2 keys to a real economic recovery

Here we are, two years into the recovery. It's easy to be disappointed.

Although economic growth is reaccelerating after a scary slowdown in the spring, the overall pace remains sluggish. A broad measure of unemployment still stands near 16%, down only marginally from its high of 17.2%. Home prices are skidding along the bottom. And over the past three years, government social benefits have accounted for a larger share of income gains than wages and salaries. (It's almost nostalgic to call what we have today capitalism.)

As I discussed in a recent column, middling growth is to be expected in the wake of a serious, penetrating recession. Driven by an asset price bubble and credit overgrowth, the hangover was bound to be painful. An ugly fiscal position at the Treasury, two wars and a Federal Reserve that's pushing the boundaries of prudence serve to complicate matters.

But history is not destiny. And we're not a country that leaves fortunes to the whims of fate. We march to our own beat. And right now, by just about any measure, America isn't moving fast enough. Sure, there have been bailouts, stimulus packages and tax cuts. Yet there is a nagging sense that those efforts were either ill-designed or too incremental. It was in-the-box thinking from the inside-the-Beltway crowd.

We need more. An economic resuscitation initiative with the kind of ambition that powered the moon shot, Manifest Destiny and all the rest. It's time for drastic measures. Here are two areas that are prime candidates: unemployment programs and free trade.

The scourge of long-term unemployment

The problem of stagnant job growth in the United States needs no preamble. We're all aware of it. Most of us are fearful of it. And for the army of unemployed, especially the long-term unemployed, it's a problem every minute of every day.

I think we can do better. Indeed, a glance across the Atlantic reveals an enviable example of how to tackle structural employment problems and jump the hurdles of recession at the same time. And it's happening in a country once considered the "sick man of Europe."

I'm talking about Germany, which has enjoyed a recent resurgence despite the handicaps of a strong euro and its role as fiscal nursemaid to the likes of Greece and Ireland. Teutonic resolve resulted in 3.5% growth in gross domestic product last year, with an additional 3.2% expected this year, according to the latest projections by the International Monetary Fund. Compare that with the 1995 to 2005 average of 1.4%.

And compare the trajectory of unemployment rates in the chart above. After years of struggling with double-digit unemployment, the German government enacted the so-called Hartz IV labor reforms. Unemployment benefits were cut, drawing thousands into the streets of Berlin in protest. The term was derided in the popular consciousness, with Hartz IV entering the German lexicon as something akin to "redneck" here at home.

But the secret sauce was in the innovative work-sharing arrangements instituted. The government would pay to keep people attached to the workforce by encouraging employers to cut hours instead of workers. Lost wages would be offset by unemployment benefits known as kurzarbeit, worth up to 67% of lost income. People would keep their jobs while companies would enjoy a more flexible, fully trained work force.

The reforms also compelled the long-term unemployed to take jobs -- any jobs -- in order to continue receiving benefits. This got to the heart of the problem of extended unemployment periods: lost skills, broken contacts and reluctance of employers to hire applicants with big gaps in their work histories.

The results speak for themselves. What's more, the steady reduction in German unemployment came despite a deeper recession than the one in the United States.

Problems related to rising long-term unemployment are serious hindrances to the economic "re-recovery" I've been writing about in recent columns and blog posts. And it's been frequently mentioned by Federal Reserve Chairman Ben Bernanke as a top concern over the past six months.

That's because higher long-term unemployment has potential to reduce the economy's natural, noninflationary rate of growth as it becomes harder for job seekers and job creators to make a match. There is already evidence this is happening: Research from Minneapolis Fed president Narayana Kocherlakota finds that labor market matching efficiency declined as much as 44% between 2007 and 2010.

This explains why CEOs can complain of an emerging talent shortage, as illustrated by this recent survey (.pdf file) by Manpower, even as millions of Americans collect unemployment checks. And that means that the unemployment rate could in fact bottom around 8% or higher without structural reforms.

The solution could involve German-style reforms of our own unemployment system. Research by René Fahr of the University of Cologne and Uwe Sunde of the University of Bonn found that the Hartz efforts "had an impact in making the labor market more dynamic and accelerating the matching process." That is precisely what the U.S. economy needs.

Instead of merely extending benefits, Congress should consider subsidizing on-the-job training programs and temporary-worker placements, as well as using its power to force people back into the workplace -- even if it's not in the same position or the same industry. Community colleges and state universities could help by increasing vocational offerings. The point is that the White House and congressional leaders need to directly address the structural reasons for long-term unemployment instead of simply throwing more money at the problem via unemployment benefits.