Jun 3rd 2011, 13:33 by R.A. | WASHINGTON
AMERICAN labour markets are faltering, and the script looks distressingly familiar. In the spring of 2010, a strong American economic recovery finally seemed imminent. In the three months to May of last year, private employers added over 400,000 workers and the future looked brighter still. But a crisis in Europe shook market confidence. As investors fled to safety, firms grew nervous and hiring slowed. Only in the fall of last year—not long after the Federal Reserve announced a new round of stimulative asset purchases—did activity pick up.
And in 2011? In the three months to April, private employers added over 700,000 jobs, and conditions again seemed to be improving. But the global economy has suffered one disruptive shock after another.
– Bad weather dragged down activity early in the year and
– political instability in North Africa and the Middle East boosted oil prices.
– A devastating disaster in Japan seems to have had a bigger impact on the Japanese economy, and on global trade, than was initially expected.
– Big emerging markets—primary sources of global growth in recent years—have been working to slow their economies to tamp down rapid inflation.
– And Europe’s crisis continues to worsen.
Amid these headwinds, American growth has disappointed, falling short of the 4% annual rates projected early in the year. And labour market trouble followed. This morning, the Bureau of Labour Statistics released a dismal economic report. After producing job gains averaging 220,000 per month in the three months to April, the economy added just 54,000 in May, below expectations. The private sector did a bit better, adding 83,000 jobs, but that was well off the healthy rate of hiring enjoyed earlier in the year. The unemployment rate rose to 9.1%, from 9.0% in April.
It’s not too difficult to spot the sources of economic weakness in the details of the report. Manufacturing employment fell by 5,000 jobs in May after rising steadily in previous months, a testament to the worsening outlook for exports in a weakening global economy. Retail trade employment growth also tumbled, as nervous consumers trimmed spending. America’s job woes have also been self-inflicted. Private firms have added over 1.7m jobs in the past 12 months, but the government has shed nearly half a million over the same period (not counting the loss of temporary Census jobs last year). Local governments alone have cut 446,000 positions since September of 2008. Some of those government jobs losses reflect a sensible rationalisation of workforces. Too many of them reflect the damaging effect of pro-cyclical budget cutting due to balanced-budget rules in cash-strapped states. More federal aid to states might have dampened the reductions, easing the drag on national growth.
Budget issues at the federal level may also be contributing to the slowdown. Unexpectedly large federal budget cuts are chipping away at quarterly growth rates with less of a cushion than previously imagined. The 0.5 percentage point drag due to slashed spending seems less problematic when the economy is expected to expand at 4%—as was once hoped for the first half of 2011—than when it’s growing at less than 2%, as America’s did in the first quarter, and as forecasters are increasingly predicting for the second quarter.
The ongoing debt-ceiling battle is an additional source of uncertainty. Legislators continue to bicker over how and how much to trim from the federal budget in exchange for an agreement to raise the nation’s statutory limit on borrowing. Failure to raise the ceiling by August will trigger default. Just yesterday Moody’s, a ratings agency, threatened to downgrade America’s debt rating if a deal on the ceiling weren’t reached by next month.
For now, market appetite for American debt is undiminished. Lagging global growth prospects and increased uncertainty are driving a flight to perceived safety, pushing down Treasury yields. Falling yields provide an awkward backdrop to American budget negotiations, in which legislators warn that bond traders may sour on American credit at any moment. They’re also a testament to the importance of the integrity of American debt. With financial markets feeling shaky, any disturbance to the trustworthiness of the safe asset of last resort could prove highly destabilising to the global financial system and the economy.
In a global economy this volatile, the American economy is going to have a rocky month here and there. But American government officials are doing themselves no favours. Federal Reserve officials are overly concerned with inflation given the outlook for slowing global growth. Now is no time for policy tightening. And elected representatives in Washington are playing with fire. By cutting too much spending in the short-term and turning the debt-ceiling fight into a political battle, Congress risks making a large unforced error. The economy is simply too vulnerable at the moment for politicians to make those kinds of mistakes.
What’s wrong with America’s economy?
Its politicians are failing to tackle the country’s real problems. Believe it or not, they could learn from Europe
Apr 28th 2011 | from the print edition
PESSIMISM about the United States rarely pays off in the long run. Time and again, when Americans have felt particularly glum, their economy has been on the brink of a revival. Think of Jimmy Carter’s cardigan-clad gloom in the inflation-ridden late 1970s, or the fear of competition from Japan that marked the “jobless recovery” of the early 1990s. Both times the United States bounced back, boosted on the first occasion by Paul Volcker’s conquest of inflation and on the second by a productivity spurt that sent growth rates soaring in the mid-1990s even as Japan stalled.
