Jobless and Staying That Way

By NELSON D. SCHWARTZ

Americans have almost always taken growth for granted. Recessions kick in, financial crises erupt, yet these events have generally been thought of as the exception, a temporary departure from an otherwise steady upward progression.

But as expectations for the recovery diminish daily and joblessness shows no sign of easing — as the jobs report on Friday showed — a different view is taking hold. And with it, comes implications for policymaking.

The “new normal,” as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector. Stocks and bonds yield paltry returns, with better opportunities available for investors overseas.

If that sounds like the last three years, it should. Bill Gross and Mohamed El-Erian, who run the world’s largest bond fund, Pimco, and coined the phrase in this context, think the new normal has already begun and will last at least another three to five years.

The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries. And if it is here, the new normal could force Democrats and Republicans to rethink their traditional approach to unemployment and other social problems.

Some unusual suspects, like Glenn Hubbard, dean of the Columbia Graduate School of Business and an economic adviser to George W. Bush, are talking about a new, expanded role for the government in addressing the problem. In particular, Mr. Hubbard favors investing more in education to retrain workers whose jobs are never coming back. “If there is a new normal, it’s more about the labor market than G.D.P.,” he said. “We have to help people face a new world.”

For his part, Mr. Gross, also a free-market advocate, believes that it’s time for the government to spend tens of billions on new infrastructure projects to put people to work and stimulate demand.

After the recession and the financial crisis, Mr. Gross came around to the view that something structural in the economy had been altered and that the debt-fueled boom led by consumers over the past two decades was over.

Last week only provided more ammunition for his argument. On Tuesday, Treasury Secretary Timothy Geithner warned that unemployment could go up before it goes down, and on Friday, the jobs report showed that the economy lost 131,000 jobs last month.

Nearly half the 14.6 million unemployed have been out of work for more than six months, a level not seen since the Depression. That’s especially worrisome because the longer unemployment persists, the more skills erode and the harder it becomes to find work.

White House officials, like Christina Romer, a top economic adviser to President Obama, have been busy speaking out against the idea of a new normal. “The fundamental problem we are still facing is the old cyclical, not the new normal,” she said. “What you need to do to get back to normal is to find more ways to get demand up.”

But the new-normal concept is gaining ground. “There is no way to know for sure, but there are broad reasons to think the new normal is possible,” said Greg Mankiw, an economist who advised President George W. Bush and now teaches at Harvard. “We’ve had a deep recession that’s lingering for quite a while, and the question is: Will it leave persistent scars?”

Laura Tyson, chief economic adviser to President Clinton, counts herself firmly in the new-normal camp: “I think we’re going to have slower growth, a higher household savings rate and an elevated unemployment rate for several years.”

Of course, one month’s data is hardly conclusive. And highs and lows in the economy have always been punctuated by the observation that this time is different. But more evidence is emerging that the old normal of unemployment at about 5 percent during buoyant economic growth is over.

Not only are more people out of work longer, but their options are narrowing. Roughly 1.4 million people have been jobless for more than 99 weeks, the point at which unemployment benefits run out. “The situation is devastating,” said Robert Gordon, an economics professor at Northwestern and an expert on the labor market. “We are legitimately beginning to draw analogies to the Great Depression, in the sense that there is a growing hopelessness among job seekers.”

Professor Gordon doesn’t foresee a quick turnaround. But the Obama administration predicts that unemployment will drop to 8.7 percent by the end of next year, and eventually sink to 6.8 percent by the end of 2013.

To reach that level, the economy would have to add nearly 300,000 workers a month over the next three years, according to Peter Morici, a business professor at the University of Maryland. Even in the first half of the year, when the economy grew at a healthy 3 percent, it added fewer than 100,000 jobs a month.

The problem is that the American safety net, which has been looser than those in Europe, was built on the assumption that unemployment would be short term. As a result, a rethinking is in order, said Mr. Hubbard, whose new book, “Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity,” is coming out this month.

The current approach, with its focus on payments over a relatively short period of time, he said, “came out of the world where unemployment was relatively temporary and then you went back to a similar position.”

“That isn’t what’s happening today.”

While he doesn’t favor extending benefits, Mr. Hubbard supports more government spending on job training as well as help for community colleges to reverse the erosion of jobs skills among the long-term unemployed.

Mr. Gross is more expansive. “We think the coma will last for years unless government policy changes to restimulate the private sector and bring unemployment down,” he said. He wants Washington to invest billions on infrastructure improvements and clean energy, along with the expanded job training favored by Mr. Hubbard.

Despite his long-held belief in free markets, smaller government and lower taxes, Mr. Gross said politicians must recognize that this time, “government is part of the solution.” He added, “In the new-normal world, there are structural problems, which require structural solutions.”