Monday, September 27, 2010

Unemployment may increase even WITH growth

It’s a creeping malaise caused by stagnant to slightly positive growth in economic output accompanied by sluggish hiring in the labor market.  It’s a long, painful economic illness, it is always and everywhere the product of leftist economic ideology, and it’s probably already here.

In today’s Wall Street Journal Online edition:

The strong likelihood of tepid economic growth through next year suggests unemployment may rise, rather than fall, as many forecasters currently predict.

In a paper published Monday, economists at the Federal Reserve Bank of San Francisco warn business cycle analysis generated within the central bank system is pointing to growth that will be “at or below potential” growth levels.

This modest rate of advancement won’t be enough to generate the needed level of job growth, which suggests “the unemployment rate could rise by as much a 0.5 percentage point during this period,” moving from the current level of 9.6% to 10.1%. The paper’s authors, economists David Lang and Kevin Lansing, observe “such a scenario would take the unemployment rate back to the peak recorded in October 2009.”

In a post late last week, I explained some of the reasoning behind such a sluggish labor market.  It’s primarily a climate of uncertainty that kills confidence and makes businesses think twice about expanding production and adding new employees.  On the other side of the labor market is supply.  Depending on which economic forecasts you read, the economy needs to add between 150,000 and 225,000 new jobs every month just to keep up with population growth.  If the economy is growing at a rate too slow to support that level of job creation, the unemployment rate rises as new people enter the job market.

This has two effects that are felt right away:  It suppresses wages because there are more people competing for fewer jobs (thus driving the price of labor down), and it creates even more uncertainty by consumers.  Consumer spending drives nearly 70% of the economic output of the U.S.  If consumers have less money to spend because of falling wages, aggregate demand is reduced, which drives down the prices of goods and services produced.

It’s a classic economic catch 22 in that consumers spending less translates into businesses hiring less, further depressing consumer confidence and spending.

So how do you get out of the spiral?

Improve business confidence.  Make it easier and less expensive to do business in the U.S., and American businesses will do what they do best.  There are many ways to improve business confidence:  Getting rid of Obamacare is one way.  De-clawing the immense federal regulatory environment is another.  But the best way to improve the business climate is to send a certain message to the business community: Cut corporate income taxes, eliminate capital gains taxes altogether and stop this stupid class war distinction between the people who create the jobs and the people who work in them.  There is no better relationship on the planet than there is between productive employee and successful small business owner.  The former is always handsomely rewarded for his efforts to improve the latter’s business success, because the latter knows that productive employee is just as good at a competitor’s place of business.