THE BLOG

What's Wrong With the Economy

09/30/2011 10:38 am ET | Updated Nov 30, 2011

The economy could easily slip back into recession as early as next year. Consumer demand is anemic, housing is in depression, and unemployment remains stubbornly high. None of the traditional treatments for recessions is having much impact, largely because this downturn is structural and not cyclical like recessions of the past. I see five basic structural issues that are undermining economic growth.

First is the debt overhang for both consumers and governments. Consumers are paying down debt, which is good, but overall they are still deep in hock. Governments are striving to reduce debt, but progress comes grudgingly, and in any case, reduced government spending will inevitably exacerbate the economic malaise. Total U.S. debt is 243 percent of GDP, the highest in our history.

Second, the housing depression keeps getting worse and appears nowhere near the bottom. Housing, including construction and service of housing, represents about 18 percent of the GDP. Excess supply keeps forcing housing prices lower. About 25 percent of home mortgages are "under water." Consumers who once used home equity as a piggy bank to support spending are scared, and I see no significant efforts to clean up the structural housing mess.

Third, unemployment isn't just a cyclical downturn, but a major part is also structural. It isn't just a matter of a cyclical downturn, though that is part of it. But we have millions of people whose job skills have become obsolete while good jobs go begging. When I was President of the National Association of Manufacturers, 30 percent of our member companies told us they could not find workers with adequate skills. Changing technology puts a premium on advanced technical skills that all too many of the unemployed simply do not have, and there is not enough effort underway to deal with it.

Fourth, and perhaps most ominous, we have a breakdown in the governing process with respect to budgets and dealing with the deficit. We bounce from one continuing resolution to another, conjuring up special commissions whose recommendations are immediately tossed overboard. The polls suggest a majority of voters hunger for realistic compromises, but both parties are hostage to their extreme fringes and cannot act responsibly.

There is no magic bullet to get us out of this bind overnight, but there are major things we can do to refurbish the economy. We could begin with a tax system that looks like it was designed on purpose -- that provides incentives for productive investment while giving more money back to consumers. We could impose an austerity agenda on Medicare that both reduces benefits and rewards cost saving initiatives by health care providers. We could reduce barriers to business creation and expansion. And we could work with business to provide unemployed workers with the skills and training they need to meet the changing needs of the workplace.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.

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