Recession highlights need for new social safety net

About six months ago, Financial Times Columnist Martin Wolf predicted that the current recession would not be a normal one, and that it would test the U.S.'s social safety net.

More than 5.7 million lost jobs later, Wolf's prediction regarding the recession's uniqueness is looking (unfortunately and painfully) on the mark -- and he's not the only economist to point out the distinct pressures caused by the U.S.'s current pronounced recession, wrapped as it is in a financial crisis.

Former Fed Chairman Paul Volcker, in a speech a couple of weeks back, said the United States may have to live with a higher "natural" unemployment rate -- essentially a downgrade of what economists define as full employment. Whereas the old natural unemployment rate was 5.5 percent, the new level may be 6.5 percent or even seven percent.

New York Times columnist and Nobel Prize-winning economist Paul Krugman has repeatedly discussed the problem of inadequate job growth -- from the 'jobless recovery' start that characterized the last expansion, to the tepid-but-never-robust job creation that defined the peak years of economic growth during the Bush 43 era. Moreover, the onset of the financial crisis and the recession, with its large layoffs, has only magnified the U.S.'s job problem, in Krugman's view.

Wolf: U.S. must upgrade safety net

Further, the more one reads about the nature of the restructuring -- which includes large job losses in the manufacturing, financial services, retail sectors -- the more illuminating Wolf's social safety net analysis becomes. Wolf, like President Obama, argues that "a better safety net -- universal health care, more generous unemployment insurance and greater support for those on low wages -- is a necessary condition for acceptance of the changes brought about by global competition."

For Wolf, there is no turning back and no short-cut for the United States. The U.S. can have the globalization that it created and advocates, but that means the continued transfer of both jobs and whole sectors to lower-cost centers abroad -- and that means millions more Americans will be thrown out of work -- citizens that must be retrained. In other words, to deny the necessity of retraining and education is tantamount to pushing unemployment even higher -- leading to even more GDP-reduction and higher levels of structural unemployment.

A globalization cost: Higher taxes

The better social safety will require higher taxes, "a willingness to accept that the U.S. will need to raise its average tax level from what it is, by the standards of high-income countries, a very low level," Wolf added.

President Obama and the Democratic-led Congress are expected to raise the two top federal income tax rates to 39.6 percent and 36 percent, but if Wolf is correct, income taxes will have to be raised more.

But what if the American people don't support higher federal income taxes? They've opposed them before. What if they cut-and-run on Obama in mid-stream? What if they oppose the improvement of the social safety net with its expansion of worker re-training provisions, education grants, increased support for higher education, and longer unemployment compensation? What if they say, as they have before: "Fend for yourself!" or '"Mr. or Ms. Unemployed, pull yourself up by your own bootstraps!" Economist David H. Wang says that stance will lead to increased social unrest, among many other problems.

"Fifteen percent of the workforce pulling itself up by its own bootstraps? I don't think so," Wang said, adding that he agrees with Wolf's analysis.

Could the U.S. unemployment rate hit 15 percent? Already at 8.9 percent, the most rosy economic scenarios have unemployment topping-out at (hopefully) only 10 percent. "A 15 percent unemployment rate is entirely possible, given the magnitude of structural changes occurring in the U.S. economy," Wang said. "And keep in mind the recovery most likely will not be robust, so we're not likely to see unemployment as low as 5 percent for many years. This recession guarantees the need for a better social safety net. There's no getting around it. In the U.S., we either have globalization and a better social safety net, as Wolf says, or we don't have globalization in the U.S. So far, I've seen few businesses leaders or politicians in the U.S. who want to stop globalization."

A social safety net side-step?

Wang did offer two wild cards that would allow the U.S. to sidestep or postpone improving its social safety net, but unfortunately economists and policy makers can't count on either.

The first is ingenuity and the U.S. economy's ability to reinvent itself. Green technology or information technology or some other as-yet unseen, breakthrough technology or new sector could vastly increase the number of jobs created to the point where the pressure placed on the U.S. social safety net by globalization is eased, Wang said. Unfortunately, that new technology or sector hasn't appeared, and hence no one is forecasting massive job growth in the immediate years ahead.

Second, at least in theory, if the emerging markets (China, India, Brazil / Latin America, Russia, Eastern Europe) collectively increased consumption of U.S. goods and services, and the U.S. companies invested at home and took advantage of the U.S.'s higher savings rate, those two forces could, Wang said, lead to strong job growth, as well. Unfortunately, however, economists can't count on emerging market countries like China -- with a savings rate above 20 percent -- to radically increasing their consumption.

So, like economist Wolf, Wang believes job dislocation in the U.S. will be pronounced, the U.S. economy will restructure, and unemployment, including continuing unemployment, will hit high levels -- conditions that will require a better social safety net.

Financial Editor Joseph Lazzaro is based in New York.

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