job growth.
More Fed money creation could put more investable cash in the hands of business — but also set off inflation, which could lead to a growth-choking interest rate hike. There is not much more that monetary policy can do against unemployment, as Chairman Ben S. Bernanke has implicitly acknowledged.
In any case, the problem for the private sector is not a lack of funds: Corporations already have about $2 trillion in cash available, well above normal levels. The problem is a lack of attractive business opportunities. Housing and construction drove job growth in the past 10 years, but they’re played out and no new growth engine has emerged. The Obama administration thinks “green jobs” are part of the answer, but clean-energy subsidies move jobs around within the economy instead of creating them.
Increasing exports, as the administration aims to do, is a promising strategy, one that has been aided by the cheaper dollar and the rise of labor costs in China. Partly as a result, Chesapeake Bay Candle, which, despite its name, has three factories in China and Vietnam, is about to open its first U.S. plant in Glen Burnie, according to the Wall Street Journal. Indeed, U.S. manufacturing has staged a mini-comeback in recent months, with 29,000 new jobs in that sector last month.
But the U.S. economy remains consumer-driven, and consumers are still paying down the debts they accumulated in previous decades. Streamlining the corporate tax structure — without cutting revenue — might improve U.S. competitiveness. Government also should maintain an efficient social safety net for the long-term jobless while focusing more effort on readying workers to take advantage of opportunities when they do emerge. That means not only expanding but also reforming education, including job training and retraining for the long-term unemployed, to endow the labor force with new skills and preserve the ones workers have. A rational immigration policy that keeps the United States open to the world’s most energetic and creative people is also part of the solution.
The costs, human and economic, of high unemployment are heartbreaking. But it will take a measure of patience as well as a sense of urgency to prevent it from becoming a permanent feature of the U.S. economic landscape.