Krugman, Lack Of Demand, Lack Of Jobs And The Future Of America

Includes: SPXU
by: Martin Lowy

Sometimes even Prof. Paul Krugman is right. Here is an excerpt from his May 10 New York Times piece decrying commentators who say the U.S. jobs problem is "structural":

"We're suffering not from the teething pains of some kind of structural transition that must gradually run its course but rather from an overall lack of sufficient demand - the kind of lack that could and should be cured quickly with government programs designed to boost spending ... There is growing evidence that the corrosive effects of high unemployment will cast a shadow over the economy for many years to come ... the biggest problem facing young Americans today isn't the future burden of debt ... It is, rather, the lack of jobs, which is preventing many graduates from getting started on their working lives."

Krugman's lack of demand diagnosis is correct. We have suffered from a lack of demand for over a decade now. The problem was masked by borrowing against home equity from 2002-2008, but it has been evident since then. I discussed that issue last week here.

Origins of the Lack of Demand

The demand problem stems from technology and global competition, and it affects all of the high-GDP-per-person countries, including the U.S. and the countries of Europe. The percentage of corporate revenue that has gone to labor in the U.S. has been decreasing since about 1970. The decrease is not a recent phenomenon; nor is it a phenomenon that any governmental policy is likely to reverse. Nor is it a "structural" phenomenon that is caused by any defect in American business. It is a process of change that, like the Industrial Revolution, changes the nature of work quite fundamentally. Those who are trained to do the new work usually will find jobs, somewhere in the world. Those who are not trained to do the new work may find jobs, but only at lower pay.

Unemployment Among Recent Graduates

We have seen that even college graduates are being affected by the lack of demand. Many recent graduates are unemployed or underemployed. A recent Georgetown University study showed that 8.9% of recent college graduates were unemployed but that the situation is far worse for high school graduates with no college, 22.9% of which are unemployed. These young people are likely to have lower earnings throughout their lifetimes as compared with those who find employment promptly on graduation.

Similar data exists for older workers who are laid off. They cannot find jobs-and still cannot find jobs after they are retrained or go back to college. The job market simply does not like anyone over 50 who is not a star.

What Is the Solution?

Krugman recommends more government spending. I suppose he would spend more on infrastructure, more on construction jobs to employ the undereducated, perhaps more on education. Personally, I am willing to endorse any project that will pay for itself. I have read that water mains all over the country are falling apart and that strapped local governments are not repairing them. Maybe repairing water mains would be an appropriate set of projects. But I do not see the virtue of digging ditches and filling them in again. We are not dealing with a cyclical issue. The cyclical cure of "priming the pump" does not apply to a long-term decline in the value of labor.

The long-term solution is better and more education. That is the only solution. It will not be a complete solution but it will lift the fortunes of the majority of Americans. The Georgetown study cited above also suggests that American college students could do better at selecting their majors with the job market in mind, if they are not going to go on to graduate school.

I recognize that the education solution is a 20-year project, at best. I recognize that it has to be paid for by government, probably by the federal government. But that is the only solution that appears to exist.

In the meantime, what should America - or European nations, for that matter - do? Is Prof. Krugman's prescription of more government spending useful as a palliative? Are there other palliatives that one might consider? Prof. Krugman is right that doing nothing in the face of such a large problem feels wrong. But history suggests that doing something just to do something does not work very well, either.

Lacking an answer, I am trying to accept what appears to be reality.

As I wrote yesterday in the context of credit cards and monetary policy, the current jobs and economic situation looks like it will remain fairly static for some time. That suggests caution to me on the investment front. As I wrote yesterday, "I have concluded that the economy, and therefore equities as well, are likely to remain fairly stagnant for some months. With that in mind, rather than sorting through my portfolio to figure out what to sell (though everything is, in principle, for sale every day), I recently bought some shares of ProShares UltraPro Short S&P500 (NYSEARCA:SPXU), a super-bearish ETF, as a hedge."

Disclosure: I am long SPXU.