This is no time for gloating, neither for Americans nor for Europeans. For both sides are in deep economic trouble, only in different ways. The U.S. runs the worst deficit (as share of GDP) since World War II, and yet Keynesianism to the max won’t budge the unemployment rate—pace Professors Krugman and Stiglitz. What does fall is the dollar and the price of real estate, a double-whammy if ever there was one.
The euro, meanwhile, may be rising, at least against the greenback, but the common currency, now ten years old, is about as stable as was Confederate script back in the Civil War. “Civil war,” actually, is not a bad way to describe the state of Euroland. On one side, there are the “PIIGS”—Portugal, Ireland, Italy, Greece, and Spain—looking at bankruptcy. In fact, Greece is bankrupt. Its foreign debt exceeds its GDP by about one-half, and, as slices of it come due, it cannot possibly redeem the bonds without yet another infusion of cash from Europe and the International Monetary Fund (IMF). Government outlays keep rising, while tax receipts are falling (year-on-year). So austerity does not work—except in the streets of Athens, where the angry masses revolt against a tottering government.
On the other side are France and Germany, the two heavies of the E.U. economy (Britain is in as much trouble as the U.S., but outside the euro). Their banks groan under a hefty exposure to Greek debt, French banks more than their German counterparts. So neither Berlin nor Paris wants the Greeks to default. But the two of them have their own little civil war. Nicholas Sarkozy wants to put Greece on welfare as long as it takes, counting on Germany—the biggest and richest country in Euroland—to foot the largest part of the bill. Angela Merkel, well aware of this unending drain, wants to impose fiscal discipline and market reforms on Athens. In the latest spat, Merkel, who is not as enamored of state action as her French counterpart, wanted to drag in banks, pension funds, and insurance companies by making them roll over Greek debt by seven years. This would be a default in everything but name, and so the French balked. Merkel, always tougher at the outset than at the end, finally relented. Participation by the private sector now is to be “voluntary.” So far, though, there haven’t been too many volunteers.
This mano-a-mano is typical for Germany and France, who are always vying for the leadership of Europe. But it is patty-cakes compared to the other horrors the monetary union has wrought, and not for lack of warning. As many economists cried out in the run-up to the euro 15 years ago, in monetary policy, one size won’t fit all—certainly not a bunch of diverging economies untrammeled by common governance. And, indeed, the euro, instead of forcing member states into fiscal convergence, has only accentuated the bad habits of the PIIGS. These countries had always lived beyond their means. With the euro, however, they could suddenly spend like Italians, but borrow like Germans, at low rates. Bond spreads converged between the spendthrifts and the tightwads, but not basic policies. Indeed, cheap money encouraged even more profligacy—worst of all in Greece (which also managed to cheat on its financial statistics before and after entering the euro).
This is where we are now: With Greek two-year bonds fetching almost 30 percent, the markets are growling that Hellas is doomed. Both Merkel and Sarkozy dread the looming default as “Lehman squared“—and so, by the way, does Washington. So, too, does the IMF, which wants to withhold a critical $12 billion pay-out to the Greeks unless the E.U. swears a holy oath on bailing out Athens, come what may.
Europe will inevitably buy time by handing over a few more slices of bail-out money to Greece, even though, one day, the country will default. With 50 cents of the euro, it will halve its debt as well as its repayments and thus buy more time. The E.U., meanwhile, still won’t have any idea where it’s going or how to handle the crisis long-term. But what else is new? Twenty-seven governments do not a “more perfect union” make. Certainly not when the natural leader, which is Germany by dint of wealth and weight, sounds such an uncertain trumpet as it has under Chancellor Merkel. Yet what, exactly, is she supposed to do when the chickens of an ill-designed monetary union have finally come home to roost? Neither she nor Sarkozy can undo the mismanagement of the PIIGS in one fell swoop.
Meanwhile, back to the United States—to its still-sinking dollar and rising unemployment. It is hard to think of a time when both the U.S. and the E.U., the two biggest players in the international economy, were in such miserable shape. We are talking about two giants with a total of 50 percent of global GDP. Who will save them?
Josef Joffe is the editor of Die Zeit in Hamburg Germany. He is also a senior fellow at the Freeman-Spogli Institute for International Studies and Abramowitz Fellow at the Hoover Institution, both at Stanford.
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be the first to comment Thursday June 9, 2011 Bad Job Market: Why the Media Is Always Wrong About the Value of a College Degree Kevin Carey 7 comments12:00 am var addthis_config = { services_compact: 'facebook, twitter, digg, delicious, google, favorites, more', services_exclude: 'print,email,mailto' }Sally Cameron thought she had done everything right. After studying French and Arabic at a tony liberal arts college, she knew that graduate school would help her career chances. But when she hit the job market, her Ivy League management degree didn’t seem to matter. The worst recession in decades had pushed the unemployment rate to nearly 10 percent and good jobs were scarce. Sally paid the rent by tending bar and filled her time with volunteer work.
Meanwhile, experts and government officials warned that the days ahead would be grim. For decades, a growing number of students had streamed into higher education assuming that their degrees would lead to prosperity. Now people were openly questioning whether college was really worth it. As one George Washington University labor economist said, “A surfeit of any commodity—a BA or an MA—means that eventually it will stop paying off.”
Sally’s story sounds like the kind of depressing story filling the pages of newspapers and the popular press these days. Two weeks ago, the The New York Times published an article titled “Many With New College Degree Find the Job Market Humbling.” The piece immediately shot to the top of the Times’ “most emailed” list. Chemistry majors were tending bar, it noted, while labor economists were finding an alarming number of college graduates in jobs that did not require a college degree.
There’s only one difference: Sally Cameron earned her master’s degree from Yale in 1980. The Washington Post story that described her struggles was published in 1982. For going on four decades, the press has been raising alarms that college degrees may no longer be a sound investment. Two things about these stories have remained constant: They always feature an over-educated bartender, and they are always wrong.
