Here's How to Deal With Entrenched Unemployment

Something is horribly wrong with both America's employment situation and with the way we measure it. In case you missed the news, the economy generated just 74,000 payroll jobs in December, but the unemployment rate dropped by three tenths of a percentage point, from 7.0 percent to 6.7 percent.

How can that be? Simple: more and more people have just given up looking for work. The percentage of prime age people in the active work force is now just 62.8 percent, the lowest since 1978, a time when far fewer women worked. And the proportion of long term unemployed remains stuck at historic highs.

It's a scandal that Republicans in the House keep blocking an extension of normal and customary unemployment benefits for the long-term unemployed. But unemployment compensation is a poor substitute for a job.

There are there convenient myths going around to explain what is occurring. First, it is said that there are plenty of jobs -- Americans just lack the skills that the labor market needs. But there is no good evidence for that proposition; it's just a convenient alibi.

The second explanation is that wages are too high. If Americans only took lower wage jobs, like destitute immigrants are willing to do, we could have full employment. That's also malarkey. Productivity keeps rising, but the fruits of that productivity are not shared with ordinary working people -- because so much of society's total product is captured by the top one percent; and because institutions that would help workers fight for a fairer share -- like unions and minimum wage laws -- keep being gutted.

The third supposed reason for America's lousy job performance is that something structural about the economy has changed. It just doesn't need as many human workers or maybe it's stuck, growing at a slower rate. A couple of months ago, Larry Summers gave a speech to the IMF to that effect, and it attracted a lot of comment. The economist's term for this trap is "secular stagnation." (In econ-speak, secular doesn't mean non-religious; it means long-term. Go figure.)

Summers warned that the economy might be at risk of becoming addicted to credit bubbles, such as the housing bubble, because nothing else was pumping up sufficient demand. Even the heroic Paul Krugman wrote that maybe Summers was on to something.

But this, too, is an alibi for government's failure to pursue policies that would get us back to full employment at decent wages. As I've previously pointed out, in 1939 and 1940, despite nearly eight years of the New Deal, unemployment was stuck above 12 percent. Many economists of that era felt this was simply the best the economy could do, thanks to new technologies, changing demands for skills and other structural excuses.

Then World War II broke out, the greatest job creation and job training program in the history of the world. People who were unskilled and unemployable in 1940 suddenly became quite employable in 1942, because government contracts revved up the depressed potential of the economy, recapitalized industry and re-skilled human workers. Unemployment dropped to two percent. The output of the economy increased by roughly 50 percent during the four years of the war.

It turned out that a decade after the financial crash of 1929, its aftermath of depressed demand was still a drag on the economy. Today, we're less than six years into the aftermath of the financial crash of 2008, but the dynamics are the same.

Moral of the story No. 1: if you want adequate employment, put decent purchasing power back in the pockets of working people. Government can do that, both by taxing the wealthy and by borrowing to finance public investment.

Moral of the story No. 2: financial crashes do massive and prolonged damage. We need regulation adequate to make sure they never occur. (That's a story for another day.)

Today, the American Society of Civil Engineers says we have an infrastructure shortfall of about $3.6 trillion dollars. The Obama Recovery Act of February 2009 was a good down-payment. But we need something like a decade of public investment at double the Recovery Act scale of about $250 billion a year.

When the same Larry Summers was Obama's chief economic adviser, the mantra was that the stimulus needed to be "timely, targeted and temporary." Like so much else that Summers advised, this counsel was wrong, wrong, wrong. Public infrastructure investment needs to be planned, purposive and permanent.

We need to address not only the shortfall of deferred maintenance in roads, bridges, water and sewer systems, but to invest in 21st century green technology, smart-grids and measures to limit the damage of global climate change. All of this will make the society more productive and create a lot of good domestic jobs.

Don't let the measured unemployment rate fool you. The real news about job creation and job quality is dismal. One person who isn't fooled, happily, is the new chair of the Federal Reserve, Janet Yellen, who will keep interest rates as low as possible as long as the rest of the government fails to provide other forms of economic stimulus. But as long as the executive and legislative branches are bent on belt tightening rather than increased public investment, the Fed can't do it alone.

As for the antiquated unemployment statistics, the government should be measuring the rate of employment against the economy's potential labor force. With that revision, the true unemployment rate would be in excess of 10 percent.

Unless we get a drastically different approach to economic recovery, the economy could limp along like this indefinitely. The cause is not secular stagnation, but perverse policies.