MGI: What are the biggest challenges facing advanced economies with regard to employment?
Peter Diamond: It is important to distinguish between challenges related to business cycles, including fallout from the financial crisis, and challenges related to longer term trends. The unemployment rate in the United States rose from roughly 5 percent to about 10 percent in two years due to disruptions resulting from the financial crisis. The nature of this financial crisis will make it difficult to bring the employment rate back to where it was any time soon. The United States also faces longer-term challenges related to trends. One of the most important trends is the rise of computers and communications technologies that facilitate globalization and enable some jobs to migrate from region to region more freely. As a result, many jobs have migrated from the United States to other countries such as China and India. More generally, improving the education of the American workforce is very important. We have a need for improvement all across the board – from pre-school to job retraining. Ideally, countries would take steps that simultaneously address short- and long-term issues, as it is important to address both.
MGI: So what should the United States do?
Peter Diamond: There is an enormous need for stimulus in the United States. The government has done almost all it can with monetary policy, but it still has plenty of ammunition on the fiscal side. This is no time for austerity—the federal debt level in the United States is still eminently manageable. The problem is that the fiscal stimulus is running out. Ideally, Washington would have passed some kind of conditional legislation that required further stimulus if the unemployment rate didn’t drop below certain levels within a particular time. The “shovel ready” mindset was misguided given the nature of the slow recovery, as predicted by Reinhart and Rogoff. It makes sense to invest in infrastructure, particularly because the United States has underinvested in infrastructure for years. The most productive stimulus efforts create jobs today while also laying strong foundations for the future. The unsustainable trend in federal debt must be addressed, but implementation does not need to happen in the near term.
MGI: What else would you target in addition to infrastructure?
Peter Diamond: Spending on R&D has shrunk in the United States in recent decades. We know from the work of people such as Robert Solow that technology is a big driver of economic growth, and R&D is a major factor driving technological progress. Education is critical. The United States really needs to improve basic education, including preschool as well as kindergarten through 12th grade education. It is important for people to get a broad education that will give them flexibility to adapt to evolving conditions and provide opportunities for them to learn new skills later in life if they change course. And immigration is an important factor that can enable economies to remain flexible. To meet immediate needs, organizations must be able to hire immigrants who have skills that residents do not have and will not be able to acquire right away.
MGI: In recent years, there has been a lot of talk about income inequality in the United States. What steps if any should the country take to address this issue?
Peter Diamond: Wages play a critical role in the allocation of workers to different jobs. The economy would be less flexible and efficient if government set wages centrally—that would be unwise. It is more productive to address underlying issues that relate to inequalities in areas such as education, health-care coverage and costs, and tax policy. There has been an extraordinary explosion in income and wealth for top earners, particularly relative to earnings generally for college graduates, high school graduates, and those without degrees. Wages have stagnated for many low- and middle-income workers. But we can address some of the disparity through tax policy.
MGI: Can you say more about using taxes to address disparities?
Peter Diamond: When the earnings distribution becomes more uneven, it is common sense to make the tax system more progressive. To pay down debt, the United States needs more revenue, and a significant chunk of that revenue needs to come from high earners. Of course, we cannot address the entire shortfall with revenue from high earners, but this is an important part of the overall solution. In Washington, the debate is focused on whether we should set the top rate where it was set during the Bush years or the Clinton years. I think we should consider setting the top rate at the level that prevailed during the first Reagan administration. Reagan cut the top rate for high earners to 50 percent from 70 percent, which is where the rate had been set since before the Nixon administration.
MGI: Can this work given the structure of the tax code?
Peter Diamond: The system is extremely complex, but there are good and bad reasons for complexity in the tax code. Some people imagine that we could do away with the complexity without losing anything from the point of view of fairness, but some of the complexity enables fairness. For example, the United States gives tax breaks to people who incur large out-of-pocket medical expenses. Some of the complexity is required to provide the right incentives. The Earned Income Tax Credit encourages low- and middle-income earners to remain in the workforce. And some of the complexity helps to encourage personal and business investment. It is important to remove elements of the tax code that enable people to gain unfair advantage, but our concern with “loopholes” can lead us to forget that some complexity is important.
MGI: There has also been a lot of talk about bringing manufacturing and other kinds of jobs back home. Is that realistic or desirable?
Peter Diamond: The United States should not attempt to bring back many of the kinds of jobs that moved away. It may profitably bring some back, but to a large extent these jobs moved away because they did not reward workers enough to make them worthwhile. It is not profitable to manufacture iPhones at wages American workers earn. I would not focus on getting particular jobs back as much as creating new jobs that call on America’s particular strengths. It is disruptive when the types of jobs that are created are different from the types of jobs that are destroyed in an economy, and we should take steps to ameliorate the disruption for workers. But this is part of a process that has costs and benefits.
MGI: Can you talk about the ways in which availability of information about employment affects the job market?
Peter Diamond: There is a lot of information available about employment in the United States, but the information is not always available when and where it is needed. We know there will be many jobs to fill in the health-care sector in the future, particularly as the population ages. But there is not enough awareness of trends such as this among some of the people who are looking for jobs or are still in school and may be thinking about what direction to take for a career. Many people also lack access to information about the characteristics of particular jobs. They may know that jobs will be available in health care, but they may not have access to information that would enable them to make decisions about which particular health-care jobs they would find fulfilling or which particular employers offer opportunities that would suit them. The same job could be very different for someone working at one employer compared to another. So it is important to make the information that we have available to people when they need it. It is also important to have education available that connects with the jobs that are harder to fill.
MGI: It is an election year in the United States. What should the country prioritize?
Peter Diamond: It's important to recognize that we have an unemployment crisis and a debt problem. Many in Washington are behaving as if we have a debt crisis that is imminent and an unemployment problem that we can get to slowly. The top priority is that unemployment right now is hurting people and will hurt them for a long time. There are a lot of people who have been out of work for a year or more. The historic record is very clear. When they come back, if they come back, their prospects will be reduced, which obviously hurts them and their families but also reflects a drop in the efficiency and productivity of the economy. Young people are having trouble getting jobs. It's not just that they are losing the earnings that they might have received in those years. To a large extent, the rapid rise in average earnings from when you get out of school to when you reach your mid-thirties is thought to be primarily driven by the accumulation of experience. Some of that has to do with skills that you get while working. Some of that has to do with the process of getting into the right kind of job for you—one you both like and have the skills to perform. Part of that may require going back to school for a bit and coming back. The extent to which young people go a couple of years without getting started on employment doesn't just hurt for those two years. For the next decade they're going be less productive to the economy, and they're going be less well paid. That is something we need to address right away. And the right answer for that, given how much monetary policy has already done, is fiscal stimulus. That's what we need, an extension of the fiscal stimulus.