Inadequate Global Demand Should Be Clinton Job Summit Focus

President Clinton has called for a job summit this September, designed to focus the attention of the leaders of the industrial nations on the serious employment problems they all confront.

Nearly 35 million workers are officially unemployed in the Orginisation for Economic Co-Operation and Development nations, which include the United States, Canada and Japan, as well as the nations of Europe. The total number of jobless would be substantially higher if individuals who are discouraged from even looking for work were added to those officially counted as unemployed.

Here in the United States, the economic recovery has been disappointing, with the unemployment rate still near 7%--a poor job market in the judgment of workers and labor market specialists alike. In Europe, things are much worse, with unemployment rates averaging a frightening 11.5%.

The jobs problem warrants the attention of the world’s leaders. The worry is that they might look in the wrong places for solutions.

Excessive unemployment can have its roots in either the demand side or the supply side. There is a great deal of interest today in possible supply-side problems in the labor market, such as mismatches between workers’ skills and the skills required by employers, or impediments to hiring posed by health benefit plans and other non-wage costs. As interesting as some of these supply-side issues are, their contribution to present overall unemployment rates is minor. If they become a jobs summit focus, it will only deflect attention from the inadequate global demand that is the main cause of today’s excess unemployment.

There are remedies for inadequate demand, the basic ones being more stimulative budgetary and monetary policies. But for various reasons, policy-makers seem unable to do the right thing.

In most countries, the effect unemployment has had on budgets is, perversely, inhibiting the use of budget policies to fight unemployment. The loss of revenues that comes with job loss and the transfer expenditures that go to those out of work have swollen budget deficits everywhere. Deficits this year in the seven major members of the OECD will be twice as large as they were in 1990, averaging more than 4% of GDP.

By supporting the purchasing power of the private sector, these cyclical additions to budget deficits have kept weak economies from getting even weaker. But that effect is not always appreciated and has not relieved the political pressure that larger deficits impose on budgetary decisions.

In the United States, the President’s proposed stimulus package, which would have temporarily increased the budget deficit as a way of getting the economic recovery up to speed, was killed by Republican opposition. At a time when the deficit was already large, the case for temporarily enlarging it further as a counter-cyclical measure could not gather enough political strength to override the opposition. But at least the U.S. economy is still expanding, just not as fast as it should be. Elsewhere, economies are in recession and the failure to stimulate demand is much more costly.

The most serious problems are in Europe, where recessions are deepening throughout most of the Continent. When German politicians pursued unification on terms that made no economic sense, the Bundesbank responded to the resulting inflationary pressures with high interest rates. Other countries trying to stay on the course for European monetary unification had to accept the same interest rates, which helped push them into recession last year.

Following last summer’s currency crisis, Britain and Italy finally went their own way and are doing a little better, although their unemployment rates remain in double digits. Now that this summer’s currency crisis has brought new ground rules to the European Monetary System, France and others will lower their interest rates some, but may still be inhibited from putting rates too far below those in Germany.

Fiscal stimulus would be useful in Europe, either along with lower interest rates as the Bundesbank gradually relents, or in place of them if it does not. But the already large deficits, even where they are mainly the consequence of high unemployment rates, have kept fiscal stimulus off political agendas. Indeed, some politicians have called for tighter budget policies in the face of growing recessions. Shades of the early 1930s.

In Japan, recession is a rare experience for policy-makers and business leaders. The West’s prescription is for Japan to provide a major budgetary stimulus to its domestic demand, centering on tax cuts to expand consumer buying and to further open its domestic market to imports. Some market opening will come, but only very slowly. As for budgetary stimulus, it has often been promised but rarely delivered, and the newly elected government may do no better than its predecessors.

Japanese economic policy-making has been largely controlled by the Ministry of Finance bureaucrats rather than by the elected officials who are nominally in control. Even though Japan has no deficit problem, the bureaucrats remember the country’s large deficits of the 1970s and have been determined not to use the budget for counter-cyclical purposes. With Japan’s export-led growth throughout the 1980s they didn’t have to. Conditions have changed, but the bureaucrats have not.

Even if expansion in the industrial world gets going despite these handicaps--and it is likely to, though weaker and later than necessary--a lot of damage has already been done and there is a risk of more. Cyclically swollen budget deficits are keeping governments from providing aid to Russia and the other former Soviet republics.

In the search for scapegoats and simple solutions to unemployment, Western markets are being closed to the nations of Eastern Europe, and pressures for protection more generally have been increasing on both sides of the Atlantic. These nearsighted reactions to current budgets and job problems ultimately hurt economic expansion and job growth everywhere. If a September job summit addressed such macroeconomic issues, it could serve an important purpose.