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Is Unemployment "Natural"?

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. And we’re talking with James Heintz. He’s the associate director of the PERI institute in Amherst, Massachusetts, and he teaches at the university there. We’re talking about asset bubbles and unemployment. Thanks for joining us, James.

JAMES HEINTZ, ASSOC. RESEARCH PROF., UMASS: Thanks.

JAY: So in the first segment we’ve been talking about these asset bubbles and the way some people, a very few, make a lot of money on the way up of a bubble, and quite a few of them make money after it bursts. But the collateral damage is employment. Jobs may be artificially kept around during these asset bubbles, but once the big bubble bursts we’re now left with 9, 10 percent unemployment officially, and a real unemployment rate closer to 20 percent. Some places, in urban centers, it’s as high as 25 and 30 percent. And we’re now hearing something about what they’re calling a new, a natural rate of unemployment, which, if I understand correctly, is the rate unemployment will be without causing inflation. First of all, talk a little bit about this, James. What is this natural rate of unemployment? And have we seen a major shift in it now?

HEINTZ: The natural rate of unemployment is a kind of a theoretical concept that economists often use to describe the rate of unemployment that an economy will tend to gravitate to if there’s not a lot of interference in the economy. So this is kind of a concept that’s been embraced by fairly mainstream, what we would call the neoclassical economists. It was first coined by Milton Friedman. And the idea is that you can try to push down unemployment below its natural rate, but if you do so, you’re going to start building up inflationary pressures that are going to be destabilizing.

JAY: So is what we’re seeing now, especially when you look at what the Republican Party’s preaching, and the likelihood of Congress that’s at the very least going to probably be paralyzed if not controlled by the Republicans, and the calls for austerity which are not coming not just from the Republicans but also from within a lot of the Democratic Party, including President Obama’s more or less on the austerity train—maybe he wants a little bit of stimulus before switching to more austerity—but are what are we seeing is a new American economy, where 8, 9 percent unemployment starts looking, quote-unquote, "natural"?

HEINTZ: I’m concerned that that might actually be the case. And it might not always manifest itself in terms of the unemployment rate, but it could manifest itself also in terms of larger numbers of part-time workers, or workers on very short-term contracts, more contingent workers, fewer permanent, good jobs in the economy. If we look at other countries that have experienced crises along the same lines as the US is currently experiencing, one thing that becomes clear is that there can be permanent structural changes in the labor market, in the nature of employment, following these crises. So, for instance, after the East Asian crisis in 1997, South Korea, who prior to the crisis didn’t really have a lot of kind of short-term, temporary jobs, saw a massive growth in short-term temporary employment, such that it now constitutes about 30 percent or a third of total employment. Japan had a bubble. After it burst, the average unemployment rate basically doubled, and it’s maintained that level since the crisis. In the US, I’m worried because if you look at the jobs figures, not only is unemployment not necessarily moving very much, but the composition of employment is actually changing. So we saw the Bureau of Labor Statistics had its employment situation release just a few days ago, where we learn that the unemployment rate was basically unchanged and the economy lost about 100,000 jobs. And the private sector was supposed to have created some jobs, but most of the job losses came from the public sector. But if you actually go into that release and look at some of the figures, there are some frightening things. For instance, the number of people, the number of people who are employed part-time but for economic reasons (so they’re not choosing part-time employment, but they can’t find full-time work and they want full-time work) increased from August 2010 to September 2010 by 600,000 people. So that’s a fundamental change in the composition of employment. All those people are counted as employed. They’re checked off as employed. So it doesn’t really affect the unemployment rate. But there are some serious changes happening, and the question is: will they last into the future? So are we looking at a situation where, unless we come up with a more long-term, more careful employment policy, whether we’re going to have, yes, sustained higher unemployment, but also a lot more precarious work and deteriorating standards of living because of that?

JAY: Which means even more economic insecurity for ordinary working people and a constant chasing after jobs. It becomes a lifelong pursuit to go find your next job for three months. But there’s a number that I find kind of interesting in all of this. The number one manufacturing nation in the world is the United States. You know, everyone thinks it’s China, and then they think it’s Germany, but it’s still the United States as of 2010, even though people keep predicting US is going to lose that position to China. Now they’re predicting in 2011 it will. But United States is still a very big manufacturer. But is the real issue or the dirty little secret here perhaps is that productivity’s gone up so much in the US that you can produce this much with way less workers? So is part of the problem or part of the question here is who’s benefiting from the productivity?

