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Time to Face Reality: Our Unemployment Problems Are Structural

In the wake of last week’s job report, there has been a flurry of new debate about what precisely is keeping job creation in the United States so anemic.

The pivotal issue is whether the challenges facing the job market are cyclical or structural. The cyclical hypothesis is that we are still suffering an employment hangover from the financial crisis and sharp recession of 2008–09, made worse by limp or insufficient government responses. The structural hypothesis is that the job market has elementally shifted, and that regardless of whether GDP growth or overall economic activity ticks up, and regardless of short-term government responses, we are in for a long period of higher unemployment as millions are caught in a generational economic transition.

This argument is nowhere close to being resolved, but what’s surprising is the degree to which the argument has been forced into a partisan framework. Diagnosing what is happening—that is hard enough. But the prevailing assumption is that structural arguments are a cover for conservatives who want to cut government spending and undermine the Obama administration, while cyclical arguments are simply handmaidens to more activist government.

Paul Krugman has been pounding the cyclical drum for years and reiterated it yet again last week. The stimulus plan of 2009 was predicated almost entirely on a cyclical view of employment that tried to find the correct formula for how much to spend in order to bring employment back to precrisis levels. Krugman is also one of the main perpetrators of the partisan school and has routinely belittled those making a structural argument as lackeys of the Tea Party or of conservatives in general. Also in the cyclical camp, whether it wants to be or not, is the Federal Reserve. Its “dual mandate” to insure full employment is tethered to a thesis that says more money in circulation will spur demand, investment, and production, which will in turn eventually lead companies to hire.

Yet the past five years have not played out that way, and there are two ways to view why they haven’t. One view is that major financial crises lead to longer cycles, so returning to acceptable employment levels takes a lot of time. The other view is that this isn’t a cyclical problem but a structural one.

After the most recent jobs report came out, Tyler Cowen argued that although some of the blame can be placed on the financial crisis, there’s also automation and lack of skills among many (especially men without college degree) that contribute to much of the current employment disconnect. A similar case is made at greater length by Erik Brynjolfsson and Andrew McAfee in their recent book The Second Machine Age. Glenn Hubbard, dean of the Columbia Business School, also argued for the structural case in a long piece in the Wall Street Journal over the weekend. Add me to that camp, as I’ve been making the structural case for the past five years.

The longer that unemployment, underemployment, and long-term unemployment remain high relative to the previous decades, the harder it is to support the cyclical case. If you are a member of the cyclical camp, you can offer a variety of explanations about why, even with GDP growth steady, employment growth has been less than stellar. First, statistically, all of the jobs that evaporated with the Great Recession have, as of last week’s jobs report, reappeared. Of course, the number of workers has grown even more, and the number who have dropped out of the labor force entirely has also grown, which is why that achievement feels less than stellar. Second, you can—as Krugman and many progressives do—claim that the recession and crisis were so severe and that the government’s response was so relatively meek that it shouldn’t be surprising that we are still a ways from where we should be.

The problem with those arguments is that they are inherently unfalsifiable. So it’s been five going on six years, but just wait, say those claiming we are in the midst of a painful cycle. And because government is unlikely to spend trillions more to stimulate or job-create, government can forever be a cause of the current impasse.

Oddly, the progressive proponents of the cyclical argument blame government just as much as the conservative proponents of the structural argument. Hubbard, a former economic adviser to George W. Bush, is the most moderate of the conservative camp, but although he sees a role for government, it is true that many who argue for the structural causes of the employment challenge are staunch opponents of aggressive government action. The most acute version of the conservative critique is that there would be more employment today were it not for the endless extension of federal unemployment benefits and the artificially low interest rates promulgated by the Fed. That explains the refusal of the Republican-controlled House to vote on the just-passed Senate bill to resume those benefits to the long-term unemployed.

Yet it is possible to argue for structural shifts and also believe that government has a vital role in managing the transition. In fact, you can make a strong case that much of what is happening is a dramatic structural shift, akin to the transition away from farming and agrarian work at the turn of the 20th century; those disruptions helped trigger the Great Depression and the deep research work of economists and statisticians to measure what was going on and assess what government could do to fix it. Today, with the transition away from manufacturing to services and information, we are in the midst of a comparable disruption, and there is much we simply do not know, cannot measure, and don’t understand.

Not only is employment growth sluggish, but many of the jobs that are being created—in health care services and retail—are poorly paid and hardly tenable. And we fail to measure or account for those trying to craft self-employed or entrepreneurial lives, which may number only a few million but whose long-term impact on the future economy will be huge.

Rather than accepting that there is much we do not know or understand about the current situation, we act as if the cycles of the 20th century are the only cycles possible and that we know how to manage these transitions with government spending. That does automatically mean that government should be passive or that the market will solve all. You can argue, as I do, for structural shifts that are deep and profound and also argue for a vital role of government in providing a safety net for those who’ve been dislocated and in helping create a fluid labor market that rewards business creation. You can argue for a dramatic paradigm shift, not as a veiled way to attack what the Obama administration has done but because that argument represents reality. And you can argue that our government policies and spending would be far more productive if the diagnosis were correct.

Imagine this: A sick patient shows up in a doctor’s office and meets two doctors. One says the patient has cancer, and the other says he has the flu. If it turns out to be cancer, then rest and fluids won’t work and may prove fatal. It doesn’t matter if the doctor is a registered Democrat or a member of the Tea Party.

The debate over cyclical versus structural employment is as vital as any to our future well-being. Poisoning that debate with an unnecessary layer of partisan bile does not just impede our understanding. It actively diminishes our ability to diagnose our challenges and respond accordingly.

This piece initially appeared in Slate.com.

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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