Until the middle of the 20th century, relatively few people worried about a glut of college graduates because relatively few people went to college. But when the 1944 G.I. Bill was followed by a huge expansion of public university and community college systems in the 1950s and 1960s, the labor market changed dramatically. In 1940, less than 5 percent of adults over age 25 had a bachelor’s degree. That number nearly quadrupled over the next forty years.
In 1976, Harvard University labor economist Richard Freeman published a book called The Overeducated American, which predicted that a surplus of diplomas would push the long-term wages of college graduates down. The New York Times wrote a front-page story about it that began: “After generations during which going to college was assumed to be a sure route to the better life, college-educated Americans are losing their economic advantage…” People magazine framed its coverage of Freedman’s book with a provocative question: “Is a college degree still a passport to white collar success?”
The answer, it turned it out, was unequivocally “Yes.” As Freedman’s book and others like it made the rounds, the labor market was embarking on what turned into a decades-long run-up in the value of college degrees. Students continued to matriculate in record numbers. The percent of adults with a bachelor’s degree passed 20 percent in the 1980s, 25 percent in the 1990s, and stands just below 30 percent today. Yet despite the increase in supply, the price that employers were willing to pay for college graduates went up, not down. The inflation-adjusted median wage of bachelor’s degree holders increased by 34 percent from 1983 to 2008. (The earnings for high school dropouts, on the other hand, fell by 2 percent during the same time.) People with graduate degrees did even better, increasing their earnings by 55 percent.
The biggest gains came at the high end of the income spectrum. In 1970, 37 percent of people with bachelor’s degrees were in the top three deciles of income. By 2007, that proportion had increased to 48 percent. Graduate degree holders went from 41 percent to 61 percent. People with only a high school diploma or less, by contrast, increasingly fell into poverty.
None of this, however, has stopped the nation’s leading news outlets from regularly publishing terrifying stories about college graduates unable to find decent work, particularly during economic downtimes when unemployment and insecurity were on the rise. The formula has been carefully refined over the years: Start with a grim headline, like “Grimly, Graduates are Finding Few Jobs.” (Times, 1991). Build the lede around a recent college graduate in the most demeaning possible profession (janitor, meter maid, file clerk) and living circumstances (on food stamps, eating Ramen noodles, moved back home with parents.) Pull back to a broader thesis, like “The payoff from a bachelor’s degree is beginning to falter.” (Times, 2005). Cite an expert asserting that this is no passing trend, e.g. “ ‘We are going to be turning out about 200,000 to 300,000 too many college graduates a year in the ‘80s,’ said Ronald E. Kutscher, Associate Commissioner at the Bureau of Labor Statistics.” (Times, 1983). Finish with a rueful quote from the recent college graduate. “When I have to put my hands into trash soaked with urine or vomit, I say ‘What am I doing here? This job is the bottom. Did I go to college to do this?’ ” (Post, 1981).
The media get the story wrong every time for a number of reasons. People naturally tend to project current trends into the future, missing the up-and-down nature of the business cycle. Editors know that “Thing-you-thought-was-true-isn’t-actually-true” stories boost circulation. The college graduates who read newspapers like the Post and Times like to see their personal insecurities dramatized as national trends of great significance.
More importantly, the press misunderstands how the education needs of the modern economy have been augmented by technology and globalization. Many jobs involving simple, repetitive tasks have been rendered obsolete by machines. Employers will pay people less money, or no money at all, to perform them. The jobs that remain, however, require increasingly sophisticated skills. A steel mill that once employed 20 low-skill laborers per unit of production may now employ one person manipulating complex equipment. Typists barely exist any more, but scientists can communicate with colleagues worldwide via email, download documents from archives instantaneously, and crunch gigabytes of data on cheap laptop computers. Economists call this “skill-biased technology change.”
Under this scenario, more productive workers earn more, on average. And the workers who come to the labor market able to take advantage of complex technologies and manipulate flows of information are disproportionately college graduates. That’s why the labor market continues to pay a premium for degrees. The great recession of 2008 threw people from all walks of life out of work. But college graduates were most likely to have jobs when the economic crisis began and were least likely to lose them in the financial storm. Even as unemployment remains stubbornly high, college graduates are the only members of the labor force whose employment rate rose during the first five months of this year.
Why, then, do the labor economists and government experts cited in perennial “college graduates are so screwed” news stories keep getting the story wrong? One factor is a flaw in the way the federal government classifies jobs. The Bureau of Labor Statistics issues periodic projections of how many people will be employed in thousands of different kinds of jobs in the future. The BLS also classifies jobs based on the level of education required. The problem, as Georgetown University economist Anthony Carnevale has documented, is that the BLS assumes that educational requirements within jobs will stay constant. When making projections, it doesn’t account for the ongoing march of skill-biased technology change.
These methods miss most of the growth in highly-educated jobs. Only a third of the long-term growth in jobs requiring a college degree has come from more employment in sectors with traditionally high education requirements—scientists, accountants, teachers, etc. Most of the growth has come within very large existing white collar and blue collar industries. To compete in the global economy, companies have to manage increasingly complex supply chains and provide high-value professional services. Huge sectors like manufacturing and health care have made heavy use of technology and require enhanced human skills to match. As a result, employers are increasingly requiring college credentials.
College skeptics also fail to account for predictable career patterns. Low-education jobs have much higher turnover rates than high-education jobs, and people tend to progress from the former to the latter. There are a lot more law firm partners out there who used to be bartenders than bartenders who used to be law firm partners.
And indeed, that’s pretty much what happened to the sad cases described over the years by the Post and Times. Back in 1982, the Postwrote aboutMel Rodenstein, a Peace Corps alum with a master’s degree in international affairs who was slaving away in a “mindless” file clerk job, forced to cut coupons and subsist on rice and beans. He went on to a series of nonprofit management jobs and, by 2010, was a senior research project supervisor at the Johns Hopkins University School of Health. In 1993, a Post article titled “Grads Without Jobs” described two young women graduating from good state universities who planned to spend a year wandering North America in a station wagon because “there are no jobs anyway.” Today, one of them lives in Silver Spring, Maryland, and runs her own H.R. consulting firm. The other got a PhD and works 20 feet away from this author in a Washington, DC think tank.
