Thursday, 23 September 2010

NAIRU jacket

The US has its foot flat down on the accelerator despite having a vehicle which appears increasingly outdated and decrepit. The tenure of an elected government is simply not long enough to make any serious inroads in fixing the vehicle. Rather, short term politics relies on policymakers seeking either a quick miracle or at least a sellable mirage by simpling injecting the maximum flow of gas to the engine. Bernanke's ultra-cheap money will not help, as indeed it has not helped the Japanese for twenty years (see post below, "The strange world of "quantum" money"). The Fed is running a giant experiment with America's future based on flawed economics. In the meantime, Obama is stuck by Congressional politics, which constrains him from more sound fiscal expansion alternatives.

Onset of decrepitude is more apparent when surrounded by newer, faster models. Each progressive effort to emerge out of a new recession becomes more cumbersome for the US and with it, so does the effort to achieve full employment. Why? Because hiring decisions in any new expansion both in manufacturing and services cannot benefit domestic workers as much as they did during previous expansion efforts. Manufacturing infrastructure continues to move offshore, as it has become more cost effective in at least a dozen other countries. Purchasing managers and multi-national companies would be foolish first to retool their local factories when the Chinese will supply them for a fraction of the domestic cost. The service sector supplying the US has become more cost effective elsewhere too, most notably in IT and back-offices supplied by India. This trend will not be reversed without reverting to large and destructive trade barriers, an outcome no sane person should seek. US unemployment for a given growth rate keeps getting higher. In economics speak, NAIRU keeps going up.

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