HEINTZ: Well, yeah. I think that since, you know, the 1980s or so, we’ve had this pattern of globalization which is based on intense competition between countries, and it’s often built on trying to reduce labor costs. And you can reduce labor costs by kind of keeping wages stagnant, which has happened in the US, but you can also reduce labor costs by drastically increasing the productivity, how much output each worker actually produces. And that’s also happened. That’s happened around the world. And so what we’re seeing is that you can have a situation where output, manufacturing output in particular, is expanding, or the US is maintaining a reasonable share of manufacturing output, but manufacturing employment is shrinking at the same time. Some people have referred to this as jobless growth, where you have a growth in output, manufacturing output, but there’s no jobs associated with it, or employment’s actually declining. So manufacturing employment in the US is about, maybe, 7 or 8 percent of total employment. Compare that to the 1950s, where it was between 25 and 30 percent of total employment.

JAY: I think even just 10 years ago, in the year 2000, it was at least double what it is now.

HEINTZ: Absolutely. So you see an erosion of employment in manufacturing, even if you kind of can say, oh, the US is holding its own in terms of output. And it’s an issue of concern for the reason that manufacturing jobs typically tend to be better jobs than a lot of the low-end service jobs.

JAY: So what we’ve seen over this last decade and more, maybe the last 20, 25, 30 years, is, especially for people working in manufacturing jobs, less of you will work harder to produce more, the benefit of which will go to the top 1 or 2 percentile, who will then take all of this capital and then start gambling against each other.

HEINTZ: Yeah. Absolutely. Absolutely. You see that pattern. And in this recovery it’s interesting because you do see a lot of firms starting to increase their output, but clearly, as we see by the statistics, they’re not hiring. So this recovery, to the extent that it is a recovery, is being driven by productivity improvements, largely.

JAY: Okay. So people are going to vote in November. And, you know, whether or not there’s any candidates that stand for what you think should be done, what should they be telling their candidates? What kind of policies would change this in terms of creating real employment?

HEINTZ: Well, I think there needs to be a renewed focus on employment. And I actually don’t think, given the severity of the crisis, that the current administration has really taken the employment issue as seriously as it needs to be taken. We have a situation where the stimulus package was passed in the beginning of 2009. That was a very good, very constructive move, although you could debate the composition of the stimulus package. But it was a two-year program, so we’re talking 2009 and 2010. That’s going to disappear in 2011, and a lot of the states and local governments and communities haven’t recovered from the crisis yet. So we’re in this situation where the thing that’s kind of kept a lot of at least public employment afloat, and with the spillover into the private sector, is going to disappear in 2011. And something needs to replace it, some type of really concerted effort to protect and create jobs. That’s what I’m not seeing, necessarily, in the policy debate, and I think that’s where we have to hold both Democrats and Republicans accountable.

JAY: So if you’re living in a place like, I don’t know, Harrisburg, Pennsylvania, what would it look like?

HEINTZ: Unemployment is astronomical, particularly in towns that have a strong manufacturing base, where, you know, manufacturing sales have just imploded with the crisis. But, you know, one of the stabilizing factors in a lot of these communities still is kind of the local government, the state government employment, you know, the schools, some of the hospitals, and so forth. And a lot of that employment, with the stimulus money, the cuts weren’t as severe as they actually might have been in 2009 and 2010, and it’s there that I think in the short run that we need to really take additional action to make sure the federal government can come in and help stabilize the situation.

JAY: Well, right now, the way the election seems to be shaping up, we’re likely actually to see the opposite. Whether Republicans take control of one of the houses or not, they’re likely to have enough seats to block any more stimulus. If that’s the case, then what happens?

HEINTZ: If they block any additional stimulus—and I think that’s a very likely scenario. All the states have to run a balanced budget, and their revenues haven’t recovered because of the crisis. And so you’re going to see large-scale cuts happening, and you’re going to see it happening at the state and local government level. And those cuts, they have been happening in 2009 and 2010, but they were far less severe than what they had to be because of the stimulus. So we’re not going to have an extension of the stimulus, and the states aren’t out of trouble yet. And so I’m really worried about 2011, that you’re going to see large-scale cuts at the state and local level which are going to hurt state economies, they’re going to hurt local local economies, and you’re not going to have that counterbalance happening at the federal level, because all of a sudden everyone’s suddenly worried about having too much debt, even though we’re not quite out of the crisis yet.

JAY: Thanks very much for joining us, James.

HEINTZ: Thanks a lot.

JAY: Thank you for joining us on The Real News Network.

End of Transcript

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