That record is worth bearing in mind today. Americans are unhappy, and becoming more so, about their country’s prospects and politicians’ efforts to improve them. In a new New York Times/CBS News poll, seven out of ten respondents said America is on the wrong track. Almost 60% of Americans disapprove of Barack Obama’s handling of the economy, and three out of four think Congress is doing a lousy job.
This malaise partly reflects the sluggishness of the recovery. Though unemployment has been falling and share prices are close to a three-year high, house prices are still in the dumps and the price of petrol has soared to levels not seen since the summer of 2008. But it’s not all about oil or indeed the short term. A careful reading of the polls suggests that Americans’ worries stretch well beyond the next couple of years: about stagnating living standards and a dark future in an economy slow to create jobs, saddled with big government deficits and under threat from China. Tellingly, a majority now regard China, not America, as the world’s leading economy.
Are these worries justified? On the plus side, it is hard to think of any large country with as many inherent long-term advantages as America: what would China give to have a Silicon Valley? Or Germany an Ivy League? But it is also plain that the United States does indeed have long-term economic weaknesses—and ones that will take time to fix. The real worry for Americans should be that their politicians, not least their president, are doing so little to tackle these underlying problems. Three failings stand out.
The competitiveness canard
The first failing, of which Mr Obama in particular is guilty, is misstating the problem. He likes to frame America’s challenges in terms of “competitiveness”, particularly versus China. America’s prosperity, he argues, depends on “out-innovating, out-educating and out-building” China. This is mostly nonsense. America’s prosperity depends not on other countries’ productivity growth, but on its own (actually pretty fast) pace. Ideas spill over from one economy to another: when China innovates Americans benefit.
Of course, plenty more could be done to spur innovation. The system of corporate taxation is a mess and deters domestic investment. Mr Obama is right that America’s infrastructure is creaking (see article). But the solution there has as much to do with reforming Neanderthal funding systems as it does with the greater public spending he advocates. Too much of the “competitiveness” talk is a canard—one that justifies misguided policies, such as subsidies for green technology, and diverts attention from the country’s real to-do list.
High on that list is sorting out America’s public finances. The budget deficit is huge and public debt, at over 90% of GDP when measured in an internationally comparable manner (see article), is high and rising fast. Apart from Japan, America is the only big rich economy that does not have a plan for getting its public finances under control. The good news is that politicians are at last paying attention: deficit reduction is just about all anybody talks about in Washington, DC, these days. The bad news—and the second reason for gloom about what the politicians are up to—is that neither party is prepared to make the basic compromises that are essential to a deal. Republicans refuse to accept that taxes will have to rise, Democrats that spending on “entitlements” such as health care and pensions must fall. No real progress is likely until after the 2012 presidential election. And the antagonism of today’s deficit debate may even harm the economy, as Republicans push for excessive cuts in next year’s budget.
When growth doesn’t bring jobs
Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment.
Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men. These were caused not only by sweeping changes from technology and globalisation, which affect all countries, but also by America’s habit of locking up large numbers of young black men, which drastically diminishes their future employment prospects. America has a smaller fraction of prime-age men in work and in the labour force than any other G7 economy. Some 25% of men aged 25-54 with no college degree, 35% of high-school dropouts and almost 70% of black high-school dropouts are not working (see article).
Beyond the toll to individuals, the lack of work among less-skilled men could have huge fiscal and social consequences. The cost of disability payments is some $120 billion (almost 1% of GDP) and rising fast. Male worklessness has been linked with lower marriage rates and weakening family bonds.
All this means that grappling with entrenched joblessness deserves to be far higher on America’s policy agenda. Unfortunately, the few (leftish) politicians who acknowledge the problem tend to have misguided solutions, such as trade barriers or industrial policy to prop up yesterday’s jobs or to spot tomorrow’s. That won’t work: government has a terrible record at picking winners. Instead, America needs to get its macro-medicine right, in particular by committing itself to medium-term fiscal and monetary stability without excessive short-term tightening. But it also needs job-market reforms, from streamlining and upgrading training to increasing employers’ incentives to hire the low-skilled. And there, strange as it may seem, America could learn from Europe: the Netherlands, for instance, is a good model for how to overhaul disability insurance. Stemming the decline in low-skilled men’s work will also demand more education reform to boost skills, as well as a saner approach to drugs and imprisonment.
Technology and globalisation are remaking labour markets across the rich world, to the relative detriment of the lower-skilled. That’s why a rosier outlook for America’s economy does not necessarily mean a rosy future for all Americans. Mr Obama and his opponents can help to shape the process. Sadly, they are doing so for the worse rather than the better.