Sally Cameron, meanwhile, isn’t tending bar anymore. She’s a senior manager at an international development consulting company that works under contract with USAID. Her recent work includes building railroads in cyclone-devastated Madagascar. Her liberal arts degree from Smith College must come in handy, since one of the two official languages there is French. That’s how things usually work out for people who get college degrees.
Kevin Carey is the policy director of Education Sector, a think tank in Washington, D.C.
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comments(7) Wednesday June 8, 2011 The U.S. Economy: Not Yet in the Clear? Bradford Plumer 6 comments12:00 am var addthis_config = { services_compact: 'facebook, twitter, digg, delicious, google, favorites, more', services_exclude: 'print,email,mailto' }After yet another weak jobs report came out last Friday—the U.S. private sector, it turns out, added just 38,000 jobs in May—economists have been groping for an explanation. One theory is that the economy is still in a deep, deep funk: As the IMF warned back in 2009, it takes a long time for the world to recover from a severe financial crisis. It doesn’t help, either, that Congress now has zero interest in addressing unemployment, that the mere mention of further stimulus is verboten, and that the Federal Reserve is too skittish about inflation to consider more aggressive monetary policy.
But another theory on offer, most recently from Fed chairman Ben Bernanke on Tuesday, was that May was just a nasty hiccup, thanks to a few unexpected one-time events. There were the lingering economic shockwaves from that 9.0-magnitude earthquake in Japan, which punched a few holes in the global supply chain. Plus, uprisings in the Middle East have sent the price of oil soaring, and that always hurts. Oh yeah, and a once-in-a-century tornado rampage flattened big swaths of the Midwest. So maybe we just got unlucky.
But even if you believe this second theory (and many economists don’t), it’s not especially comforting. After all, unexpected crises and disasters seem to happen with a fair amount of regularity these days. If the plan for growth is to hope nothing sudden or jarring happens in the months ahead, that’s not a terribly prudent plan. So here’s a list of things that could still go very wrong in the months ahead—and send our all-too-fragile economy reeling yet again:
The debt ceiling stays put. Democrats and Republicans are still no closer to a deal on lifting the debt ceiling. The consequences of not doing so—even for a brief spell—could be dire. Michael Ettlinger and Michael Linder of the Center for American Progress recently looked at what might’ve happened if the debt ceiling had stopped rising last year. The budget deficit for August and September 2010 was $125 billion. If the government had suddenly been forced to cut spending by that amount, GDP would have dropped 2.3 percentage points—a worse quarterly drop than we experienced back in late 2008, deep in the throes of the financial crisis, and the worst since 1947. The GOP House leadership has quietly tried to assure Wall Street that things will never reach that point, but, as budget maven Stan Collender wrote in Roll Call on Tuesday, financial markets are already getting jittery—and that, in itself, could raise borrowing costs and bog down the broader economy.
Austerity fever takes hold. Sure, Republicans may finally agree to lift the debt ceiling. But what if, in return, they exact billions of dollars in immediate cuts to the federal budget? Even if you believe, as many conservatives do, that spending cuts help the economy over the longer term, it’s hard to see how mass layoffs of government employees improve matters in the near future. For the past year, we’ve been seeing growth in private-sector jobs partially counteracted by steep reductions in public-sector jobs, mostly at the state and local level. Unemployed people are unemployed people, regardless of where they last worked. Note that Britain’s experiment with austerity isn’t looking too good at this point.
Greece goes under. Just last week, Moody’s pegged the odds that Greece would either default on its debts—or seriously restructure them—in the next five years at about 50 percent. Given that European banks are holding some $52 billion in Greek sovereign debt, the consequences of default for the global financial system could be far-reaching. Even Barack Obama, who’s normally sunny about U.S. economic prospects, recently fretted in public that a Greek default could create an “uncontrolled spiral” and “trigger a whole range of other events.” (E.U. policymakers are currently contemplating a new aid package for Greece and trying to figure out how to avoid exactly this scenario.)
Oil rockets upward. Yes, gas prices have simmered down in the past week. But it doesn’t take much for an oil-price spike to occur. The war in Libya, for instance, only threatened about 2 percent of the world’s supply of crude. But, as James Hamilton of the University of California San Diego explains, sometimes a small event is all it takes. “It’s hard to get people to reduce their consumption of oil,” says Hamilton. “Which is why it might take a 20 percent price increase to get people to cut back a mere 2 percent.” Worse, Hamilton has previously found that the oil shock of 2007-2008—when prices approached $150/barrel—was a major trigger for the current recession. Which means we better hope Yemen doesn’t get too unruly and that those stories about how vulnerable Saudi oil infrastructure is to terrorism are overblown.
Hurricane season gets deadly. Forecasters expect that this summer and fall will be a particularly rowdy season for Atlantic hurricanes. Thanks, in part, to warmer ocean temperatures, Phil Klozbatch and Bill Gray of Colorado State University are predicting five “intense hurricanes” this year (the average from 1950 to 2000 was about two a year). A well-placed hurricane can wreak a fair bit of economic havoc—in 2005, the rough consensus among forecasters was that Katrina would shave off between one-half and one percentage point from U.S. economic growth in the short term. That wasn’t fatal back then, since the economy was still chugging along nicely. Now? Not so easy to, um, weather.
