How Policymakers Misunderstand the Unemployment Crisis

Century Foundation fellow Mark Thoma wasn’t surprised that Republicans talked so little about the unemployment crisis at their convention. But he expected more from the president, who gave only passing mention to his American Jobs Act, which could have created as many as 2 million new jobs and increased GDP by 1.5 to 2 percent per year if Republicans in Congress hadn’t blocked it.

Part of the problem, Thoma writes, is the prevailing notion that unemployment is structural—the result of a mismatch between workers’ skills and available jobs—rather than cyclical:

Republicans say it is mainly a structural problem best addressed by policies such as tax cuts to enhance long-run growth. Democrats, while acknowledging the benefit of long-run growth policies, believe the structural problems predate the recession and our current problems are due to a lack of demand. Thus, our employment problems are best addressed by demand stimulus policies. Once again, the evidence is against the Republican claims. Demand deficiency rather than structural impediments appears to be the main problem. But since the structural interpretation supports the call for tax cuts for the wealthy, it should come as no surprise that Republicans persist in making the structural claim.

Some conservatives, thankfully, are breaking ranks with the Republican establishment. New research by Edward Lazear, former chief economic adviser to George W. Bush, reveals “the industrial mismatch index in late 2011 is at the same level as before the 2007-2009 recession.” Even with an unemployment rate stubbornly above 8 percent, Lazear finds “no evidence that the recession resulted in a long-lasting skills gap that would require retraining experienced workers to work in different industries.”

That means high household debt and weak consumer demand are to blame for sustained unemployment, not a supply-side skills mismatch solved by lower taxes and job retraining (as Bill Clinton suggested last week).

Unfortunately, while we have the fiscal and monetary tools to boost aggregate demand and create jobs, Republicans have effectively blocked any legislation that would increase spending or revenues:

Obama’s stimulus proposal included tax cuts for individuals and businesses, and increased spending on infrastructure. It also included help for state and local governments so they could avoid additional layoffs of teachers, firefighters, and public safety workers. Republicans surely could have supported some of these proposals – tax cuts are their favorite remedy for anything that’s wrong with the economy – but they decided to put winning the election ahead of policies such as tax cuts for businesses and the hope of providing jobs for struggling households.