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A “New” Normal Requires Stronger Social Safety Nets

While this “Great Recession” highlights need for new social safety net, this need existed when U.S. accepted and promoted globalization.  It is just that the “Great Recession” is making a bad situation worse.

Globalization has promised great things for everyone - lower cost products, more efficient international labor markets and economic growth.  The problem is that with globalization there are winners and losers especially in U.S.  The losers have been workers - particularly working class Americans.  Globalization creates downward pressure on wages and salaries.  Economists say that they have not been able to draw a connection because lower wages and increased globalization. 

Oh yeah, let me share a personal story: a family member use to work a good paying job with a electrical controls manufacturer in Illinois.  He worked his way up to foreman of production and because of this job he was able to afford a modest house in the suburbs.  Unfortunately, after ten years on the job, he lost the job because the company moved manufacturing to Mexico.  He is now working two jobs and still not making what he was making at the manufacturing company and his wife had to go to work in order to find a job with health care insurance.  We know this happening all over but this happened before the “Great Recession”. 

We are now hearing about “new” normal levels for our economy.  These lower levels, if true, mean a much smaller economy and a lower living standard for many of us (translation: working class Americans).  For instance, PIMCO’s (money management firm and big player in U.S. bond market) Managing Director, Bill Gross is expecting a “new” level for economic growth:

.... any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have.

This translates into a much lower living standard and in fact Mr. Gross acknowledges that in his letter.  What may cause this contraction in growth?  It could be several factors: 1) increased personal savings rate (people saving more spending less) or 2) fewer jobs - more unemployment.  Some economists, including Edmund Phelps, economic professor at Columbia University and winner of the 2006 Nobel Prize in economics, are saying that the “Great Recession” will lead to a naturally higher unemployment rate:

Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”

Check out what this economist says:

Laurence Ball, an economics professor at Johns Hopkins University in Baltimore, says unemployment may peak at 10 percent, and “it will be a long time before we see 5 percent” again.

Again, this all translates into to a lower living standard for us.  Some people may argue that the employment situation will improve with economic growth.  This is true but at what peak level.

Already, almost a quarter of the unemployed have been out of work for 27 weeks or longer, the highest proportion since 1983. Permanent layoffs—for workers who don’t expect to ever regain the same job—hit a record 51.5 percent in March. Mass layoffs, those that affect 50 or more people, rose to a record 2,933, comprising almost 300,000 lost positions.

“We’re shedding jobs in industries in a significant way, and we’re not going to see those same industries be the source of job creation,” Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, said in an April 21 interview. “We’re going to be living in a world in which we’re going to be feeling that the normal on the unemployment rate is above 6 percent.”

We are losing jobs that are not going to come back to U.S. - either these jobs will be transferred to another country or simply be eliminated.  Our current situation is very similar to 1981- 1982 recession, when unemployment peaked at 10.8 percent and 2.8 million jobs disappeared many in the manufacturing sector and never returned.

People who lost stable work in the early 1980s sustained large and long-lasting earnings reductions, according to research by economists Till von Wachter of Columbia University, Jae Song of the Social Security Administration and Joyce Manchester of the Congressional Budget Office. A typical 40- year-old man who became unemployed at the time went on to suffer a 20 percent loss in lifetime earnings, they found.

The income hit is all the greater when displaced workers have to start over in new careers because their old employers were in sectors that have shrunk.

“People losing their jobs now in permanently downsizing industries have to be aware that they’re particularly at risk of pretty large losses” to lifetime wages, says von Wachter, who briefed staff at the Fed and the European Central Bank last month on the effects of mass layoffs.

This lower living standard means that we will have to reform and strength our social safety nets: education and retraining, universal health care, more generous unemployment insurance and greater support for workers affected by globalization.  There is no-turning back.  We started down this path of globalization and with no signs of stopping it means more transfers of jobs to countries with lower labor costs - meaning millions more Americans without jobs.  Denying or ignoring the need to reform or strengthen our social safety nets will only lead to higher unemployment, economic stagnation and worse: social unrest. 

But this stronger social safety net comes with a cost: higher taxes.  There is no way to avoid it.  Remember, globalization has created winners and losers.  Well, the winners have not been willing to share their winnings with others.  So, the government should step in and redistribute some of those winnings.  We will all be better off for it.  If you don’t believe me then you better find way to keep tens of millions of people content and relatively healthy without higher taxes - good luck with that.  Sorry, cutting taxes is not the answer - we tried that and nothing trickled down.