May 15, 2013


Why Washington Saved the Economy, Then Permanently Destroyed the Labor Market  (DEREK THOMPSON, MAY 13 2013, Atlantic)

I have two stories for you about Washington and the economy. Both true. But very different.

The first story is called: How Washington Saved the Economy. You might begin in 2008, when the Federal Reserve went on an unprecedented spree of asset-buying to un-gunk the banks, push down interest rates, and spur investing in mortally weakened economy. This was followed, in 2009, with an equally historic stimulus package aimed at filling holes in state budgets and sending cash back to families and businesses. The government ran steep $1+ trillion deficits to keep as much money in the weak private sector as possible.

There is little question that monetary and fiscal stimulus blunted the recession -- and saved the economy.

The second story is called: How Washington Permanently Scarred the Labor Market. You might begin this story in 2011, when Congress (led by Republican obstructionism) embarked on a historic quest to crush deficit spending by any means necessary. Hold the economy hostage over the debt ceiling? Check. Kill the American Jobs Act while scheduling a too-awful-to-be-a-real-law sequester? Check. Allow the too-awful-to-be-a-real-law sequester to become a real law? Checkmate. 

The deficit fell fast. As unemployment ebbed, the ranks of long-term jobless calcified, creating two separate job markets. One broken market for people out of work for more than six months. And another slowly healing market for everybody else. But the combination of a thermostatic recovery and a deep aversion to stimulus crushed any hope that the long-term unemployed would get the help they needed. Long-term unemployment isn't special just because it's longer; it's special because it's self-perpetuating. Skills atrophy, networks dry up, and employers discriminate, creating a vicious cycle of joblessness that can't be cured by normal economic growth.

There is little question that, in the last two years, Washington has essentially left the long-term unemployed to fend for themselves -- and permanently scarred the labor market.

...which is, obviously, that a robust economy is at least not dependent on high employment.  Indeed, the dichotomy outlined here raises the implication that we have a choice: a healthy economy or high employment.  It is the failure to recognize that this is a choice that clouds so much thinking today.

We really can't discuss the future sensibly until folks ask themselves a threshold question: does an economy exist to create wealth, and jobs are incidental, or to create jobs, and wealth is incidental?

The respective answers create massively different policy prescriptions.  On the one hand, we can work to make the economy more productive and efficient and then worry about how we redistribute the greater wealth we've created, or we can seek to make the economy less productive and less efficient so that we can continue to redistribute less wealth via jobs.    

Posted by at May 15, 2013 11:22 AM

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