One of the pseudo-debates in economics is between Salt Water economists and Fresh Water economists about whether unemployment in the United States is "demand" driven, or "structural." It is a pseudo-debate because the real argument is over whether we should pursue neo-Hoover policies aimed at "restoring confidence" through general austerity or not. The nominal terms of the debate mean that Neo-Keyensians are arguing against Keynes, and the Neo-Hooverans are arguing in favor of policies whose origins are so discredited, that even factually pointing where it comes from will make all serious members of acceptable discourse choke.
Let's go over two important points: first America's employment problems are structural, and second, Keynesians should be embracing this, because the only way out of structural employment problems is government spending.
As one can see, from the bottom of construction employment in the 1991 downturn, through the top, was a steady increase, faster, and steadier in fact, than payroll employment in general. However the second economic cycle is quite different: it mirrors payroll employment's long slog, and then takes off. This is a direct result of the "Ownership Society" policies of tax incentivization, the Fed's loose money stance, the use of construction as the basis for derivatives and other instruments, as well as a demographic bulge which fueled construction spending in Europe as well. However there is something not visible in the previous economic cycle: a complete collapse.
To make this evident even to someone who has an ideological axe to grind:
The 1990's cycle from bottom is shown next to the 2000's cycle from bottom. This removes the convalescence of both cycles. As can be seen, the slope of both is relatively the same early on in the actual expansion of both cycles, then the 2000's moves to a steeper slope, levels off and then crashes. And then has stayed flatter for longer.
Now what makes this structural is that despite massive intervention in the housing market: bailing out banks, historically low interest rates, and keeping inventory off the market, there has been no recovery in construction. This includes the construction relevant period of the ARRA, aka the Stimulus Bill. Or, even with stimulus, of a sort, there is no recovery in this sector. This is a clear indication that the problem with construction, as with several other sectors, is that the shape of the economy's demand has shifted.
Anyone who can't see that, is not being a friend to labor.
Now people who ought to know better, that is Neo-Keynesians, are saying that the downturn is all demand driven. That is macro-stimulation would be effective. However, where there has been the most directed stimulus, there has been nothing.
The answer is, instead, that housing was an investment for a generation. There was a demand not only for construction, but for suburban services: suburban teachers, roads, and so on. With the collapse of the ability to sell houses for a profit, that is, stagnant housing prices, people are responding by trying to cut expenses. This is a normal reaction to a flattening of top line growth. Now the argument that stimulus would allow for demand is also incorrect. This is because people coming into the housing market aren't in the market for ex-urban McMansions, but for urban housing, whose construction growth is continuing. A younger, as yet largely without 5-18 year old children who take up more family space, does not want, and cannot afford, the 3000 foot productions of before.
This is structural shift in operation: previously a store of wealth driven by a large demographic progression has ended.
The larger structural shift is not merely the ebbing away
of the demographic shift of the body boomers going to a stagnation
phase, but the shift away from a wage and productivity driven economy:
capital and demand increased productivity, wages followed – to a rent
driven economy: prices are artificially propped up, and those who
benefit from them collect more than all of the gains in the economy.
This structural shift means that huge categories of jobs, even in
services, are being slashed.
This and a myriad of other examples can show that the problem is structural. Old construction jobs are gone and not coming back, and with them old suburban service jobs are going away as the echo boom ends, and has not generated an echo's echo. This should be simple, but clearly ideology gets in people's way.
Now for the next part, having taken the neo-Keynesians to task for not being able to read a simple column of numbers, the larger and uglier error: that unemployment is structural is not an argument for austerity or privatization, but quite the reverse.
A structural shift means that old categories of demand are drying up, and even with all of the stimulus in the world, there will be no improvement, because rents will rise to soak up all available liquidity. For example: oil prices, which despite a massive downturn have bounced back to near their pre-crisis levels. This goes in reverse of the conventional wisdom that events such as "The Arab Spring" are inflation driven. In fact oil and food prices spiked after, not before, rebellion spread. The logic is that those that benefit from oil inflation are funding disruption. Iran's nuclear program, and funding of rebellion are part of keeping uncertainty, and therefore prices, high.
However, supply follows demand. If people cannot afford new goods and services, then they will not be developed.
This isn't hard, it is history. The standard story of the Great Depression is that the New Deal ameliorated the Depression, and that the Second World War ended the depressionary cycle. It also restructured the American economy: it created a mechanized workforce, able to drive and use modern electrical and internal combustion devices, and the obvious need for a massively structured and mobile US economy. Consider that the Manhattan project was larger, at its peak, than the automobile industry, and that the government was virtually the entire GDP of the United States.
This history is replicated, in less dramatic ways, in several points in history: government, particularly a government at war, restructures the economy to use the most effective technologies for the purpose of war fighting. If those technologies also can drive a civilian economy, even if they are not the best way of doing so, the results remain behind, and the new economy blooms. But what are wars? Many of them are attempts to secure the dwindling availability of old bottleneck resources, or new resources.
This again, should be history. World War I began as an attempt to secure water and coal resources of the Rhine for Germany and France, and similar land resources in other parts of Europe, particularly agricultural land. While World War II's first acts, in Manchuria and the remilitarization of the Rhine, were to secure the same goals, the ultimate goal became what Wavell identified early: oil. Oil became, as Yergin put it "the prize."
To turn to a simple economic equilibrium. Restructuring economic activity is not accomplished by reducing demand, because it is the presence of demand that allows investment. What the salt-waterists are arguing is that cheap labor makes holders of wealth more willing to invest, this is mostly incorrect. It is true that cheap labor allows for the creation of certain kinds of massive projects, such as the Empire State Building, such projects do not spur large scale recovery by themselves. One should note that the Great Depression trundled along before and after building mid-town Manhattan's most impressive address. There was a skyscraper war going on at the time, but this was largely concentrating labor, not creating demand for it. Nor is it low prices from low regulation: the same Empire State Building was the product of far more rigorous safety than had ever been used before, with many fewer deaths and injuries.
Instead it is the presence of an overwhelming goal that drives restructuring, as those with rents cannot simply hold on to some eventual recovery, which, as Keynes showed, is not inevitable.
Thus, if one believes the numbers, one must believe that the employment problems in the US are structural, as there is no increase in liquidity that will make distant far suburbs economically viable without the low oil prices, and rental structures based on a demographic wave, that sustained them. Houses are still overpriced, not because of the nominal prices, but because the jobs that were created to sustain them, including research, military, security, and prison jobs, are going away, with those goes away the demand for teachers to increase housing prices. People paid teachers not to educate children, but to make the community more desirable.
But if one believes the basics of market economies, one must also believe that the solution to a structural problem is pro-active demand for the restructured economy. That demand will have to be led by the one entity that can monetize the new economy, even in the form of goods that are not rival and exclusive, namely, the government. This is because making fundamental objects rival and exclusive holds back progress, such as trying to set rail guages based on profit. Others don't join, and there is no ignition. The slow adoption of the steam engine is an example. Only by creating the preconditions of a market, which a government is best suited to do, can a market mechanism then optimize the space.
Thus, this is a stupid pseudo-debate: the people preaching against structural unemployment are preaching in favor of inflationism that will destroy their own political support, and the people preaching that the structural problem exists, have no intention of doing anything but making it worse.
Can generation #fail please grow up?