Sunday, June 12, 2011

US should bank on rebuilding

Jun 11, 2011
By Fareed Zakaria

EVERY week brings fresh evidence that America's unemployment crisis is much deeper and more systemic than predicted - yet Washington seems unwilling or unable to do anything about it.

Fears over the budget deficit and a dysfunctional political climate have paralysed people on both sides of the political aisle. The result is that America is 'sleepwalking' through its biggest crisis, writes Mr Mohamed El-Erian, the low-key chief executive of Pimco, a global management investment fund.

About 24 million Americans are unemployed or underemployed (the latter in part-time jobs that average US$19,000 (S$23,000), half the median wage). If these people don't find jobs soon, they will lose skills and work habits and become permanently unemployable, with grim consequences for their families, communities and the country. And if job growth does not pick up significantly, tax revenue will stay depressed, unemployment costs will rise and the deficit will balloon well beyond current projections.

America still seems to be hoping that somehow this problem will resolve itself, but it won't. Federal Reserve chairman Ben Bernanke explained this week that the economy has gone through the worst financial crisis and the deepest housing collapse since the Great Depression.

In fact, the problem is even worse. Employment growth has been stalled since 2000. If not for the housing and credit bubble, this jobs crisis would have revealed itself much earlier.

It's a new world for the American worker. Technological change and globalisation allow companies to get more output with fewer workers. Emerging markets provide millions of skilled workers who can produce the same products at a fraction of the price that Americans can. The Bureau of Labour Statistics notes that from 1947 till 2000, productivity growth was correlated with employment growth. Since 2000, they have diverged. Productivity has risen while employment has fallen. The Nobel Prize-winning economist Michael Spence has concluded that in the United States, growth and employment will diverge in the future.

Does this mean that America is stuck in a low-growth, low-employment future? No, but the crisis is structural, and Americans have to recognise its scope and urgency. 'Shutting off the alarm and pulling the blanket over one's head is not a solution,' says Mr El-Erian.

Republican concerns about government spending over the long term are understandable, but cutting spending in the short run will result in more unemployment and slower growth. President Barack Obama talks about jobs but seems too paralysed to do something ambitious to help create them. Even Mr Bernanke said this week that there isn't much he could do about the slow-growth, high-unemployment trajectory America is on. Have Americans all become fatalists?

In fact, Washington could enact some measures that would spur job creation, many with a limited effect on the deficit. Most immediately, it needs to find ways to employ the millions of workers whose jobs disappeared with the housing bust. The simplest way to help them, and the country, would be to create a national infrastructure bank to repair and rebuild America's infrastructure - which is in a shambles and ranks 23rd globally, according to the World Economic Forum - down from sixth only a decade ago.

House Majority Leader Eric Cantor has played down this proposal as just more stimulus, but if Republicans set aside ideology they would see it is actually an opportunity to push for two of their favourite ideas: privatisation and the elimination of earmarks.

The US builds infrastructure in a remarkably socialist manner; the government funds, builds and operates almost all of it. In many countries in Europe and Asia, the private sector plays a large role in financing and operation of roads, highways, railways and airports, as well as other public resources. An infrastructure bank would create a mechanism by which such private-sector participation would become possible in the US as well. Yes, some public money would be involved, mostly through issuing bonds, but such projects, with huge long-term payoffs, could genuinely be called investments, not expenditure.

A national infrastructure bank would also address a legitimate complaint of the Tea Party - earmarks. One of the reasons federal spending has been inefficient is that Congress spreads money around in ways that make political sense but are economically inefficient. An infrastructure bank would make these decisions using cost-benefit analysis, in a meritocratic system, rather than basing decisions on patronage and whimsy.

The US needs much more: a revival of manufacturing, emphasising technical training and apprenticeship programmes; aggressive measures to promote those industries that are booming, such as entertainment and tourism; an expansion of retraining; streamlining the patent process; more visas for skilled immigrants to stay and create companies and jobs. These should be part of a national plan for jobs that President Obama must lay out soon. But start with something that would have an immediate impact and put people back to work - the rebuilding of America.


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