The Agenda

Edmund Phelps on the Economy

The Daily Beast (I write a column for them, incidentally) has published an interview with the great Edmund Phelps, and I’m sorry to say that Phelps is convincingly pessimistic.

It would be a pipe dream to think we could get back to 4.5 percent unemployment such as we had in the middle years of the present decade. For some time, I thought of the middle 1990s as a kind of benchmark year that was normal for its time, when the unemployment rate was about 5.5 percent, but now we’ve got two fundamental reasons why we can’t even get back there. The first is that the financial sector and particularly the banking industry is in very bad shape. The balance sheets are very weak. They appear to be making a lot of profits these days, but it still is going to take years for them to build a strong equity position that will make them feel like taking on a lot of risk. The second problem is that households have lost a tremendous amount of housing wealth and the drop in housing prices is not going to be reversed. That was a bubble and I presume that the bubble won’t regrow, so consumer demand is going to be weak.

So will this decline in consumption lead to greater investment that will then fuel a rapid recovery? Well, no.

That’s what we always wanted a few years ago when we thought consumers were spending beyond their means and investors were being starved and growth was threatened. People were saying, “Look at China where they save so much,” etc., etc. But there are reasons why investment won’t rush in fully to crowd in and take the place of consumer demand. For one thing, it’s not a closed economy. Interest rates can fall only so much in the U.S. economy because we’re operating in the global economy and in much of the world, not only China and India, but maybe Latin America to some extent, things are not as bad. This means that the weakness of consumer demand to some extent is going to create a weakness, causing a net decline of employment that will weigh down total employment.

As far as policy responses, Phelps is skeptical about the wisdom of a third stimulus. He does, however, favor low-wage employment subsidies, an idea he brilliantly advanced in Rewarding Work: How to Restore Participation and Self-Help to Free Enterprise, easily one of the most convincing books I’ve ever read.

Some countries like France, Singapore, have instituted programs that pay employers for hanging on to employees, especially low-wage employees, so as to make employment higher than it otherwise would be. Singapore is having pretty good success with that program right now—output looks like it will fall by 9 percent but so far employment has held up. Why don’t we do that in the U.S.?

Note that this approach is exactly the opposite of raising the minimum wage in the middle of a catastrophic recession: rather than punishing employers for hiring workers with a marginal attachment to the overground laborforce, it rewards them for doing so.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

Most Popular

White House

The Damning Inspector General’s Report

It is hard to believe that the run-up to the presidential-election year has plumbed such a depth of farcical degradation. It must be that Trump’s influence has contributed to unserious responses, but he can’t be blamed for the unutterable nonsense of his opponents and the straight men of the political class ... Read More
White House

The Damning Inspector General’s Report

It is hard to believe that the run-up to the presidential-election year has plumbed such a depth of farcical degradation. It must be that Trump’s influence has contributed to unserious responses, but he can’t be blamed for the unutterable nonsense of his opponents and the straight men of the political class ... Read More
Elections

Diversity Panic Hits the Democratic Field

Stop me if you’ve heard this one before. An Asian guy, two black guys, three white women (one of whom spent much of her life claiming to be Native American), a Pacific Islander woman, a gay guy, a Hispanic guy, two elderly Caucasian Jews (one a billionaire, the other a socialist), a self-styled Irishman, and a ... Read More
Elections

Diversity Panic Hits the Democratic Field

Stop me if you’ve heard this one before. An Asian guy, two black guys, three white women (one of whom spent much of her life claiming to be Native American), a Pacific Islander woman, a gay guy, a Hispanic guy, two elderly Caucasian Jews (one a billionaire, the other a socialist), a self-styled Irishman, and a ... Read More
World

Present at the Demolition

Economists at the World Bank and International Monetary Fund must feel pretty lucky these days. They work for just about the only institutions set up in the aftermath of World War II that aren't in the middle of an identity crisis. From Turtle Bay to Brussels, from Washington to Vienna, the decay of the economic ... Read More
World

Present at the Demolition

Economists at the World Bank and International Monetary Fund must feel pretty lucky these days. They work for just about the only institutions set up in the aftermath of World War II that aren't in the middle of an identity crisis. From Turtle Bay to Brussels, from Washington to Vienna, the decay of the economic ... Read More
World

Well . . . .

So much for my prophecies of doom. Britain's Conservatives won, and they won with a very healthy parliamentary majority, breaking through Labour’s “red wall” across the industrial (and post-industrial) Midlands and the North. The BBC: Leave-voting former mining towns like Workington, which was seen as ... Read More
World

Well . . . .

So much for my prophecies of doom. Britain's Conservatives won, and they won with a very healthy parliamentary majority, breaking through Labour’s “red wall” across the industrial (and post-industrial) Midlands and the North. The BBC: Leave-voting former mining towns like Workington, which was seen as ... Read More
World

The U.K. Elections Were the Real Second Referendum

In the end, it wasn’t close at all. Jeremy Corbyn’s Labour party met a fate to which it has been accustomed for most of the last half-century. Once again, the British roundly rejected socialism. Boris Johnson and his conservatives will form the next British government. This was no slight rejection. Labour ... Read More
World

The U.K. Elections Were the Real Second Referendum

In the end, it wasn’t close at all. Jeremy Corbyn’s Labour party met a fate to which it has been accustomed for most of the last half-century. Once again, the British roundly rejected socialism. Boris Johnson and his conservatives will form the next British government. This was no slight rejection. Labour ... Read More
White House

The Costs of Trivializing Impeachment

Resorting to a vague “abuse of power” theory, the House Judiciary Committee Friday morning referred two articles of impeachment to the full House on the inevitable party-line vote. The full House will impeach the president next week, perhaps Wednesday, also on the inevitable party-line vote. The scarlet ... Read More
White House

The Costs of Trivializing Impeachment

Resorting to a vague “abuse of power” theory, the House Judiciary Committee Friday morning referred two articles of impeachment to the full House on the inevitable party-line vote. The full House will impeach the president next week, perhaps Wednesday, also on the inevitable party-line vote. The scarlet ... Read More