Structural or cyclical? Yes, still

Once again, the debate over the nature of our economic woes is erupting on the fault line of a structural versus cyclical slowdown — see Krugman & Delong on one side and Sachs & Atkinson. We saw this debate last time in early 2011 (see earlier posting). So let me repeat a little of what I said back then.
My answer to the question as to whether it is cyclical or structural is yes. It is both. There is a huge demand component to this recession. Financial markets froze; consumer spending and business investment plummeted. No one can or should deny that. Thus, steps to stimulate economic growth were necessary, and apparently successful.
But every recession in the past three decades has been structural. Jobs were permanently lost in some sectors and new jobs created in others. As I’ve stated before, the recession of the early 1980’s was the first recession of the I-Cubed Economy where workers were not placed on temporary layoff but permanently fired. Companies and workers were “downsized” rather than laid-off. Involuntary part-time work was the response of people downsized.
This was part of the switch away from the industrial economy. In the industrial economy, temporary lay-offs were the way of buffering the labor force from cyclical downturns. Workers were kept around for the next upturn — with either union-based or government-based unemployment payments to maintain family income until the recall.
In the I-Cubed Economy, that process has disappeared. Workers have to find new jobs — often in new industries. Cyclical downturns now lead to structural changes. And structural changes aggravate cyclical downturns.
While both are at work in the current situation, the differences between structural and cyclical has large implication for economic policy. If cyclical, the solution is to stimulate demand. If structural, then a different set of policies is called for. The problem is that this either/or rhetoric distracts us from doing what is needed — both/and.
There is also a slightly more dangerous part to the debate — on both sides. Both arguments can be used as an excuse to do nothing. If the recession is simply cyclical, then we just have to wait for the cycle to play out and the recovery to take hold. If anything is to be done it should be limited to traditional industrial-age solutions, such as tax cuts and accelerated depreciation. [FYI – see recent posting on the value of accelerated depreciation in a knowledge economy]. On the other side, the argument is that there is little government can do about structural unemployment. The market needs to sort itself out – maybe with some help in the long run from some worker retraining programs.
But there are policies we can undertake that would have the dual benefits of raising demand and building a stronger competitive foundation. For example, tying to unemployment benefits to job sharing and worker training. Under most proposed job sharing plans, workers would reduce hours with portion of the workers’ lost wages covered by unemployment insurance (UI). Rather than reduce their hours, we should use those hours for training. It can be on-the-job training or classroom training.
As either an alternative or in conjunction with UI payments, companies could be given a tax credit for the cost of the training — for both direct costs and the payroll cost of those workers participating in the training. The program could even be taken a step beyond a tax credit. As with a recent change to clean energy tax credit, the tax credit could be front loaded by either offering payments in lieu or allowing monetization of the tax credit in the financial markets (see earlier posting). This way, small businesses would get the money as they need it to pay the workers in the training program.
In this way, those “lost” hours from job sharing aren’t lost at all. They are an investment in future growth. The knowledge credit covers both the short term problem of maintaining incomes in a downturn and the long term problem of improving skills needed to maintain competitiveness. This would have the dual effect: It would increase our human capital — a major input to the innovation ecosystem. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
The much touted but never-considered-seriously National Infrastructure Bank is another example of a programs that would address both cyclical and structural issues.
Access to capital is another issue. The Small Business Administration (SBA) notes that borrowing by small businesses remains slow. We could to do more help small businesses get access to financing through using their intangible assets as debt collateral. In a number of reports (and posting on this blog), we have discussed examples of intangibles being used as loan collateral (for example, see Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance and Intangible Asset Monetization: The Promise and the Reality). In fact, I like to point out that this has been going on for a long time. The first trade secrets case in the United States involved the debt on a bond secured in part by a secret chocolate-making process in 1837. In 1884, Ara Shipman loaned Lewis Waterman $5,000 to start a pen-manufacturing business, secured by Waterman’s patent.
As I’ve argued for before, there are two action that SBA could take:
•  Develop SBA underwriting standards for IP. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.
•  Create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the U.S. Commerce Department’s National Institute of Standards and Technology (NIST). Such a direct lending program would be a step beyond SBA’s current loan guarantee programs–direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.
These two action would begin to unlock the debt financing option for high-growth companies.
We also need programs to stimulate entrepreneurship, to help companies, especially small and medium size businesses embrace design thinking — and the 21st Century linkage between manufacturing and services. Done right, these programs could inject financing into SMEs for immediate benefit while transforming their businesses.

One thought on “Structural or cyclical? Yes, still”

  1. Changing labor market

    Sebastian Mallaby has an interesting piece in the FT – “The US labour market doesn’t work”A quarter of a century ago, the US workforce was a wonder. Laid off in one corner of the economy, Americans quickly landed jobs elsewhere….

    Like

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