Advanced Malaise

Mareeg.com-NEW YORK – Economics is often called the dismal science, and for the last
half-decade it has come by its reputation honestly in the advanced economies.
Unfortunately, the year ahead will bring little relief.

Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United
Kingdom, and the United States is lower today than before the Great Recession hit.
Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008.

There are a few exceptions: After more than two decades, Japan’s economy appears to
be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy
of deflation stretching back to the 1990’s, it will be a long road back. And
Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an
increase of 3.9% in five years is not much to boast about.

Elsewhere, though, things really are dismal: unemployment in the eurozone remains
stubbornly high and the long-term unemployment rate in the US still far exceeds its
pre-recession levels.

In Europe, growth appears set to return this year, though at a truly anemic rate,
with the International Monetary Fund projecting a 1% annual increase in output. In
fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund
predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a
0.4% contraction; and it predicted US growth to reach 2.1%, whereas it now appears
to have been closer to 1.6%.

With European leaders wedded to austerity and moving at a glacial pace to address
the structural problems stemming from the eurozone’s flawed institutional design, it
is no wonder that the continent’s prospects appear so bleak.

But, on the other side of the Atlantic, there is cause for muted optimism. Revised
data for the US indicate that real GDP grew at an annual pace of 4.1% in the third
quarter of 2013, while the unemployment rate finally reached 7% in November – the
lowest level in five years. A half-decade of low construction has largely worked off
the excess building that occurred during the housing bubble. The development of vast
reserves of shale energy has moved America toward its long-sought goal of energy
independence and reduced gas prices to record lows, contributing to the first
glimmer of a manufacturing revival. And a booming high-tech sector has become the
envy of the rest of the world.

Most important, a modicum of sanity has been restored to the US political process.
Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage
points from what it otherwise would have been – continue, but in a much milder form.
Moreover, the cost curve for health care – a main driver of long-term fiscal
deficits – has bent down. Already, the Congressional Budget Office projects that
spending in 2020 for Medicare and Medicaid (the government health-care programs for
the elderly and the poor, respectively) will be roughly 15% below the level
projected in 2010.

It is possible, even likely, that US growth in 2014 will be rapid enough to create
more jobs than required for new entrants into the labor force. At the very least,
the huge number (roughly 22 million) of those who want a full-time job and have been
unable to find one should fall.

But we should curb our euphoria. A disproportionate share of the jobs now being
created are low-paying – so much so that median incomes (those in the middle)
continue to decline. For most Americans, there is no recovery, with 95% of the gains
going to the top 1%.

Even before the recession, American-style capitalism was not working for a large
share of the population. The recession only made its rough edges more apparent.
Median income (adjusted for inflation) is still lower than it was in 1989, almost a
quarter-century ago; and median income for males is lower than it was four decades
ago.

America’s new problem is long-term unemployment, which affects nearly 40% of those
without jobs, compounded by one of the poorest unemployment-insurance systems among
advanced countries, with benefits normally expiring after 26 weeks. During
downturns, the US Congress extends these benefits, recognizing that individuals are
unemployed not because they are not looking for work, but because there are no jobs.
But now congressional Republicans are refusing to adapt the unemployment system to
this reality; as Congress went into recess for the holidays, it gave the long-term
unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million
Americans who lost their unemployment benefits at the end of December have been left
to their own devices. Happy New Year.

Meanwhile, a major reason that the US unemployment rate is currently as low as it
is, is that so many people have dropped out of the labor force. Labor-force
participation is at levels not seen in more than three decades. Some say that this
largely reflects demographics: an increasing share of the working-age population is
over 50, and labor-force participation has always been lower among this group than
among younger cohorts.

But this simply recasts the problem: the US economy has never been good at
retraining workers. American workers are treated like disposable commodities, tossed
aside if and when they cannot keep up with changes in technology and the
marketplace. The difference now is that these workers are no longer a small fraction
of the population.

None of this is inevitable. It is the result of bad economic policy and even worse
social policy, which waste the country’s most valuable resource – its human talent –
and cause immense suffering for affected individuals and their families. They want
to work, but the US economic system is failing them.

So, with Europe’s Great Malaise continuing in 2014 and the US recovery excluding all
but those at the top, count me dismal. On both sides of the Atlantic, market
economies are failing to deliver for most citizens. How long can this continue?

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at
Columbia University. His most recent book is The Price of Inequality: How
Today’s Divided Society Endangers our Future.

Project Syndicate, 2014.