A Debt Problem, but an Unemployment Crisis
January 17, 2012
Is there any form of stimulus you think makes special sense right now?
I'm particularly in favor of major infrastructure spending. The forecasts and the Reinhart-Rogoff book say we've got a number of years until we get back to a tight labor market. We don't need shovel-ready projects. We can do the serious large projects, and maybe only part of them will happen with high unemployment, but we need them. It will help. We can do more R&D. The drop in support for R&D is plausibly connected to the slowdown in technical progress that we've seen compared to the golden days earlier on. Of course, the US is in serious need of education reform. Some of that involves money. There are lots of issues around education reform.
Right now we have such slack labor markets and output markets, there's no reason to be concerned about inflation and we should be marching ahead with major fiscal stimulus at this point.
The trade-off right now is a concern about an increasing deficit from an already historically high level. So a higher deficit is something you would be prepared to live with to create those infrastructure jobs to reduce the unemployment level?
First of all, let me clarify. It's not just to create the jobs; it's to create the infrastructure. So I view us as having an unemployment crisis. The long-term unemployed have a hard time getting back in the labor market at productive and well-paying jobs. Young people are having delays in the start of a career and are not only losing out on earnings now, but they are not accumulating the experience that leads to higher wages later. They will be hurt for years and years. So we do have an unemployment crisis.
And how would you characterize the issue of the government deficit issue?
We have a debt problem. The US's ability to pay off its current debt is there. We can be very upset at Washington’s shenanigans during the debt-limit fiasco and not coming to grips with Social Security, for example. There is no question that there is inability there. The US could stay on its current track for at least a decade, maybe even two before we'd see the bond market starting to look for higher interest rates, because of the concern about the ability to pay back. There isn't a concern.
As for infrastructure, there are things that we need to do sooner or later anyway. Doing them sooner is going to save money on the debt down the road, even though it is costing us now. So it's important to not behave as if we have a debt crisis and an unemployment problem, but to make sure we've got the timing of those priorities right. The debt problem can wait, particularly if you put in place something like a Social Security fix. It doesn't harm the short run economy. It will have a big hit 20, 30 or 40 years from now.
And if that is in place, the bond market will see that.
I’d like to discuss some of the research for which you received the Nobel Prize, related to labor markets, and specifically to market frictions.
Market frictions are more than just in the labor market. You can go on the Internet, with all that advertising, and it can be hard to decide what you want to buy even when you know what the prices are. It is an oversimplification, but it applies to the problem of finding a job, the problem of finding a loan, or finding what you want to buy. Think of the complexity of switching from one cell phone provider to a different provider and what's involved in sorting that out.
The way introductory economics start – and it is full of great insights for lots of questions – is we have demand and supply and we have a price the clears the market.
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