A wild card. No one foresaw the earthquake that rocked northern Japan and cracked open a nuclear reactor. No one predicted the BP oil spill either. So what other unforeseen surprises might lurk in the months ahead? Al Qaeda tries to avenge bin Laden's death? Pakistan and India stumble into conflict? A stodgy old tyrannical regime—say, North Korea—suddenly collapses? Rogue Chinese hackers decide to do something more ambitious, and destructive, than hack into Gmail? A newer, bolder swine flu? No one knows for sure. But it’s hard to imagine that sudden one-time jolts, a la the Libya war or the Fukushima meltdown, are a long-gone thing of the past.
Bradford Plumer is an associate editor at The New Republic.
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comments(6) Wednesday June 1, 2011 A Tale of Two Deficits Henry J. Aaron 2 comments7:04 pm var addthis_config = { services_compact: 'facebook, twitter, digg, delicious, google, favorites, more', services_exclude: 'print,email,mailto' }Listening to today’s debates, one might think that the United States faces a budget deficit. Not so. America faces two budget deficits. The first challenge is near term. Once the economic recovery is well-advanced, we must find a way to cut spending or raise taxes to prevent government debt from rising faster than income. The second challenge is dual: to slow the growth of health care spending, in general, and Medicare spending, in particular, and to decide whether to make cuts to Social Security. Treating the two budget challenges as one, however, just hampers efforts at finding an adequate solution to either.
To understand why the debate about the role and size of social insurance is largely independent from the debate about closing the near-term deficit, consider the proposals advanced by House Budget Committee chairman, Representative Paul Ryan. The Medicare conversion he proposes would not take effect until 2023. The plan makes no mention of Social Security. In the past, Ryan has proposed pension cuts, but only after a delay of seven years. Likewise, various budget commissions have endorsed long-term changes in Social Security. None, however, has suggested changes that would save more than a pittance over the next decade.
The bipartisan unwillingness to cut benefit for people who are retired or nearing retirement is based on two solid foundations. First, it is bad policy. People who are retired or about to retire would have no time to adjust to major cutbacks in Social Security and Medicare. Belying talk of greedy geezers, median income of people over age 65 was less than $25,000 a year in 2008. Fewer than one in four had income over $50,000. Added work may be an option for some, but not for most. Second, it is bad politics. The elderly vote in large numbers. They would, with justification, punish elected officials who renege abruptly on longstanding promises. That is why implementation of most of the cuts on Social Security benefits enacted in 1983 didn’t even start until 2000 and won’t be fully implemented until 2022—and then only for new retirees. These two considerations explain why Representative Ryan delayed replacing Medicare with a cash voucher for twelve years.
But near-term deficit reduction cannot wait that long. No one knows just how high the outstanding U.S. debt can go before investors, private and public, at home and abroad, come to doubt the nation’s capacity or willingness to service that debt. Some nations, less economically robust than the United States, have gotten into trouble when their debt was less than annual output, but the prevailing consensus is that the United States would be well advised to prevent its total debt from exceeding its annual income, particularly because so much of that debt is held abroad and the United States is currently running large trade deficits as well. Under current projections, the 100 percent threshold will be crossed sometime after 2020, but well before 2025. In short, the job of cutting the deficit must be finished in ten to twelve years.
Quite independently, a debate over the size and role of social insurance is entirely appropriate and salutary. The nation’s two principal social insurance programs are too big and too central to the lives of individual Americans and to the functioning of the entire economy to escape scrutiny as circumstances change and views evolve. It is necessary, as well, for the nation to debate how best to rein in the growth of health care spending. Whether or not measures to slow the growth of spending on these two programs prove eventually to be necessary, they can not materially affect the fiscal balance within the next decade.
Right now, however, the U.S. budget deficit equals 10 percent of gross domestic product, and one can explain the entirety of it without mentioning Medicare or Social Security. All of the current deficit and all of the deficits projected for the next decade can be explained—fully explained—by tax cuts enacted during the Bush administration, the costs of two wars, the economic downturn and measures to counter it, and the costs of servicing the resulting debt. Were it not for these factors, the budget today would be fully in balance.
Economic recovery will lower the deficit, but not enough. Additional measures will be necessary to stop debt from rising to potentially dangerous levels. Cuts in Medicare and Social Security spending, as a practical matter, cannot be agreed to and implemented fast enough to contribute materially to meeting that challenge. The only solutions are cuts in other government spending or tax increases.
Cutting the nation’s deficits as soon as the recovery is well under way is therefore imperative. Deciding how much the nation can and should spend on health care and pensions will be a long and tortuous debate—as is proper. But linking the two is virtually guaranteed to delay essential near term measures that would help sustain America’s hard-earned and priceless reputation as the world’s safest financial center.
Henry J. Aaron is a Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution.
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comments(2) Tuesday March 15, 2011 Broken Links Eamonn Fingleton 12:00 am var addthis_config = { services_compact: 'facebook, twitter, digg, delicious, google, favorites, more', services_exclude: 'print,email,mailto' }Not many people in the American electronics industry had ever heard of the Japanese town of Niihama before the summer of 1993. That changed overnight when a small specialty chemical factory there was knocked out by a fire. Obscure though it may have been, this factory accounted for 65 percent of the world's supply of epoxy cresol novolac, a resin essential in making most semiconductors. As shockwaves shot through the world electronics industry, prices of some kinds of semiconductors doubled in days. The crisis soon became so acute that the Clinton administration weighed in with a public plea to the Japanese government to take emergency action to restore supplies.
The episode illustrates in microcosm a problem that may confront many key global manufacturing industries on a much larger scale in the wake of the Japanese earthquake: shortages of highly rarefied but critical materials, components, and capital goods. Even as the death toll mounts and rescue teams race to dig out survivors, the world's supply chain chiefs are bracing for major disruptions in the availability of many so-called "producers' goods," in which Japanese companies have built up dominant or even monopoly positions. Just how gravely will these shortages impact the world economy?
