Monday, August 13, 2012

The first and third threat...

On Saturday I cited Robert Samuelson’s op-ed piece in the Washington Post last week,  and I quoted from that piece as follows:

“The young (and I draw the line at 40 and under) face two threats to their living standards. The first is the adverse effect of the Great Recession on jobs and wages. Even if this fades with time, there’s the second threat: the costs of an aging America. It’s not just Social Security, Medicare and Medicaid — huge transfers from the young to the old — but also deferred maintenance on roads, bridges, water systems and power grids.”

I pointed out that this is really three threats, not two (the long run impact of our current recession, social support programs for the elderly, and crumbling infrastructure), and I discussed the middle of them and left the first and last for today.

It’s not clear that Samuelson had the long run impact of today’s unemployment in mind when he raised the first of his three threats.  Maybe he meant that the discouraging job market is only a threat while unemployment is high.  In fact, in today’s column praising Romney’s choice of Paul Ryan as a running mate, he continues his obsession with the threat to the future posed by old people, and does not mention any longer term threat from current recession.  He also does not mention the threat posed by crumbling infrastructure.  So his first and third threats are not his top phobia: it’s the aging population that really worries him.

But there is a long run impact to extended high unemployment.  If we act quickly, we can limit the damage, but the longer we delay the harder that becomes.  Simply speaking, long run unemployment gradually becomes permanent; skills erode, self-confidence erodes, personal expectations erode, plans erode, a sense of hope and purpose erodes.    The graphs in this blog post by Brad DeLong make it fairly clear.  Over the last few years, civilian participation in the labor force has declined, year by year.  So what started as a general decline in demand rather than a structural issue can slowly, over time, become structural, with the long-term unemployed gradually becoming both unemployable and withdrawn.   The unemployment number may decline, but it declines because eventually, after long struggle, people drop out of the labor force.  That means that the potential GDP declines too.

Samuelson’s third threat also has some sting in it, as I’ve said several times in this blog, and as many many others have said too.  This isn’t complex, and it isn’t obscure.  If we fail to maintain our national investment in infrastructure, in highways and bridges, railroads, dams, power grids, water for life and for irrigation, sewage treatment plants, and all of it, then we are failing to maintain our ability to produce.  If we fail to increase our infrastructure, then we are failing to increase our ability to produce.  Much of that investment is done by private industry, but much is not.  

But---again, as I’ve said here before, and as many others are screaming in their blogs too---we can go a long way toward defending against both of these threats at the same time, by spending federal dollars on investment in maintained and improved infrastructure, and on increased research; in other words, if we hire people (thus reducing unemployment in the short run) to perform tasks that can increase our economic growth in the future.   We could end this recession in fairly short order, within a year or two, if we had the political will to do it, and we could lay the foundation of future prosperity at the same time.  Our failure to do these things may have a very high cost, and for a very long time.

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