Commentary on unemployment policy for the United States, January 2010

As of December 2009, the US unemployment rate is at 10% representing 7.7M people unemployed.  Over the coming months, the rhetoric and legislation from Washington D.C. is likely to be focused on “creating jobs,” a goal that is as assuredly amiable in the abstract as it is likely to stoke a discussion that will be substance-poor in the details.

 

The topic is politically and technically intricate, but the basic question facing policymakers and the American public is the following: “How should we create American jobs?”  Leaving aside most of the political and normative nuances, the discussion that follows focuses on the technical questions surrounding US employment.

 

The critical backdrop to the discussion is an acknowledgement that this business cycle and recession was substantively different from previous recessions – this is a structural (not cyclical) recession and therefore must be addressed as such.  There was an enormous 20-year financial bubble market that led to a mis-allocation of resources- too much in some industries, sectors and geographies, and too little in others. 

 

Because of the time span involved, including a substantial majority of many people’s adult lives, it can be hard to think of the 1990-2010 period as an anomaly, yet the anomaly rested on a few interlocking economic fundamentals.  During this period, the dollar remained overvalued by at least 20% due to a variety of geopolitical and structural reasons (hurting US exports and helping imports), interest rates remained too low by an estimated 200-300 basis points (inducing borrowing and disincentivizing savings at all levels of the economy), and asset returns in the housing and equity markets were too high by nearly a factor of 2x (also incentivizing ever decreasing personal savings rates and encouraging consumers to leverage the one asset they could- houses).  The net effect was an over-sized consumer-pleasing sector (discretionary consumer goods, housing, and housing-related goods and services) and financial services sector, and an under-sized export sector (high-value added manufacturing and even mid-tier manufacturing, exportable services) and energy sector.

 

Unemployment in a structural readjustment recession is the consequence of a re-balancing process that will involve permanently shuffling capacity from areas of excess to areas of deficit, and where the excess is laid off faster than the deficit is discovered, we see unemployment.   Businesses are adjusting quickly and have slashed capacity or “gone under” in areas of excess at a rate faster than any recession since WWII, but until the displaced workers find their footing in new sectors, the areas of deficit (i.e., new job opportunities) will not become fully apparent.  Slowing this process are barriers that are preventing this re-normalization to a “new normal.”

 

The barriers to equalizing and then reducing overall unemployment can be matched up into two basic categories.  Firstly a mismatch between the supply and demand for certain types of work and secondly a mismatch across specific geographies.

 

Given that, the focus of policies and actions at the public and private sector levels needs to be on reducing the barriers that inhibit movement across industry/sector and across geography.  We can begin by examining the US unemployment insurance programs as they exist today.

 

Unemployment insurance programs were created based on the intent of reducing the pain and consequences of unemployment in an economy of regular booms and busts, not surprising for a set of programs originally conceived in Wisconsin in 1932.  A recession or bust would usually result in a series of layoffs as a company slashed costs and capacity during a downturn, but then the next boom would lead to the re-hiring of many of the laid off workers.  Unemployment insurance was a way of smoothing out the boom-bust cycle for workers by giving them a stipend to sit tight for 6-12 months until the cycle reset itself.

 

As concerns about the decline of US manufacturing increased, very specific programs such as the Trade Adjustment Assistance program were created (expanded most recently when combined with the comparable NAFTA provision in 2002).  These programs do target dislocations caused by structural readjustments in the economy.  Yet this program only applies to those displaced due to the shift of manufacturing outside the US (with certain other restrictions and exceptions).  In an economy that is majority service sector oriented and where the structural readjustments are not export related, but rather due to a financial bubble, this program is emblematic of the anachronistic state of labor policy and addresses an inadequate fraction of the current unemployed.

 

Geography is a more subtle issue often not openly dealt with in public policy, except when localities attempt to attract employers to move jobs or factories to their area.  For example, the proposition that Michigan is over-populated relative to its long-run economically sustainable size would be an anathema discussion on the US Senate floor- Sen. Levin would beg to differ.  Yet geography is still substantively tied to economic performance, albeit now more due to variations in business and tax climate than in the availability of fast rivers and coal deposits.

