Inaction is now the biggest economic risk

The long-term cost of high unemployment to individuals and to society is huge.

The long-term cost of high unemployment to individuals and to society is huge.

Not surprisingly, NIESR's latest forecast, published today, has led to predictable headlines focusing on our prediction of a "return to technical recession." But this misses the point. We are forecasting that the economy will contract slightly in the first half of this year; some other forecasters agree, others don't. But the differences are within the margin of error; we could well be wrong. The point is that almost everyone expects, even assuming an eventual successful resolution of the eurozone crisis, that growth will be slow at best.

So what should be done? The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy. The credible commitment to a sustainable fiscal policy over the longer term provides the government with the flexibility to provide a clearly defined and temporary boost to near-term demand. For example, an increase in government investment would not have a significant impact either on long-run sustainability or - given the way they are defined - the likelihood of the government meeting its fiscal targets.

It is important to be clear that this is not about averting a recession in the short-term. It doesn't matter very much, either to the economy as whole or to individuals, whether economic growth is 0.2 per cent or -0.1 per cent. This is about minimising the long term social and economic damage. On current forecasts - both ours, and that of the Office of Budget Responsibility (OBR) we are set for an extended period where growth will not be enough to reduce unemployment to the levels we saw before the recession. We expect unemployment to rise to about 9 percent - 3 million - this year and to remain high. Even in 2014, it will still be over 7 per cent. This compares to the OBR's estimate that the structural unemployment rate is about 5.25 per cent.

That difference - the "unemployment gap", shown in the chart below, is a measure of the how much extra (or less) unemployment there is as a result of macroeconomic conditions - i.e. cyclical unemployment resulting from labour demand, or lack of it (more explanation here). In other words, if macroeconomic policy is broadly on track, the unemployment gap should be small; it is a measure of the number of people who are not working because macroeconomic policy isn't either.

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The chart shows that the unemployment gap in the aftermath of the 2008 recession will be larger and longer than any recession since 1970 (which certainly means any recession since the war) including the early 1980s, although there is probably some uncertainty about the 1980s estimates. It says that - on the official view and the official forecast - the unemployment gap is a million now, rising, and will be higher in 2013 than now; and that even by 2015, fully seven years after the recession began, it will be over 2 percent of the labour force, about 650,000 people. Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs.

The argument about fiscal policy is often presented as "Yes, fiscal stimulus might do some good, but are you willing to take the risk?" In my view the risks are hugely exaggerated, as I wrote in this magazine. But people talk much less about the downside of inaction. If we do not do something to boost labour demand now, we are not just taking a risk, we are accepting the likelihood of continuing high levels of unemployment that will damage both many individuals and society as a whole. In 1925 Winston Churchill expressed his dismay that policymakers seemed to be "perfectly happy with at the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed." As Martin Wolf puts it, "How masochistic does one need to be?".

Jonathan Portes is Director of the National Institute of Economic and Social Research. His blog is http://notthetreasuryview.blogspot.com

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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How the Democratic National Committee Chair contest became a proxy war

The two leading candidates represent the Hillary Clinton and Bernie Sanders factions.

While in the UK this week attention has been fixed on the by-elections in Stoke-upon-Trent and Copeland, in the US political anoraks have turned their eyes to Atlanta, the capital city of the state of Georgia, and the culmination of the Democratic National Committee chairmanship election.

Democrats lost more than a President when Barack Obama left the White House - they lost a party leader. In the US system, the party out of power does not choose a solitary champion to shadow the Presidency in the way a leader of the opposition shadows the Prime Minister in the UK. Instead, leadership concentrates around multiple points at the federal, state and local level - the Senate Minority and House Minority Leaders’ offices, popular members of Congress, and high-profile governors and mayors.

Another focus is the chair of the national party committee. The Democratic National Committee (DNC) is the formal governing body of the party and wields immense power over its organization, management, and messaging. Membership is exclusive to state party chairs, vice-chairs and over 200 state-elected representatives. The chair sits at the apex of the body and is charged with carrying out the programs and policies of the DNC. Put simply, they function as the party’s chief-of-staff, closer to the role of General Secretary of the Labour Party than leader of the opposition.

However, the office was supercharged with political salience last year when the then-chair, Debbie Wasserman Schultz, was exposed following a Russian-sponsored leak of DNC emails that showed her leadership favoured Hillary Clinton as the party’s presidential nominee to Bernie Sanders. Schultz resigned and Donna Brazile, former campaign manager for Al Gore in 2000, took over as interim chair. The DNC huddled in December to thrash out procedure for the election of a permanent replacement – fixing the date of the ballot for the weekend of February 24.

The rancour of the Democratic primaries last year, and the circumstances of Schultz’s resignation, has transformed the race into a proxy war between the Clinton and Sanders factions within the party. Frontrunners Tom Perez and Keith Ellison respectively act as standard bearers for the respective camps.

Both are proven progressives with impeccable records in grassroots-based organizing. However Perez’s tenure as President Obama’s Labor Secretary and role as a Hillary booster has cast him as the establishment candidate in the race, whereas Ellison’s endorsement of the Sanders campaign in 2016 makes him the pick of the radical left.

The ideological differences between the two may be overblown, but cannot be overlooked in the current climate. The Democrats are a party seemingly at war with its base, and out of power nationwide.

Not only are they in the minority in Congress, but more than a third of the Democrats in the House of Representatives come from just three states: California, Massachusetts, and New York. As if that weren’t enough, Democrats control less than a third of state legislatures and hold the keys to just sixteen governors’ mansions.

Jacob Schwartz, president of the Manhattan Young Democrats, the official youth arm of the Democratic Party in New York County, says that the incoming chair should focus on returning the party to dominance at every tier of government:

“The priority of the Democratic leadership should be rebuilding the party first, and reaching out to new voters second," he told me. "Attacking Donald Trump is not something the leadership needs to be doing. He's sinking his own ship anyway and new voters are not going to be impressed by more negative campaigning. A focus on negative campaigning was a big part of why Hillary lost.”

The party is certainly in need of a shake-up, though not one that causes the internecine strife currently bedevilling the Labour Party. Hence why some commentators favour Ellison, whose election could be seen as a peace offering to aggrieved Sanderistas still fuming at the party for undermining their candidate.

“There's something to be said for the fact that Ellison is seen as from the Bernie wing of the party, even though I think policy shouldn't be part of the equation really, and the fact that Bernie voices are the voices we most need to be making efforts to remain connected to. Hillary people aren't going anywhere, so Ellison gives us a good jumping off point overall,” says Schwartz.

Ellison boasts over 120 endorsements from federal and state-level Democratic heavyweights, including Senator Sanders, and the support of 13 labor unions. Perez, meanwhile, can count only 30 politicians – though one is former Vice-President Joe Biden – and eight unions in his camp.

However the only constituency that matters this weekend is the DNC itself – the 447 committee members who can vote. A simple majority is needed to win, and if no candidate reaches this threshold at the first time of asking additional rounds of balloting take place until a winner emerges.

Here again, Ellison appears to hold the edge, leading Perez 105 to 57 according to a survey conducted by The Hill, with the remainder split among the other candidates.

Don’t write Perez off yet, though. Anything can happen if the ballot goes to multiple rounds and the former Secretary’s roots in the party run deep. He claimed 180 DNC supporters in an in-house survey, far more than suggested by The Hill.

We’ll find out this weekend which one was closer to the mark.

Louie Woodall is a member of Labour International, and a journalist based in New York.