Economist's View
We've been worried about the wrong thing: The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won't blame fear, per se. Instead, they'll castigate our leaders for fearing the wrong things.
For the overriding fear driving economic policy has been debt hysteria... After all, haven't economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?
Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. ... But while debt fears were and are misguided, there's a real danger we've ignored: the corrosive effect, social and economic, of persistent high unemployment. ...
Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what's really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don't count those who have given up looking for work because there are no jobs to be found. ...
The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. ... And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak. ... So we are indeed creating a permanent class of jobless Americans.
And let's be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we've been doing exactly what basic macroeconomics says you shouldn't do — cutting government spending in the face of a depressed economy.
It's hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.
Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It's ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.
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