Photo: Daily Bail
Guillermo Calvo, Fabrizio Coricelli, and Pablo Ottonello have an interesting piece on VoxEU.org.They look at what’s ailing the U.S. labour market.
It’s not a skills gap, nor housing nor fiscal policy per se, they write.
Rather, it comes down to what’s financially prudent for businesses in the wake of a crisis.
“Following the disruption in credit markets typical of financial crises, collateral requirements drastically change and loans are biased towards projects and firms possessing easily recognisable collateral, associated with tangible assets, which can be defined as ‘intrinsic collateral’. Projects involving the creation of new jobs are generally cut off from financing, as they possess little ‘intrinsic’ collateral, and thus the recovery of output tends to be jobless.
How do we get around this? Well, a bit of inflation would probably be quite useful…
“The empirical evidence does not bluntly contradict the existence of a long-run vertical Phillips curve (of unemployment versus inflation) around the pre-crisis rate of unemployment. But, it also suggests that a sharp dosage of price inflation for a limited period of time may go a long way to restoring full employment after financial crises, albeit at the cost of lower real wages.
…But would come with a host of problems:
“We hasten to say, though, that these observations do not lead us to urge Mr Bernanke to take the high-inflation road.
- Firstly, because he would probably lose his job and be replaced by a mindless hawk.
- Secondly, and of greater substantive relevance, because a spike in dollar inflation could seriously jeopardise the credibility of the strongest global currency, a pivotal anchor of the world economy.
- Thirdly, because inflation is not a regular tax; once the genie is out of the bottle it may take a life of its own (emerging markets offer plenty of examples for disbelievers).
So what’s the answer? Liquidity and credit.
“[The Fed should] coordinate another large quantitative easing operation with the ECB in order to restore the stock of ‘safe assets’ (see Barclays Capital 2012, Gorton et al. 2012, IMF 2012), and help reactivate the credit market by speeding up bankruptcy procedures. Restoring safe assets is not inconsistent with expansionary monetary policy or high fiscal deficits (see Barclays Capital 2012), but it also includes structural reforms aimed at reestablishing credibility in capital markets.
Read more at VoxEU.org.