 

There’s a truth in marketing that it takes tremendous effort to switch consumers from one product to another, more commonly known as “brand loyalty.”  This brand loyalty effect is even more intense in other aspects of American life including location and profession.  For example, in a given year (taking 2007-2008 as a recent data point), only about 1% of the population moved to a different region of the country (or went abroad).  Even within a county, the mobility rate is only about 7%.  For the unemployed, the rate of relocating from one region to another is only a little over 2%, ranging from 1% for those who originate in the Northeast, to about 3% for those originating in the South or West.

 

Unfortunately for many people, the inducement to switch industries or geographies doesn’t necessarily come from the joy of an enticing better offer, but from the pain of the deterioration of a current situation.  Current unemployment insurance and related policies are designed to preserve a status quo- they are payments to sit tight and hope that a new job will come along and that the economy will improve in time.  In this current recession that is a well-meaning but likely disingenuous policy leading people to waste precious time believing that hope is right around the corner.  At some point the unemployment benefits will run out and households will have to make even more drastic lifestyle adjustments after morale and employability have eroded away.

 

Key policy actions.

 

We put aside the basic normative question of whether or not a government should or should not provide unemployment assistance- that is a moral, ethical and political question.  However, presuming a certain level of assistance is going to be provided, the question is how to structure that aid in a way that will be most effective in reducing the level of unemployment.

 

(1) Create irresistibly attractive subsidies to go back to school, with a level of economic support that is realistic to the needs of working families.

 

The unemployed should be faced with an offer to re-orient themselves to new jobs that realistically meets their interim financial needs.  Because there is already a comprehensive infrastructure in place for assessing financial aid need built into the college FAFSA system, the expansion would be an extension of a known program rather than the de novo installment of a new program (and all the mistakes and perils that entails).

 

The relatively mild uptake of these programs to date is likely due to an unrealistic assessment of the financial aid required for a working family of 4-5 versus an 18-year old still living with his or her parents.  Purely for argument purposes, the $787B stimulus package works out to over $65K per unemployed worker.  Assuming a 50% uptake, that package could have been administered as a full-ride scholarship for 2 years including a living expense stipend for roughly 6M unemployed workers.  Point being, with the size of dollars that have been talked about in Washington D.C., there is enough money to create an incredibly compelling path forward for the unemployed, one that would have a return on investment to the US economy of at least 3-4X based on relatively conservative estimates.

 

Finally, on this point, businesses and private institutions know how to measure whether a new product or service hits their customer “sweet spot.”  Administering this program through the existing infrastructure would further enhance the likely uptake, and give a more realistic assessment of what it would take to incent workers to re-train for new industries.

 

(2) Make it irresistible to “try out” new workers.

 

A substantial portion of the fully-loaded cost of hiring a new worker is the risk that the hiring business will be stuck with them.   Businesses are naturally reluctant to hire new workers at the sign of new demand because they are unable to discern the difference between interim fluctuations, and the start of a new growth trend.  New hire “probation” policies and other such HR policies are created to enable employers to gently step around the minefield of employment laws that includes wrongful termination lawsuits.

 

Providing businesses with a new hire exemption for hiring someone who is on the unemployed rolls including immunity from wrongful termination for the first year, along with other special privileges will both enhance the churn rate of the unemployment rolls (important as the backlog becomes ever large), and reduce the cost of “trying out” new workers, which is especially important in the early phases of an economic recovery and during the readjustment phase of a structural recession.

 

Similarly, creating the opportunity for “internship” or “train-to-work” programs would enable employers to act as an extension of the educational system.  A majority of educational dollars  in the US are actually spent outside the formal educational system- through company training programs.  Tapping into this hidden asset of the private sector would further accelerate the ability for the unemployed to learn new roles in the economy- ultimately giving the employer an irresistible offer.

 

(3a) Reduce the cost to relocate within the US.

 

Presenting an unemployed worker with the opportunity to relocate states as a one-time benefit of unemployment would enable different metro areas to normalize their levels of unemployment.  Unfortunately, because unemployment insurance is administered at the state level, there is a clear conflict of interest.  While some states struggling with unemployment costs and budget deficits may be interested in off-loading their costs on another state, most states would rather bring the money to their people, than see their people move to the money.