Experts on industrial logistics point out that, as world manufacturing has become more technologically advanced, it is more likely that a single supplier, or even a single factory, can be critical to a whole industry. And we know that, in this vein, Japanese corporations enjoy monopolies or oligopolies in a host of crucial niches in supplying advanced materials, components and production machinery for industries like electronics, cars, and aerospace. In two books in the 1990s, I made a sustained effort to track Japan's more important manufacturing "chokepoints," as they are known to customers. I succeeded in identifying close to 100. Some are well known, such as the YKK Company's global lock on zip fasteners and Shimano's dominance in bicycle gears. Many have hithero gone largely unnoticed, but are actually much more important to the smooth functioning of the world economy: A good example is semiconductor-grade silicon—a highly purified not-an-atom-out-of-place material that only a couple of companies worldwide can make. The leading suppliers, Shin-Etsu and Sumco, are both Japanese and, as far as I can tell, there are no significant suppliers left in either Europe or America. If any of their factories or suppliers have been affected by the earthquake, the entire global electronics industry will be quickly feel the impact. The dangers now looming after the Japan quake recall the old adage, "For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rider was lost."
Tim Cracknell, a partner in the London-based JLT risk consulting firm, believes many in the global supply chain of industrial goods have been caught off guard by the disaster. Supplies from Japan, he says, could be disrupted for months. And Jim Handy, an executive at the semiconductor research firm Objective Analysis, has said he expects "phenomenal" price swings and large near-term shortages as a result of the quake.
Several American analysts have expressed particular concern about supplies of so-called NAND flash memories, which are crucial components in products like Apple's iPhone and iPad. Japanese producers are known to control nearly half the global market in these devices, and, though it is not clear that any of these producers is located in the region most affected by the quake, there are fears that the general dislocation in Japan may delay supplies. Another product category causing concern is so-called microcontrollers, which are computer-on-a-chip devices used in everything from car engines to heart implants. Two major microcontroller makers, Freescale Semiconductor and Renesas, do have large operations in the devastated north.
There are undoubtedly many more crucial supply chain items whose principal source of production is in the north. But their identity may emerge only after a delay of days or even weeks. Indeed, it is difficult to guess where the biggest problems will emerge. For one thing, Japanese companies are generally not forthcoming about details such as market share. Moreover, in the case of large corporations such as Hitachi or Toshiba, it is difficult to identify which, out of hundreds of factories located throughout Japan, are responsible for any particular item. (Japanese corporations are not subject to the sort of disclosure expectations taken for granted in the United States.)
To be sure, Japan has had major earthquakes before, and the effects on industrial supply chains have been muted. The quake that devastated Kobe in 1995, for instance, did not have a major impact. Another piece of luck—if one can such a word at time when so many lives have been devastated—is that Tohoku, the northern region worst hit in the disaster, is, by Japanese standards, something of an underpopulated backwater. It is quite agricultural, its economy famous mainly for such commodities as rice and peaches. It is also known for fishing villages and tourist attractions, and its major city, Sendai, is an educational center, boasting no less than half a dozen significant universities. Had an earthquake this big struck close to Tokyo or Japan's other megalopolis, Osaka, the cost would have been many times greater, not only in lives but in economic dislocation and damage to Japan's industrial backbone. "They dodged an enormous bullet with this one," Marcus Noland, a Washington-based Japan watcher, has commented to the Wall Street Journal.
Even so, the industrial impact this time is likely to be far greater than in 1995. Last week’s destruction was greatly exacerbated by one of the biggest tsunamis in Japanese history, which destroyed everything in its path. Moreover, industry has changed dramatically in the last two decades. Technological progress and globalization have both tended to encourage increasingly specialized production. In a world where national markets are no longer protected, the toughest competitors with the newest production processes, as well as the most patient shareholders and bankers (like the Japanese), have tended to win—while others fall by the wayside, unable to finance the move to the next stage of technology. This concentration is risky: Because of it, the Niihama incident, in which a fire in a single Japanese factory brought an entire industry to its knees, could be repeated a hundredfold.
Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity.
be the first to comment Tuesday February 15, 2011 The Case for More Federal Aid Alexander C. Hart 14 comments12:00 am var addthis_config = { services_compact: 'facebook, twitter, digg, delicious, google, favorites, more', services_exclude: 'print,email,mailto' }State governments are facing catastrophic budget deficits for fiscal year2012, and they are suggesting drastic cuts to attempt to fill the gaps. But this proposed austerity may not be necessary, and, moreover, it is almost certainly unwise. While the draconian changes under consideration in many states are a sad legacy of the economic downturn, their sheer magnitude represents a failure of the federal government: From Hill Republicans to President Obama, officials in Washington are proposing new budgets that wouldn’t do nearly enough to assist the states.
There is no denying that states’ budget problems are severe. Arizona is short about $1.2 billion, around 13 percent of its 2011 budget. Illinois faces a $15 billion gap, an astonishing 44.9 percent of its 2011 budget. Minnesota is forecasting a $6.2 billion hole, about a sixth of the state’s two-year budget. And California is grappling with the nation’s largest deficit—$25.4 billion, about 30 percent of what the state spent the year before. All in all, “44 states and the District of Columbia are projecting budget shortfalls totaling $125 billion for fiscal year 2012,” according to the Center on Budget and Policy Priorities. That’s only slightly less than the entire budget of New York.
States are facing these gaps largely because tax revenues are well below historical norms—Texas, for example, is projected to collect $72 billion in fiscal 2012 and 2013, down from $87 billion in the two years that preceded it—and the bad economy requires governments to support more people with unemployment and Medicaid benefits. What’s more, balanced-budget provisions—unlike the federal government, almost all states are forbidden from running deficits—also mean states can’t just borrow money while they wait for the economy to recover. So, as they have in recent years, states have proposed again slashing their spending, sharply raising tax rates, or a combination thereof.
