How to Reverse U.S. Economic Malaise

Sharon Rieger's picture
Friday, June 17, 2011

U.S. unemployment remains high at 9.1 percent (FT) and expectations are grim for creating sustainable job opportunities. But while it is "probably going to stay high for a fairly long time," public sector investment in education, technology, and infrastructure are a way to tackle unemployment by addressing longstanding structural problems on "the tradable side of the economy," says Nobel Prize-winning economist A. Michael Spence. While the United States also faces a widening deficit and the prospect of default (WSJ) if Congress fails to reach an agreement on raising the nation's borrowing cap -- a scenario that could plunge the economy back into recession -- Spence says the "question of how we're going to preserve future government investment while balancing the budget is getting lost in the shuffle." He also notes that, in terms of foreign policy, the United States is "getting to the point that we can't stay in the role of [dictating] gobal security," and is entering a period in which its "economic power and national influence are going to be more broadly spread out."

Why is employment still so high three years after the financial crisis?

Two reasons. One is that, coming into the crisis, the United States was over-consuming based on the "wealth effect." People thought they were richer, so they started consuming more and saving less. When the crisis hit [spending] dropped back to more normal levels. So part of the problem is that it will take a while because of the damage to household balance sheets. And the housing markets are in great trouble, so people are being conservative, and are trying to rebuild their pension savings and their balance sheets. In an environment where you're short of domestic demand, employment doesn't come back all that fast.

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