Center on Education and the Workforce

The American Response to financial

crisis: Lessons for low and middle-income countries

Presentation by Anthony P. Carnevale At

The World Bank Forum On

Maintaining Productive Employment In Times of Crisis

April 29, 2009

The American response

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Simultaneous Two-Part Recovery Plan

1.Stimulus

1.Re-regulating and re-financing

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The American ResponseStimulus

(1)Classic Keynesian consumption led stimulus, (2)Targets spenders with additional funding for automatic

stabilizers and (3)Invests in infrastructure for modernization in key sectors

including energy efficient infrastructure, healthcare and education.

Re-regulating and re-financing

Troubled Assets Relief Program (TARP) targets financial institutions to overcome the short-term perspectives of banking and financial institutions.

Center on Education and the WorkforceSource: Georgetown University Center on Education and the Workforce’s Analysis of Macroeconomic Advisers (MA) Long-term Economic Outlook, March 2009

Figure 1: With stimulus package, employment growth

set to resume in 2011

163.9

143.6

147.2

96.0

121.0

146.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Mar 01-Nov 01

recession

Jul 81-Nov82

Jan 80-Jul 80

recession Dec 07-present

recession

Jul 90-Nov 91

Start of Stimulus

Source: Bureau of Labor Statistics, Employment Situation, various years Center on Education and the Workforce

Less than 4 years of High School

4.6%

10.1%

4 or more years of High School, no College

2.9%

5.8%

2.9%

Some college, 1-3 years 4.2%

1.3%BA and above

2.1%

4.4%

All

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Nov 73-Mar75Recession

Jan 80-Jul 80Recession

Jul 81-Nov 82Recession

Jul 90-Mar91Recession

Mar 01-Nov 01Recession

Dec '07-presentRecession

Figure 2: Least educated are most vulnerable in economic downturns (unemployment rates by education)

The jobs created will require a broad spectrum of training and education levels.

The following slides show the industries and occupations where the stimulus jobs will be created as well as their education and training requirements.

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•The American Recovery and Reinvestment Act (ARRA), 2009 will help the least educated the most.

11,000

26,000

50,000

98,000

99,000

158,000

214,000

240,000

244,000

345,000

408,000

499,000

604,000

678,000

Jobs Created by Industry, 2010Q4

Construction (18.5%)

Retail Trade (16.4%)

Leisure and Hospitality (13.6%)

Manufacturing (11.1%)

Professional and Business Services (9.4%)

Government (6.6%)

Education and Health Services (6.5%)

Financial Activities (5.8%)

Wholesale Trade (4.3%)

Other Services (2.7%)

Transportation and Warehousing (2.7%)

Mining (0.7%)

Information (1.4%)

Utilities (0.3%)

3,675,000 Total

Center on Education and the WorkforceSource: Romer and Bernstein (2009) based on their estimates of the effects by Industry from Mark Zandi’s “The Economic Impact of a $600 Billion Fiscal Stimulus Package,” Moody’s Economy.com, November 28th, 2008

Figure 3: Stimulus jobs created by industry

8,338 (0.2%)

133,757 (3.6%)

216,654 (5.9%)

245,937 (6.7%)

458,275 (12.5%)

468,504 (12.8%)

497,820 (13.5%)

512,320 (13.9%)

523,007 (14.2%)

609,388 (16.6%)

-

Service occupations

Sales and related occupations

Management ,business & ,related occupations

Construction &extraction occupations

Professional and related occupations

Office &administrative support occupations

Production occupations

Transportation &material moving occupations

Installation ,maintenance & ,repair occs

Farming ,fishing ,and forestry occupations

3.7 million Total

Source: Carnevale, Strohl and Smith’s analysis of March CPS data, 2005-2007 (pooled sample) Center on Education and the Workforce

Figure 4: Stimulus jobs created by occupation

Center on Education and the WorkforceSource: O*NET Education and Training by Occupation

1,007,344

336,807

287,303

338,514

1,704,032

High School or Less (46%)

Some College (9%)

Post-secondary Certificate (8%)

Associate's degree (9%)

Bachelor's degree or higher (27%)

3,675,000 Total

Figure 5: Stimulus jobs help the least educated the most

But a substantial share require some college or better

*Non-degreed jobs include high school dropouts, high school graduates, post-secondary certificates and some college but no degree.

Source: O*NET Education and Training by Occupation Center on Education and the Workforce

Figure 6: 45% of non-degreed* stimulus jobs require at least

1 month of formal classroom training

Formal Classroom Training

586,000(25%)

677,201(29%)

251,661(11%)

286,609(12%)

243,358(10%)

291,022(12%)

None Up to 1 month 1-3 months 3-6 months 6-12 months 1 or more years

45%

•We rely on a mix of Keynesian stimulus and automatic stabilizers whereas Europeans rely more on automatic stabilizers within a more robust welfare state

•In both cases there is substantial infrastructure in place for effective policies that can reach people within and outside labor markets in times of crisis

•We are focused on growth and distribution at the margin, not development. We are currently fighting a short-term risk/fear of deflation, and are less concerned about long term risk of inflation, in part because of our unique currency position

What is unique about the American response, especially compared with developing nations, is the context in which

it occurs

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What’s good about the Obama stimulus package that may be transferable

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•Timeliness: Otherwise there is a risk that stimulus can be pro-cyclical, increase volatility and reduce long term growth

•Customization: Doesn’t emphasize tax cuts at a time when tax cuts would be used to reduce public and private debt and not stimulate employment

•Balance: Mixes short term relief with long term investment

•Farsighted: Focuses short term income, nutrition and healthcare assistance on part-time working mothers and children beyond the reach of conventional economic policy instruments

Concerns

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• The financial crisis may become a fiscal crisis because stimulus increases public debt

• Long-term debt raises intergenerational equity concerns and reduces future growth

• Long term government spending and investments crowd out private

investments

Dependency on external financing encourages more fiscal stimulus in good times and limits the ambit for stimulus in bad times

Limited foreign assistance needs to balance continued economic development with humanitarian aid

Automatic stabilizers are relatively weak which reduces the ability of added stimulus to smooth cycles.

Stimulus requires strong currencies and reserves and the investor confidence they bring

Stimulus slows to a trickle in the informal sector and has to be balanced with targeted programs for income support family planning and healthcare, especially for women and children

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There May Be Special Problems for Stimulus in Developing Nations

There seems to be only two reliable rules for economic and social policy that apply equally in developed, middle income and developing economies

Rule #1 Adapt solutions to national conditions

Rule #2: Never forget rule #1

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There is only so much others can learn from the US Experience:

Don’t make our mistake. Balance innovation and regulation of financial markets as financial markets evolve.

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The Most Important Lesson to Learn From

the US Experience

• Coordinate fiscal and monetary policies • Beware of policy changes in the developed nations

(Mexico 1980)• Be timely, depending on the projected length of the

recession• Balance short term safety net and income-support

with long-term investment • Emphasize investment in human capital• Customize policies to serve local humanitarian and

economic conditions• Target family planning as well as women’s and

children’s health and nutrition to avoid intergenerational damage

• Ensure that most spending and tax cuts are temporary so it won’t affect long-term government debt

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In addition