The unemployment has been above nine percent for eighteen months now.
So far there is no sign that the bulk of our excess unemployment is in any sense "structural"--no sign that the so-called "natural" rate of unemployment around which the economy should oscillate has risen from its normal 5%. If it has risen at all so far, it is very unlikely that it has risen above 6%: we still have a huge amount of "cyclical" unemployment that would melt away without inflation if only spending were higher.
But if unemployment remains above 8%, more and more of cyclical unemployment will become structural unemployment, and the natural rate of unemployment will rise.
An ugly word for an ugly economy: You may not know the term "hysteresis." It's the "lagging of an effect behind its cause," and it's an ugly word that sounds like a foot fungus. It's also an ugly thing to have happen to your economy. And it may be what's happening to ours. We understand that our economy is growing too slowly and that our labor market is taking too long to recover.... What gets less attention is the way that slow job growth begets slow job growth.... hysteresis.
Adam Posen... doesn't think we're taking the threat of an extended period of crummy growth nearly seriously enough. When people worry about what comes next for the economy, he said in a speech to the Bank of England, they worry about a double-dip recession or a temporary period of deflation. Those, he explained, are not close to how bad things can get. "The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy," Posen said, "and/or inducing a political reaction that could undermine our long-run stability and prosperity."
To see what he means, consider a Michigan construction worker laid off in early 2008. He didn't lose his job because he was bad at it but because his firm lost access to credit. He hasn't been able to find another job, because no one is hiring in his area, and he can't sell his house, because it's now worth less than what he owes on his mortgage.
Right now, he's an example of what economists call "cyclical unemployment." He's unemployed because of the business cycle. But if his stretch of joblessness lasts for too long, that might change. His skills might deteriorate, and so too might his confidence. He might join an altogether more troubled group: the "structurally unemployed" -- the out-of-work who can't get jobs because they're not suited for the jobs that employers are offering. The long-term unemployed, Posen warns, can become "de facto unemployable over time."
Then there's the political consequences of extended economic distress. Troubled countries do not always make wise decisions. Financial pain empowers demagogues and opportunists. Trade wars are begun, and borders closed. And we're beginning to see signs of this in our own polity.
It's not just that this year's crop of challengers for Congress -- notably Christine O'Donnell, Sharron Angle and Rand Paul -- have more extreme views than you'd normally find in the two major parties. It's that the voters are drifting as well. In 1999, only 30 percent of the country thought free trade had hurt America. Now it's 53 percent -- and among both tea partiers and union members, it's above 60 percent.
You can tell a similar story on immigration....
Remember that we're only three years into this economic crisis. Goldman Sachs Group chief economist Jan Haltzius is projecting that we'll see growth in the range of 1.5 to 2 percent next year and that unemployment will rise above 10 percent....
But even if we recognize that slow growth is an overriding problem that requires an aggressive response, what's there to do about it?... Congress seems to have given up on fiscal policy, as the insufficient stimulus spending it authorized in 2009 hasn't done the trick. And though the Federal Reserve seems likely to mount another round of quantitative easing after the election, it's coming late, and it's not likely to be enough...