Monday, May 7, 2012

"Learned Helplessness" in Hard Times

Economist Robin Wells @ The Guardian:
Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population, and a significant fall from the 154,000 jobs added in March. While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow...

And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. Months with stronger numbers will be seen as confirmation that the economy is turning the corner, and months with weaker numbers will be seen as confirmation that there's little one can do in the face of the need for longterm adjustments in the economy. Learned helplessness sets in.

One could not have asked for a clearer example of learned helplessness than Ben Bernanke's recent press conference, where he labeled calls for further Fed stimulus "reckless" and appeals for a higher inflation target "irresponsible" because it would, in his view, sacrifice its commitment to a 2% inflation target. Higher inflation helps stimulate a depressed economy as consumers and businesses find it less appealing to sit on cash, and it reduces the real cost of pre-existing debt. Ironic given that a 4% inflation rate during the Reagan years was considered perfectly acceptable...

Another variant of this mindset is the appeals to "structural unemployment" as the problem. Structural unemployment is unemployment that is due to factors that are, in the medium-term, impervious to the forces of supply and demand in the labor market – factors such as a mismatch between skills that unemployed workers have and the ones employers are looking for, the inability of the unemployed to move to where the jobs are, and unemployment benefits which blunt the incentive to take a job. Granted, all of these factors are reasons why in normal times attempts to get the unemployment rate below a certain level carries an unacceptable level of risk.

But we are not in normal times, and appeals to structural unemployment is a red herring that only serves to distract from what focusing on pushing for we can do. It's a travesty given the state of public education in the US that we've laid off hundreds of thousands of schoolteachers; rehiring them would not only help the economy but it would also improve our long-run growth potential. Ditto for hiring laid-off construction workers to repair falling-down bridges and schools and repairing broken roads.

Perhaps the most maddening area of willful policy blindness is failure to address the foreclosure crisis. Obama's own inspector general has roundly criticized the treasury department for its glacial approach in helping underwater homeowners and its unwillingness to pressure the big banks – recipients of Tarp bailouts, mind you – to help.
Congressional Democrats have been at loggerheads with Edward J DeMarco, the conservator of the federal loan giants Freddie Mac and Frannie Mae, to reduce principal on underwater mortgages in the belief that this would reduce foreclosure rates and ultimately save the lenders money. He has, however, staunchly refused, and on Tuesday a congressional committee discovered that pilot programs by Fannie Mae and Freddie Mac that sought to save taxpayers by reducing foreclosures through principal forgiveness, were halted too early in their trials to measure their outcomes, allegedly (by a former Fannie employee) for ideological reasons. Now, after nearly three years of devastation in the housing market, DeMarco and other lenders are finally conceding that principal forgiveness can, in fact, reduce their losses.

So where does this leave us? First, we need to understand that a "slow bleed" of the economy – chronically high but not catastrophic rates of unemployment, low levels of private investment, and deteriorating public infrastructure – are nonetheless devastating. Many workers will lead permanently diminished careers, and the economy's long-run productive capacity may be permanently lowered. Second, recognize that it is all too likely that poliymakers will fail to advocate for policies to get this economy going. Learned helpless is, unfortunately, a comfortable state of affairs.
Finally, that leaves us with the distinct possibility that without a political sea-change in favor of more progressive policies, we have reached the limits of what is possible. It's up to US voters to overcome their habit of learned helplessness as well.

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