Friday, May 11, 2012

The Structural Revolution

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[We] believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.

There are several overlapping structural problems. First, there are those surrounding [..] technological change. Hyperefficient [..] companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers.

Then there is political sclerosis. Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic.
These and other structural problems have retarded growth and wages for decades. Consumers tried to compensate by borrowing more. Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy — mostly into health care, government and education. 

But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up. 

Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain and France would have the best economies on earth [..].

Running up huge deficits without fixing the underlying structure will not restore growth. As Raghuram Rajan of the University of Chicago writes in the current issue of Foreign Affairs, “Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly — or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction and government sectors need to shrink, and workers need to move to more productive work.” 

Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, the Germans are a bit too willing to impose short-term pain on the diverse national economies in Europe. But they are absolutely right to insist on the sort of structural reforms they themselves passed in the 1990s. 

In the United States, there are almost no politicians willing to embrace the cyclicalist agenda, which would mean much larger deficits. Structuralists don’t have a perfect champion either. President Obama is too minimalist. He doesn’t seem to believe America’s structural problems are that big, making his reform ideas small.  

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