America: Welcome to Europe circa 1985

Economists worried that the US could be set for a period of Japanese-style stagflation may be looking in the the wrong direction. A new report suggests America could instead be set for a dose of eurosclerosis - chronically high unemployment in a growing economy.

The problem appears to be that America's historic advantages -  a mobile, skilled workforce, technologically adept, plenty of useable real estate for expansion, low interest rates - are no longer either unique nor assured.

A poll of economists estimates US growth at 2.6 per cent over the next two years while unemployment will remain essentially where it is now at 10 per cent. Jan Hatzius, chief US economist at Goldman Sachs, forecasts the jobless rate will in fact rise to 10.75 per cent by the middle of 2011. Given the way the US computes unemployment, that suggests a true unemployment rate of nearer 20 per cent of working-age Americans.

"We had been worried about turning into Japan," says David Wyss, an economist at Standard & Poor's rating agency. "But it may be more likely that we end up with sclerosis."

With Europe today easing restrictions on the mobility of its workforce with further cross-border standardisations, America seems to be heading in the opposite direction.

The great economic migrations to California, from the cottonfields in the south to factories in Chicago and Detroit, may be no more. According to the US Census bureau, workforce mobility has dropped to the lowest level since records began in 1948. Only 12 per cent of the population moved in 2008, partially reflecting the statistic that one quarter of all households owe more on their home than it is worth - an obvious disincentive to move.

"The weak housing market will contribute to high unemployment," Nobel Prize-winning economist Joseph Stiglitz told Congress this month.

If the US falls into an 1980s-style European contagion of low growth and persistent unemployment, there will be increasing pressure to extend government programmes to stimulate the economy in ways that increase the role of central government.

"There's been a regime change," another Nobel Prize-winning economist, Edward Prescott, told Bloomberg. He predicts taxes will rise and that will weigh on the US economy by reducing incentives to work, just as is the case in Europe.

Where the US typically sustains unemployment at around half of European levels, the new norm may be to sustain high levels of
long-term unemployment - a classic symptom of eurosclerosis (a term coined by economist Herbert Giersch in 1985). Currently, 5.8 million Americans have been looking for work for more than six months - the most since records began in 1948.

"There's reason to think we could suffer a US sclerosis," says Laurence Ball, professor of economics at Johns Hopkins University. "That would be horrible. We'd have a big pool of people being left behind." In other words, welcome not to Japan but to Europe of the mid-80s. ·