October 30, 2009

Higher jobless rates could be new normal

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MARK LENNIHAN / AP

People line up for a job fair in March in New York. Economists say weak employment may linger for years.

WASHINGTON — Even with an economic revival, many U.S. jobs lost during the recession may be gone forever and a weak employment market could linger for years.

That could add up to a "new normal" of higher joblessness and lower standards of living for many Americans, some economists are suggesting.

The words "it's different this time" are always suspect. But economists and policymakers say the job-creating dynamics of previous recoveries can't be counted on now.

Here's why:

• The auto and construction industries helped lead the nation out of past recessions. But the carnage among Detroit's automakers and the surplus of new and foreclosed homes and empty commercial properties make it unlikely these two industries will be engines of growth anytime soon.

• The job market is caught in a vicious circle: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.

• Many small and midsize businesses are still struggling to obtain bank loans, impeding their expansion plans and constraining overall economic growth.

• Higher-income households are spending less because of big losses on their homes, retirement plans and other investments. Lower-income households are cutting back because they can't borrow like they once did.

That the recovery in jobs will be long and drawn out is something on which economists and policymakers basically agree, even as their proposals for remedies vary widely.

Retrenching businesses will be slow in hiring back or replacing laid-off workers. Many of the 7.2 million jobs the economy has shed since the recession began in December 2007 may never come back.

"This Great Recession is an inflection point for the economy in many respects. I think the unemployment rate will be permanently higher, or at least higher for the foreseeable future," said Mark Zandi, co-founder of Moody's Economy.com.

"The collective psyche has changed as a result of what we've been through. And we're going to be different as a result," said Zandi, who formerly advised Sen. John McCain, R-Ariz., and now is consulted by Democrats in the administration and in Congress.

"Full employment"

Many economists consider a jobless rate of 4 to 5 percent as reflecting a "full employment" economy, one in which nearly everyone who wants a job has one. After the 2001 recession, the rate climbed to 5.8 percent in 2002 and peaked at 6.3 percent in 2003 before easing back to 4.6 percent for 2006 and 2007.

Will unemployment ever get back to such levels?

"I wouldn't say never. But I do think it's going to be a long time," said Bruce Bartlett, a former Treasury Department economist and the author of the book "The New American Economy: The Failure of Reaganomics and a New Way Forward."

"The linkage between growth in the economy and growth in jobs is not what it was," he said. "I don't know if it's permanently broken or temporarily broken. But clearly we are not seeing the sort of increase in employment that one would normally expect."

Even before the recession, many jobs had vanished or been shipped overseas amid a general decline of U.S. manufacturing. The severest downturn since the Great Depression has accelerated the process.

Many economists believe the recession reversed course in the recently ended third quarter and they predict modest growth over the next few years.

Yet the U.S. jobless rate is at a 26-year high of 9.8 percent -- and likely to top 10 percent soon and stay there a while.

In September, the jobless rate rose in 23 states, including Washington.

"Many factors are pushing against a quick recovery," said Heidi Shierholz, an economist at the labor-oriented Economic Policy Institute. "Things will come back. But it's going to take a long time. I think we will likely see elevated unemployment at least until 2014."

At best, many economists see an economic recovery without a return to moderate unemployment. At worst, they suggest the fragile recovery could lose steam and lead to a double-dip recession.

"We will need to grind out this recovery step by step," President Obama said earlier this month.

He and congressional Democrats are having a hard time agreeing on how to keep the recovery going and help millions of unemployed workers -- short of another round of stimulus spending amid rising voter alarm over soaring deficits.

So far, they've been unable to win even a three-month extension of unemployment insurance for people in states with jobless rates above 8.5 percent. (The rate in Washington state was 9.3 percent for September.)

The extension easily passed the House earlier this month, but is bogged down in the Senate over disputes over which states would get the funds. Hundreds of thousands of people have already lost their benefits or are about to lose them.

The White House credits the president's $787 billion stimulus plan passed in February for keeping job losses from becoming even worse. Since Obama took office in January, the economy has lost 3.4 million jobs.

Waste of money

Republicans argue the stimulus program has not worked as a job producer and is a waste of tax money. And the U.S. Chamber of Commerce recently launched a multimillion advertising campaign to celebrate small-business entrepreneurs -- and to argue that further government intervention will not spur permanent job growth.

Chamber of Commerce leaders called for creation of more than 20 million new private-sector jobs over the next decade, saying it's needed to replace jobs lost in the recession and to keep pace with population growth.

"The government can support a few jobs in the short run" while free enterprise is the only system that can create 20 million of them, said Thomas Donohue, the chamber president.

To many economists, such a goal seems unreachable given today's altered economic landscape.

"It's a new normal that U.S. growth is going to be anemic on average for years. Right now, the prospect is bleak for anything other than a particularly high unemployment rate and a weak jobs-creating machine," said Allen Sinai, president of Decision Economics.

Sinai says he doubts that unemployment will dip below 7 percent anytime soon.

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