The effects, unsurprisingly, could be devastating. In Arizona, if Governor Jan Brewer’s budget is enacted, 280,000 poor people will lose their Medicaid benefits. In Texas, one budget under discussion would lay off 9,600 state workers, eliminate financial aid for 60,000 college students, end vocational rehabilitation for about 7,000 disabled Texans, and slash already-skimpy Medicaid reimbursement rates by 10 percent. Illinois is filling part of its budget hole by raising its income-tax rates by about two-thirds, meaning that a family of four earning $60,000 would pay an extra $1,040 in state taxes.And the state also hiked its business-tax rate, meaning that Illinois’s total rate is now one of the highest in the country. But all the Illinois tax increases will fill less than half of the projected deficit, so steep spending cuts might still loom on the horizon.
These cuts not only impose a human cost; they also threaten to undermine our fragile economic recovery. While it’s tempting to cheer government belt-tightening—if families have to make sacrifices, why shouldn’t state governments?—t
Sally Cameron thought she had done everything right. After studying French and Arabic at a tony liberal arts college, she knew that graduate school would help her career chances. But when she hit the job market, her Ivy League management degree didn’t seem to matter. The worst recession in decades had pushed the unemployment rate to nearly 10 percent and good jobs were scarce. Sally paid the rent by tending bar and filled her time with volunteer work.
Meanwhile, experts and government officials warned that the days ahead would be grim. For decades, a growing number of students had streamed into higher education assuming that their degrees would lead to prosperity. Now people were openly questioning whether college was really worth it. As one George Washington University labor economist said, “A surfeit of any commodity—a BA or an MA—means that eventually it will stop paying off.”
Sally’s story sounds like the kind of depressing story filling the pages of newspapers and the popular press these days. Two weeks ago, the The New York Times published an article titled “Many With New College Degree Find the Job Market Humbling.” The piece immediately shot to the top of the Times’ “most emailed” list. Chemistry majors were tending bar, it noted, while labor economists were finding an alarming number of college graduates in jobs that did not require a college degree.
There’s only one difference: Sally Cameron earned her master’s degree from Yale in 1980. The Washington Post story that described her struggles was published in 1982. For going on four decades, the press has been raising alarms that college degrees may no longer be a sound investment. Two things about these stories have remained constant: They always feature an over-educated bartender, and they are always wrong.
Until the middle of the 20th century, relatively few people worried about a glut of college graduates because relatively few people went to college. But when the 1944 G.I. Bill was followed by a huge expansion of public university and community college systems in the 1950s and 1960s, the labor market changed dramatically. In 1940, less than 5 percent of adults over age 25 had a bachelor’s degree. That number nearly quadrupled over the next forty years.
In 1976, Harvard University labor economist Richard Freeman published a book called The Overeducated American, which predicted that a surplus of diplomas would push the long-term wages of college graduates down. The New York Times wrote a front-page story about it that began: “After generations during which going to college was assumed to be a sure route to the better life, college-educated Americans are losing their economic advantage…” People magazine framed its coverage of Freedman’s book with a provocative question: “Is a college degree still a passport to white collar success?”
The answer, it turned it out, was unequivocally “Yes.” As Freedman’s book and others like it made the rounds, the labor market was embarking on what turned into a decades-long run-up in the value of college degrees. Students continued to matriculate in record numbers. The percent of adults with a bachelor’s degree passed 20 percent in the 1980s, 25 percent in the 1990s, and stands just below 30 percent today. Yet despite the increase in supply, the price that employers were willing to pay for college graduates went up, not down. The inflation-adjusted median wage of bachelor’s degree holders increased by 34 percent from 1983 to 2008. (The earnings for high school dropouts, on the other hand, fell by 2 percent during the same time.) People with graduate degrees did even better, increasing their earnings by 55 percent.
The biggest gains came at the high end of the income spectrum. In 1970, 37 percent of people with bachelor’s degrees were in the top three deciles of income. By 2007, that proportion had increased to 48 percent. Graduate degree holders went from 41 percent to 61 percent. People with only a high school diploma or less, by contrast, increasingly fell into poverty.
None of this, however, has stopped the nation’s leading news outlets from regularly publishing terrifying stories about college graduates unable to find decent work, particularly during economic downtimes when unemployment and insecurity were on the rise. The formula has been carefully refined over the years: Start with a grim headline, like “Grimly, Graduates are Finding Few Jobs.” (Times, 1991). Build the lede around a recent college graduate in the most demeaning possible profession (janitor, meter maid, file clerk) and living circumstances (on food stamps, eating Ramen noodles, moved back home with parents.) Pull back to a broader thesis, like “The payoff from a bachelor’s degree is beginning to falter.” (Times, 2005). Cite an expert asserting that this is no passing trend, e.g. “ ‘We are going to be turning out about 200,000 to 300,000 too many college graduates a year in the ‘80s,’ said Ronald E. Kutscher, Associate Commissioner at the Bureau of Labor Statistics.” (Times, 1983). Finish with a rueful quote from the recent college graduate. “When I have to put my hands into trash soaked with urine or vomit, I say ‘What am I doing here? This job is the bottom. Did I go to college to do this?’ ” (Post, 1981).
The media get the story wrong every time for a number of reasons. People naturally tend to project current trends into the future, missing the up-and-down nature of the business cycle. Editors know that “Thing-you-thought-was-true-isn’t-actually-true” stories boost circulation. The college graduates who read newspapers like the Post and Times like to see their personal insecurities dramatized as national trends of great significance.
More importantly, the press misunderstands how the education needs of the modern economy have been augmented by technology and globalization. Many jobs involving simple, repetitive tasks have been rendered obsolete by machines. Employers will pay people less money, or no money at all, to perform them. The jobs that remain, however, require increasingly sophisticated skills. A steel mill that once employed 20 low-skill laborers per unit of production may now employ one person manipulating complex equipment. Typists barely exist any more, but scientists can communicate with colleagues worldwide via email, download documents from archives instantaneously, and crunch gigabytes of data on cheap laptop computers. Economists call this “skill-biased technology change.”
