Math and Economics Are Hard!

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Monday, 31 January 2011 05:36

That is pretty much what former Obama adviser Steven Rattner had to say in the Washington Post today. In his piece, Rattner told President Obama:

"don't blame the talented economists who were advising you .... Creating jobs is a slow and frustrating process in the wake of a tough recession."

Calling the president's economic advisers "talented" is good for their self-esteem (we know how important that is), but in the real world, their talent as economists must be judged by their performance. Missing the biggest asset bubble in the history of the world (a credential shared by all of the president's economic advisers) doesn't speak well for them. 

However even more important is their failure to generate jobs for the country's workers following the bubble's collapse, which has to be the top priority for economic policy. While job creation might be "hard" other countries have managed to do it. For example, Germany has managed to bring down its unemployment rate from 7.1 percent at the start of the downturn to 6.7 percent today. This was accomplished in spite of the fact that Germany actually had a steeper downturn than the United States.

Mr. Rattner's piece suggests one of the key causes of the administration's failure to generate jobs. Rattner highlights the more rapid productivity growth in the United States over the last decade than in other countries, in particular singling out Germany as country with slower growth.

While faster productivity growth is generally better than slower growth, this is not the case when an economy does not have full employment. In this context, faster productivity growth just leads to more unemployment. One of the key mechanisms that Germany has used to keep its unemployment rate down is work-sharing. This is a program where the government subsidizes firms for keeping workers on their payroll, but working fewer hours than normal.

An expected outcome of this program is lower productivity. The idea is that it is best to keep people employed, where they can still get most of their paycheck, continue to develop their skills, and maintain contacts with their fellow workers. The alternative of having them laid off would mean higher productivity in the short-term, but it could lead to millions of workers joining the long-term unemployed. It is very difficult for these workers to be subsequently re-employed, therefore leading to permanent losses to the economy. Of course a prolonged period of unemployment is also likely to be devastating to the unemployed workers and their families.