 

Yet the simple fact of the matter is that some states have pushed themselves into untenable economic positions, including the industrial Midwest, parts of New England and the Northeast, California and potentially Florida.  Accelerating the relocation of households out of these states towards healthier job markets and state economies will ultimately result in a faster economic rebound of both the job market and the more general economy for all states.

 

For those who might be concerned about the ideas of using funds to support moving, the simple fact is one can either spend money to keep someone in one spot where they may never be able to find a job, or spend money to help them go to another place where they have a better shot of finding a matching job, and probably a lower cost of living.  Given the choice, it seems a bit academic to worry about this particular use of funds when the alternative is spending money to encourage people into a state of inertia.

 

(3b) Streamline bankruptcy restructuring to enable a one-time purge of the American balance sheet.

 

One of the key inhibitors to efficient geographic relocation in this particular recession has been the widespread phenomenon of underwater mortgages, particularly in the overheated coastal markets where in some neighborhoods and cities as many as 70-80% of residents are “underwater.”  The inability or desire to bring cash to a short sale has left mortgage holders with two unpalatable choices- either continue paying a mortgage on a balance that may be 2-3X the value of the house, or walk away and take the credit hit.  Over time, negative equity home owners are moving towards the latter of the two options.

 

Debt strangulation is a periodic phenomenon that accompanies a credit market cycle.  But when it inhibits the readjustment of the real economy, such as the failure to relocate to more economically viable locations, this can create real costs to the overall welfare of the nation that far surpass the academic concerns of “moral hazard” and fears that lenders will now have to raise their risk premiums (side note: they should have had higher risk premiums all along- 5% mortgages are a steal, not a right).

 

A one-time purge of the American balance sheet is the necessary pair to cleaning the financial system’s balance sheet.  Lenders have to come to terms with the fact that metaphorically speaking, Americans dined at their very fine restaurant, ordered the wine and lobster, but then skipped out on the check.  The meal has already been eaten so at best you can ask them to wash the dishes.

 

Personal bankruptcy laws were actually made stricter in 2005, forcing more people into Chapter 13 rather than Chapter 7 (and disincentivizing the use of court-mediated restructuring).  In a nutshell, Chapter 7 is a one-time purge of your balance sheet- you get wiped out, but the slate gets cleared.  In Chapter 13, a portion of your debts gets converted into a payment plan.  Obviously lenders favor getting something rather than nothing.  Yet it’s the risk of having your loans wiped out that keeps lenders vigilant, and it is far more chastening to the bottom line than bank taxes or compensation limits in the long run.  The logic of easing losses on lenders to expand credit has been somewhat turned on its end.

 

A one-time express bankruptcy and restructuring should allow the unemployed to completely wipe their balance sheet, including their mortgage.  At that point they’re free to take advantage of relocation assistance or schooling.  Their credit would be shot, but after all that is the point of a credit record- identifying who has a history of being over optimistic.

 

Turning to the implications at a personal or individual level, this recession has created anxiety for many, uncertainty for most, and a disproportionately trying circumstance for some.  It is part of the implicit tradeoff made for a freer and more dynamic United States.  To thrive in this economy require personal responsibility that extends to far more than the use of credit.

 

Individuals and households must maintain situational awareness of the economic and social environment and remain vigilant and prepared to take action based on facts and independent judgment.

 

For the employed, it will likely mean constantly searching out for new opportunities within (or outside) their current employer, and cultivating fall back plans that include financial cushions, as well as alternate skills and capabilities.  When the US was largely a nation of yeoman farmers, Americans understood the need to remain flexible with changing seasons and markets, and at times, relocate to find new opportunities.  Farmers were basically agricultural generalists, hedging the weather and market by changing their mixes of crops, feedstocks, and livestock.  As new markets opened, they moved West by the thousands.

 

In an economy of specialization, the impact of structural shifts becomes even more potentially devastating because that essential character of flexibility and wanderlust has been made dormant.  The underlying goal of any employment policy should ultimately be measured by its ability to awaken those elements of American character.

Posted via web from Austin