Sunday, October 30, 2011
Total global credit rose from $80 trillion in 2000 to $210 trillion today
Unemployment and deleveraging
The great debate
Oct 28th 2011, 13:34 by Buttonwood ECONOMIST
JUST off the plane from the Buttonwood conference in New York and, as always, it was great to have the chance to hear so many important thinkers speak on a wide variety of issues.
The speech that stuck in my mind was a passionate defence of the US jobs act from Gene Sperling, director of the National Economic Council in the Obama administration. Maybe the reason it caught my attention was that all the passion in this debate tends to come from the deficit-cutting side, but Mr Sperling made a very convincing case that long-term unemployment is a huge crisis.
The current mean period for workers to be unemployed is 40.5 weeks; in the early 1980s recession, it was 21. The longer a worker is unemployed, the harder it is for he or she to get a job; some companies even state that the unemployed need not apply for jobs. This can be terrible news for those at both ends of the age spectrum. Those in their 20s can find that a long spell of unemployment leaves a permanent dent in their lifetime income; those over 55 may find it impossible ever to get work again.
That, argues Mr Sperling, is why some kind of stimulus is needed. Doing nothing is not an option. To those who say that the 2009 stimulus plan failed, he had a convincing rebuttal; when President Obama was elected in November 2008, forecasters were projecting a decline in GDP over two quarters of 1.6%. The actual decline was 7.8%; the economy was in freefall. That output was growing again by late 2009 surely owed something to fiscal stimulus (although monetary policy must have had an impact too).
But what about tackling the deficit? Here Mr Sperling had a key fact which demonstrated why reduction cannot be achieved by spending alone. In 2000, 45 million people were getting social security; by 2020, that figure will be 70 million. Medicare has a similar uplift. Given that background, it is implausible to state that spending can be locked in at 2000 levels; one cannot repeal ageing, as Mr Sperling said. Even if adjustments are made to those programmes (increasing the retirement age, controlling drugs costs), politicians can, at best, slow the rate of spending increase. Taxes will have to be raised.
Typically, however, the other striking speech came from Kyle Bass, the investor, which illustrated the other side of the problem. He pointed out that total global credit rose from $80 trillion in 2000 to $210 trillion today. In many nations, debt is three to four times GDP. These figures have normally been seen only in the course of major wars (i.e 1914-1918 and 1939-1945) when the result was a complete wipeout for creditors of the losing states.
Dealing with this debt is a kind of deadweight on the economy. Yes, every debt is also someone else's asset. But the burden of repaying debt will affect the decisions of consumers, companies and governments while uncertainty over whether they will get repaid will weigh on investors. The euro crisis (which hadn't been solved by this week's deal) illustrates the point.
So that's the key issue. How to deal with an age of deleveraging without blighting the lives of millions of people though long-term unemployment. I am not sure that the conference provided the answer but it did make me think that one should not be too ideological about the issue; to recognise, for example, that America might have more flexibility to deal with the problem (because of its reserve currency status) than Britain or Greece.