Cecilia Rouse is a professor of economics and public affairs at Princeton University. Rouse was an editor of the Journal of Labor Economics and served a year in the White House at the National Economic Council and served as a member of the President’s Council of Economic Advisers.
Harlan Levy: If the U.S. economy is really recovering, when will it become robust?
Cecilia Rouse: I do believe the U.S. economy is strengthening, although it’s not strengthening fast enough. We’ve had almost two years of consecutive job growth in the private sector. At the same time we’ve seen job losses in the public sector. On net, however, we have seen employment growth, and Gross Domestic Product is looking more positive as well.
That said, I think the recovery is nascent. I believe it is still fragile, but that it is positive. But it will still be another few years before we will be back on completely solid footing.
H.L.: Where will there be job growth?
C.R.: In general, health care is a vibrant sector due to changes in health care technology and increases in demand for health care, especially because of the aging of our population. The growth is at all levels of health care -- doctors, nurses, health aides, and physical therapists.
There are some areas of manufacturing as well, where we see job growth and where they find it hard to find workers with the skills they need.
H.L.: What are the main factors?
C.R.: A key factor is going to be what happens in Europe, which many forecasters believe is slowly sliding into recession, which could spark a global recession.
So there’s a lot of risk and uncertainty there. That said, we’ve got to see more robust growth in manufacturing and a rebound in construction, although not to the heights that we had before, because that was a bubble. But we really won’t have recovered until our labor market is healed. That will have occurred not only when the measured unemployment rate has come down significantly but also when the employment-to-population ratio has begun to rise, which is the number of workers as a fraction of the population, but I think it will take a while. We’re talking years, not months.
H.L.: What’s the biggest problem?
C.R.: The biggest economic problem is that we have a lack of economic demand. When economists look at an unemployment rate of 8.5 percent, they ask what’s causing it? Is it because employers don’t need the workers, a lack of aggregate demand? Is it because workers don’t have the skills employers are searching for, so the job openings are there but the right workers aren’t there for the jobs? Is it because the jobs are in one geographic location and the workers are in another, so there’s a geographic mismatch?
Many have looked for evidence that the main cause of today’s unemployment rate is that workers don’t have the right skills, but they cannot find evidence of that. There may be pockets where there are job openings but not workers with the right skills, but as a general matter, that is not the major reason for the current high unemployment rate.
H.L.: What’s the effect of the Congressional deadlock on the economy?
C.R.: It adds to a lot of uncertainty, and, most importantly, it means that the federal government is not getting its work done. It’s not good for our economic recovery. For example, I think it’s important to extend unemployment insurance benefits for another year. We’ve got an 8.5 percent unemployment rate where almost half of those workers have been unemployed for six months or more. That means that a large fraction of the unemployed is not eligible for state unemployment insurance, and in households where there’s an unemployed worker who’s receiving the federal benefits, that paycheck is really important to them being able to feed the family and pay the rent. Congress has always extended federally-funded unemployment benefits when we’ve had unemployment this high, because there are just no jobs.
It’s not about unemployment insurance being a disincentive for workers to find work. It’s about the fact that, one, job loss provides an economic hardship on families; two, unemployed workers without the means to feed and support their families are not good for economic activity; and three, we’re kidding ourselves that the cost won’t show up somewhere else. If these unemployed workers are not getting an unemployment insurance benefit check, they’re more likely to apply for disability insurance, which, if successful, they will likely be on it for life, and that’s going to cost us much more. More generally, these workers will draw on other forms of federal and state assistance.
Federally-funded unemployment insurance benefits during times of economic crisis are appropriate.
H.L.: Should the Bush tax cuts for the wealthy be allowed to expire at year-end?
C.R.: Yes. We’ve got evidence pointing to the ever-increasing levels of economic inequality which is not healthy for our economy, and any adverse impact on the economy of letting them expire will be very small and in the future. We’re talking about a very small portion of our population. This is a population that is not at risk of not being able to feed their families, not at risk of losing their homes. The likelihood that they would spend their tax cuts now is very low.
H.L.: What do you think of the Republicans’ mantra of cutting spending and no increases in revenue?
C.R.: I think we’re actually reaching the limit of further productive spending cuts. At some point you’re going to start cutting into good education programs, programs for children and others that are shown to have positive longer-term impacts. Furthermore, the real crisis in terms of federal spending is going to come from rising health care costs and Social Security. If you really want to deal with our federal debt going forward, it’s our entitlement programs that need sensible reform.
H.L.: What do you think of the Democrats who want more spending?
C.R.: In the short term, that’s an appropriate response to an economic downturn. If the private sector is not providing economic activity, that’s what the public sector can do in the short term. Also, one of the fastest ways to bring down the federal deficit is to support economic growth. With growth comes increases in tax revenue and decreases in federal outlays, because you have fewer individuals who need food stamps, fewer individuals in need of other forms of federal assistance.
That said, the spending should be in smart places. Education is a good place to make investments, as it is one of the foundations of economic growth. Similarly, it’s a smart time to invest in infrastructure. We know that infrastructure helps businesses do their jobs better and the rate at which the federal government can borrow right now is at historically low levels. It’s a great time to be making these investments that the private sector typically will not do, but which we know the private sector benefits from. We all benefit by having better roads, better bridges, better communications technology, and betters public transportation. It would provide the foundation for even faster economic growth going forward than most forecasting are predicting.
The major reason appears to be a lack of economic activity. As a result, once economic activity returns, workers will be hired back, and labor force activity will increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
