The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.
While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.
Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is – housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.
Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.
Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.
We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.