Under this scenario, more productive workers earn more, on average. And the workers who come to the labor market able to take advantage of complex technologies and manipulate flows of information are disproportionately college graduates. That’s why the labor market continues to pay a premium for degrees. The great recession of 2008 threw people from all walks of life out of work. But college graduates were most likely to have jobs when the economic crisis began and were least likely to lose them in the financial storm. Even as unemployment remains stubbornly high, college graduates are the only members of the labor force whose employment rate rose during the first five months of this year.
Why, then, do the labor economists and government experts cited in perennial “college graduates are so screwed” news stories keep getting the story wrong? One factor is a flaw in the way the federal government classifies jobs. The Bureau of Labor Statistics issues periodic projections of how many people will be employed in thousands of different kinds of jobs in the future. The BLS also classifies jobs based on the level of education required. The problem, as Georgetown University economist Anthony Carnevale has documented, is that the BLS assumes that educational requirements within jobs will stay constant. When making projections, it doesn’t account for the ongoing march of skill-biased technology change.
These methods miss most of the growth in highly-educated jobs. Only a third of the long-term growth in jobs requiring a college degree has come from more employment in sectors with traditionally high education requirements—scientists, accountants, teachers, etc. Most of the growth has come within very large existing white collar and blue collar industries. To compete in the global economy, companies have to manage increasingly complex supply chains and provide high-value professional services. Huge sectors like manufacturing and health care have made heavy use of technology and require enhanced human skills to match. As a result, employers are increasingly requiring college credentials.
College skeptics also fail to account for predictable career patterns. Low-education jobs have much higher turnover rates than high-education jobs, and people tend to progress from the former to the latter. There are a lot more law firm partners out there who used to be bartenders than bartenders who used to be law firm partners.
And indeed, that’s pretty much what happened to the sad cases described over the years by the Post and Times. Back in 1982, the Postwrote aboutMel Rodenstein, a Peace Corps alum with a master’s degree in international affairs who was slaving away in a “mindless” file clerk job, forced to cut coupons and subsist on rice and beans. He went on to a series of nonprofit management jobs and, by 2010, was a senior research project supervisor at the Johns Hopkins University School of Health. In 1993, a Post article titled “Grads Without Jobs” described two young women graduating from good state universities who planned to spend a year wandering North America in a station wagon because “there are no jobs anyway.” Today, one of them lives in Silver Spring, Maryland, and runs her own H.R. consulting firm. The other got a PhD and works 20 feet away from this author in a Washington, DC think tank.
Sally Cameron, meanwhile, isn’t tending bar anymore. She’s a senior manager at an international development consulting company that works under contract with USAID. Her recent work includes building railroads in cyclone-devastated Madagascar. Her liberal arts degree from Smith College must come in handy, since one of the two official languages there is French. That’s how things usually work out for people who get college degrees.
Kevin Carey is the policy director of Education Sector, a think tank in Washington, D.C.
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After yet another weak jobs report came out last Friday—the U.S. private sector, it turns out, added just 38,000 jobs in May—economists have been groping for an explanation. One theory is that the economy is still in a deep, deep funk: As the IMF warned back in 2009, it takes a long time for the world to recover from a severe financial crisis. It doesn’t help, either, that Congress now has zero interest in addressing unemployment, that the mere mention of further stimulus is verboten, and that the Federal Reserve is too skittish about inflation to consider more aggressive monetary policy.
But another theory on offer, most recently from Fed chairman Ben Bernanke on Tuesday, was that May was just a nasty hiccup, thanks to a few unexpected one-time events. There were the lingering economic shockwaves from that 9.0-magnitude earthquake in Japan, which punched a few holes in the global supply chain. Plus, uprisings in the Middle East have sent the price of oil soaring, and that always hurts. Oh yeah, and a once-in-a-century tornado rampage flattened big swaths of the Midwest. So maybe we just got unlucky.
But even if you believe this second theory (and many economists don’t), it’s not especially comforting. After all, unexpected crises and disasters seem to happen with a fair amount of regularity these days. If the plan for growth is to hope nothing sudden or jarring happens in the months ahead, that’s not a terribly prudent plan. So here’s a list of things that could still go very wrong in the months ahead—and send our all-too-fragile economy reeling yet again:
The debt ceiling stays put. Democrats and Republicans are still no closer to a deal on lifting the debt ceiling. The consequences of not doing so—even for a brief spell—could be dire. Michael Ettlinger and Michael Linder of the Center for American Progress recently looked at what might’ve happened if the debt ceiling had stopped rising last year. The budget deficit for August and September 2010 was $125 billion. If the government had suddenly been forced to cut spending by that amount, GDP would have dropped 2.3 percentage points—a worse quarterly drop than we experienced back in late 2008, deep in the throes of the financial crisis, and the worst since 1947. The GOP House leadership has quietly tried to assure Wall Street that things will never reach that point, but, as budget maven Stan Collender wrote in Roll Call on Tuesday, financial markets are already getting jittery—and that, in itself, could raise borrowing costs and bog down the broader economy.
Austerity fever takes hold. Sure, Republicans may finally agree to lift the debt ceiling. But what if, in return, they exact billions of dollars in immediate cuts to the federal budget? Even if you believe, as many conservatives do, that spending cuts help the economy over the longer term, it’s hard to see how mass layoffs of government employees improve matters in the near future. For the past year, we’ve been seeing growth in private-sector jobs partially counteracted by steep reductions in public-sector jobs, mostly at the state and local level. Unemployed people are unemployed people, regardless of where they last worked. Note that Britain’s experiment with austerity isn’t looking too good at this point.
Greece goes under. Just last week, Moody’s pegged the odds that Greece would either default on its debts—or seriously restructure them—in the next five years at about 50 percent. Given that European banks are holding some $52 billion in Greek sovereign debt, the consequences of default for the global financial system could be far-reaching. Even Barack Obama, who’s normally sunny about U.S. economic prospects, recently fretted in public that a Greek default could create an “uncontrolled spiral” and “trigger a whole range of other events.” (E.U. policymakers are currently contemplating a new aid package for Greece and trying to figure out how to avoid exactly this scenario.)
