America Hit By 2009 Recession As Wages Were Stagnant Due To Global Competition – Citigroup Peter Orszag Argues That US Should Invest Smartly In Education As A Way To Regain Strength

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By Paolo von Schirach

February 19, 2012

WASHINGTON – America is short of breath because we have to deal with the impact of two major issues. The first one is stagnant or declining wages, a global “tectonic shift“ affecting most developed economies that started several years ago. The second one is the gigantic financial crisis that we are very slowly trying to emerge from. This is the analysis provided in a February 15 Chicago speech by Peter Orszag, Vice President of Global Banking at Citigroup and until July 2010 Director of Management and Budget in the Obama administration.

Crisis in the middle of a negative trend

If we accept this perspective of a crisis occurring in the middle of a long term negative economic trend, it becomes easier to understand why it is so difficult to get out of this slump. The 2008-2009 financial crisis hit a comparatively less vibrant America made relatively poorer by declining wages, a country in which family incomes can grow a bit only if both spouses are working. And this wage stagnation has been brought about by the massive addition to the global labor pool of hundreds of millions of mostly Asian workers, without any commensurate increase of invested capital.

To put it simple terms, in the context of a globalized world economy, we have many more workers competing for employment in economic sectors that have not grown in size at the same speed. And so American wages do not grow because US firms have to compete with mostly Asian counterparts employing very inexpensive workers. To stay competitive, American workers cannot demand higher wages.

Nobody understood how deep the recession would be

As America was still adjusting to this “tectonic shift” that caused stagnant wages and living standards, we had the 2008-2009 financial disaster. And financial crises, Orszag noted, are much tougher than recessions caused by the business cycle. The Typical “V” shaped curve of rapid decline followed by an equally rapid come back did not happen this time. If it is any consolation, as Orszag observed, nobody got the nature and magnitude of this recession right. And so there was a fundamental mismatch between the problem and the policies offered to fix it. The famous “Stimulus Package” passed at the very beginning of Obama’s term did not work as intended because it could not work. It was designed to fix a temporary crisis, not a long drawn slump.

Unfortunately, it is going to take much longer to emerge from this crisis because millions of people have to climb up from very high levels of personal debt. All this debt prevents average Americans to consume, and without the pull of consumption there is not much demand and therefore not much additional employment.

Smart investments in education can provide a way out

So, what do we do about all this? We should increase America’s skills level, argues Orszag. Indeed, along with the long term trend of wage stagnation, we have to consider that in recent decades there has been no growth in the number of Americans getting a college education.

So, one way out of this stagnation predicament is to get a better educated labor force, this way upgrading America’s human capital pool. Of course, it would take years before we could see any tangible benefits from an increased number of skilled people. But one way to get faster results, says Orszag, is to establish direct and organic links between employers in a particular region and the Community Colleges that provide valuable education services to the local population.

If employers could supply reasonably accurate estimates of the types of skills they will need, then Community Colleges could steer an appropriate number of students towards those subjects, giving them a fairly good chance of getting a job upon completion of their studies. Orszag indicated that employers in the Chicago area have launched exactly this kind of structured dialogue with Community Colleges.

This could make a difference

This approach aimed at optimizing the value and cost effectiveness of investment in education may not be a panacea. But if it were adopted nation wide it would help lower unemployment levels, while giving US corporations the skills levels they need in order to improve their competitiveness. Compared with populist nonsense about fixing unemployment by taxing the rich, something that would do nothing to create jobs, this would be a very good start.


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