I confess that I have been avoiding writing on the economy. Not for want of trying, I've probably tried to write a good half dozen posts that last two weeks on some aspect of the mess we face but time and again, I give up half way through in frustration and utter depression. Instead, I've focused on more cheerful subjects like Pakistan and Afghanistan. I'll take a score of failed states over our failing economy. And failing it is.

Tonight, well, actually, this morning since I can't sleep thinking about this mess that has enveloped the globe, the frightful bleed in jobs raises serious questions as to the depths of this downturn. This past Friday was a dark and dismal day. The US economy lost 2.6 million jobs in 2008 and it is now losing 600,000 a month. Basic math skills tell me that's quite a clip. The unemployment rate is now 8.1%. Now that's an interesting number because as Paul Krugman points out in his Behind the Curve op-ed in today's New York Times it is the number that the Obama Administration planned for year-end 2009 number. It's not-even mid-March and we have blown through it. That's certainly a worry in more ways than one.

Dr. Krugman spells out his worry as always very succinctly:

So here's the picture that scares me: It's September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it's still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

But he can't get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

O.K., that's a warning, not a prediction. But economic policy is falling behind the curve, and there's a real, growing danger that it will never catch up.

His last sentence is what forms the basis of one of my three main worries about the economy and the response of policy makers so far. My worry is that the US economy is not just shedding jobs temporarily, but may be undergoing a painful restructuring process that will eliminate some types of jobs for good. In other words, our problems are structural and not cyclical. And that is likely to mean a permanently smaller sized economy with prolonged unemployment at a much higher level that is likely socially unacceptable. My fear is that we are likely to see entire industries to disappear from the American landscape, a mass extinction of entire industrial sectors.

Even in the midst of the so-called Bush recovery back in 2003-2006, Cathy E. Minehan, President of the Federal Reserve Bank of Boston, admitted in a moment of rare candor that the recovery was a "job-loss" recovery. Her comments were:

But unfortunately, unemployment has fallen in large part because many people have stopped looking for work. They have left the labor market, thereby reducing the labor force participation rate to a relatively low level. If those unemployed workers had remained in the labor force or returned and failed to obtain jobs, the jobless rate would currently be near 7 percent.

The dark truth is about 12.7 million Americans, or 8% of the labor force, still hold manufacturing jobs as of last month. Fifty years ago, 14.6 million people, or 28% of all workers, were in the manufacturing sector. Even at the start of the Reagan era, one in five US workers worked in factories. And as these higher paying jobs evaporate, so does the middle class lifestyle of the American working class. Because the jobs that are being created are more and more in the service sector and those jobs pay less on average. But here's the other shoe that's about to drop, employment in professional and business services fell by 180,000 in February. And although all industries suffer during cyclical downturns, the service sector is generally able to hold its own. That it is not suggests that this isn't likely an economic crisis that most of us have ever witnessed in our lifetimes. The problem is structural and across evermore sectors of the economy.

Job losses that stem from structural changes are permanent. As entire sectors of industries decline, whole classes of jobs are eliminated, compelling workers to switch industries, sectors, locations, as well as develop new skills in order to find a new job. And that for starters can take years to work through. The other implication is that macroeconomic policies like tax cuts, deficit spending, and low interest rates will not revive the manufacturing sector because they do not address the structural challenge of imports and outsourcing.  

The structure of American production for the American market has to be purposely rebuilt by adopting some sort of industrial policy, that is, intensive state-led intervention in the economy to foster some industrial sector. The foundation of a new American economy that aims to rebuild and preserve manufacturing as the most important sector will also require a new trade policy that restricts imports, especially from China.  And this is likely not politically feasible because the words "import-substitution industrialization,""tariffs," and "state-led planning" (I am more talking about Scandinavian and Asian-style planning) remain largely outside the vocabulary of most American policy makers. It's likely to take a total systemic crash before something that ambitious is tried.

Sources
Erica L. Groshen and Simon Potter, "Has Structural Change Contributed to a Jobless Recovery?"
William R. Hawkins, "US Manufacturing's Steep Decline Calls for New Trade Policies"
Cathy E. Minehan, "Labor Markets: What We Know and What We Don't".
David Harvey, A Brief History of Neo-liberalism.