Oil rockets upward. Yes, gas prices have simmered down in the past week. But it doesn’t take much for an oil-price spike to occur. The war in Libya, for instance, only threatened about 2 percent of the world’s supply of crude. But, as James Hamilton of the University of California San Diego explains, sometimes a small event is all it takes. “It’s hard to get people to reduce their consumption of oil,” says Hamilton. “Which is why it might take a 20 percent price increase to get people to cut back a mere 2 percent.” Worse, Hamilton has previously found that the oil shock of 2007-2008—when prices approached $150/barrel—was a major trigger for the current recession. Which means we better hope Yemen doesn’t get too unruly and that those stories about how vulnerable Saudi oil infrastructure is to terrorism are overblown.
Hurricane season gets deadly. Forecasters expect that this summer and fall will be a particularly rowdy season for Atlantic hurricanes. Thanks, in part, to warmer ocean temperatures, Phil Klozbatch and Bill Gray of Colorado State University are predicting five “intense hurricanes” this year (the average from 1950 to 2000 was about two a year). A well-placed hurricane can wreak a fair bit of economic havoc—in 2005, the rough consensus among forecasters was that Katrina would shave off between one-half and one percentage point from U.S. economic growth in the short term. That wasn’t fatal back then, since the economy was still chugging along nicely. Now? Not so easy to, um, weather.
A wild card. No one foresaw the earthquake that rocked northern Japan and cracked open a nuclear reactor. No one predicted the BP oil spill either. So what other unforeseen surprises might lurk in the months ahead? Al Qaeda tries to avenge bin Laden's death? Pakistan and India stumble into conflict? A stodgy old tyrannical regime—say, North Korea—suddenly collapses? Rogue Chinese hackers decide to do something more ambitious, and destructive, than hack into Gmail? A newer, bolder swine flu? No one knows for sure. But it’s hard to imagine that sudden one-time jolts, a la the Libya war or the Fukushima meltdown, are a long-gone thing of the past.
Bradford Plumer is an associate editor at The New Republic.
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Listening to today’s debates, one might think that the United States faces a budget deficit. Not so. America faces two budget deficits. The first challenge is near term. Once the economic recovery is well-advanced, we must find a way to cut spending or raise taxes to prevent government debt from rising faster than income. The second challenge is dual: to slow the growth of health care spending, in general, and Medicare spending, in particular, and to decide whether to make cuts to Social Security. Treating the two budget challenges as one, however, just hampers efforts at finding an adequate solution to either.
To understand why the debate about the role and size of social insurance is largely independent from the debate about closing the near-term deficit, consider the proposals advanced by House Budget Committee chairman, Representative Paul Ryan. The Medicare conversion he proposes would not take effect until 2023. The plan makes no mention of Social Security. In the past, Ryan has proposed pension cuts, but only after a delay of seven years. Likewise, various budget commissions have endorsed long-term changes in Social Security. None, however, has suggested changes that would save more than a pittance over the next decade.
The bipartisan unwillingness to cut benefit for people who are retired or nearing retirement is based on two solid foundations. First, it is bad policy. People who are retired or about to retire would have no time to adjust to major cutbacks in Social Security and Medicare. Belying talk of greedy geezers, median income of people over age 65 was less than $25,000 a year in 2008. Fewer than one in four had income over $50,000. Added work may be an option for some, but not for most. Second, it is bad politics. The elderly vote in large numbers. They would, with justification, punish elected officials who renege abruptly on longstanding promises. That is why implementation of most of the cuts on Social Security benefits enacted in 1983 didn’t even start until 2000 and won’t be fully implemented until 2022—and then only for new retirees. These two considerations explain why Representative Ryan delayed replacing Medicare with a cash voucher for twelve years.
But near-term deficit reduction cannot wait that long. No one knows just how high the outstanding U.S. debt can go before investors, private and public, at home and abroad, come to doubt the nation’s capacity or willingness to service that debt. Some nations, less economically robust than the United States, have gotten into trouble when their debt was less than annual output, but the prevailing consensus is that the United States would be well advised to prevent its total debt from exceeding its annual income, particularly because so much of that debt is held abroad and the United States is currently running large trade deficits as well. Under current projections, the 100 percent threshold will be crossed sometime after 2020, but well before 2025. In short, the job of cutting the deficit must be finished in ten to twelve years.
Quite independently, a debate over the size and role of social insurance is entirely appropriate and salutary. The nation’s two principal social insurance programs are too big and too central to the lives of individual Americans and to the functioning of the entire economy to escape scrutiny as circumstances change and views evolve. It is necessary, as well, for the nation to debate how best to rein in the growth of health care spending. Whether or not measures to slow the growth of spending on these two programs prove eventually to be necessary, they can not materially affect the fiscal balance within the next decade.
Right now, however, the U.S. budget deficit equals 10 percent of gross domestic product, and one can explain the entirety of it without mentioning Medicare or Social Security. All of the current deficit and all of the deficits projected for the next decade can be explained—fully explained—by tax cuts enacted during the Bush administration, the costs of two wars, the economic downturn and measures to counter it, and the costs of servicing the resulting debt. Were it not for these factors, the budget today would be fully in balance.
Economic recovery will lower the deficit, but not enough. Additional measures will be necessary to stop debt from rising to potentially dangerous levels. Cuts in Medicare and Social Security spending, as a practical matter, cannot be agreed to and implemented fast enough to contribute materially to meeting that challenge. The only solutions are cuts in other government spending or tax increases.
Cutting the nation’s deficits as soon as the recovery is well under way is therefore imperative. Deciding how much the nation can and should spend on health care and pensions will be a long and tortuous debate—as is proper. But linking the two is virtually guaranteed to delay essential near term measures that would help sustain America’s hard-earned and priceless reputation as the world’s safest financial center.
Henry J. Aaron is a Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution.
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