After The Jobless Decade: What Next?

Since 2000, according to Neil Irwin of the Washington Post, we have
had  a jobless decade for workers.  Marshalling solid and widespread
evidence, the writer points out that for the previous 70 years job
growth had clipped along at a 20% or better rate each decade.  Yet the
net worth of households, including value of house, retirement funds and
other assets has all declined since 2000–when adjusted for inflation. 
That compares with sharp gains in every previous decade since the
1950s.  The following summary from Neil Irwin’s superb article should be fodder for my readers. 

What caused this massive downturn?

Of course, the 1990s ended at the top of a stock market and investment buble, and a recession followed.

Trillions of dollars that poured into housing investment and consumer spending distorted economic activity.

Capital was funneled into “mini-mansions in Sun Belt suburbs, many of which now sit empty.

Housing took the capital rather than industry, its machinery or business investment.

The macroeconomy was seriously mismanaged, putting the U.S. and
Europe into big trouble.  Nariman Behravesh, chief economist at IHS
Global Insight says: The big
bad thing that happened was that, in the U.S. and parts of Europe, we
let housing bubbles get out of control.  That came back to haunt us big
time.

The debt also played out in commercial real estate and financial firms. 

Irwin’s summary encapsulates our troubles: The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money.

What can we learn?

The
insights from this debacle won’t come overnight.  It’ll take some solid
historical and economic research and several hundred dissertations to
make sense of the past few years.

Remember that we learned a great deal from the two major debacles of the past century.   

The
great depression, especially the research of Bernanke, taught us that
without major interventions the country will be gripped by financial
collapse.  The lesson, therefore, was “Don’t let the financial system
collapse.”

When
you go from the Great Depression of the 1930s to the Great Inflation of
the 1970s, research resulted in a rethinking of what drives inflation. 
The result?   Economists make the credibility of central banks and
keeping inflation expectations in check by managing interest rates and
other processes a very high priority. 

The
lessons of this decade, variously called the Zero Decade or the Bubble
Decade, are still being formulated.  Irwin indicates that the major
lesson of top governmental officials is that bank regulation shouldn’t
occur in a vacuum.  As a result of major gains in system thinking,
we’ve learned that monitoring
individual banks will be profoundly inadequate.  Instead, bank
supervisors will need to understand the risks and frailties that the
entire banking system creates for the economy as a whole–and manage
those risks.

Irwin
indicates that Fed officials have become more skeptical of routinely
raising interest rates to try to manage inflation.  Officials have
found that the side-effects of raising interest must also be taken into
account. 

Obviously,
the Obama administration has made the question of how to prevent a
recurrence of the 2008-2009 meltdown priority in tandem with supporting
growth through investments in clean energy and other areas.

The
article concludes that forecasters assume the financial crisis to be
over, and are now generally expecting the job market to turn around
early in 2010, creating new jobs.  Economists will spend years trying
to figure out how, in a decade that begin with great promise, things
could go so wrong.  The notion that we can fix this overnight, as so
many pundits argue, is utter nonsense.

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