As Becker points out, the real significance of the increase in the unemployment rate from 9.6 percent in October to 9.8 percent in November is not the .2 percent increase, which is within the margin of error, but that it signals the depth of the economic hole that the country has fallen into. It is now three years since the depression—and it is a depression, not a “recession” or even a “Great Recession”—those are euphemisms—began, and it did not end last summer when GDP stopped falling (by that measure, the Great Depression ended in 1933). The proper comparison is between actual GDP and the GDP trend line (3 percent a year)—until actual GDP rejoins the trend line, the economy is in depression. Real (inflation-adjusted) GDP is roughly the same today that it was three years ago; it “should” be 9 percent higher—which would make GDP almost $1.5 trillion greater today than it is. The economy cannot rejoin the trend line with unemployment as high as it is.
A rise in the unemployment rate can actually be a recovery signal. The reason is that the rate is based on a definition of the unemployed that excludes people who have not been looking for work in the previous four weeks. As an economy recovers and demand for labor grows, people who had been discouraged from looking for a job because demand was so weak begin looking—and until they find a job, they are counted as unemployed. But that is a case in which both employment and unemployment are rising, while the increase in the November unemployment rate reflected, rather, weakening demand for labor, though probably that is a random event rather than the beginning of a trend.
Besides the 15 million unemployed, another 2.5 million Americans would like to work but have not searched for work in the last four weeks and a further 9 million are involuntarily working only part time. Many full-time workers have taken steep pay cuts, though the costs of goods and services have not fallen. (True, average hourly earnings have not declined, but often the pay cuts take the form of furloughing workers or cutting shifts, so that the worker is working fewer hours per week and therefore taking home less pay. The worker may or may not be able to find a part-time job to fill the gap.) The total number of employed persons in the United States is only 140 million; when you subtract from that number the workers who are involuntarily working part time and the (unknown) number of workers worried about losing their jobs or experiencing hardship because their wages have been cut, and then adds the unemployed and the discouraged workers, it is apparent that the employment picture is very dire.
The fall in income and rise in anxiety that mark (and mar) the current labor situation cause a reduction in consumption and hence in production, and so reduce the incentive of both consumers and businesses to borrow, and of banks to lend (they fear high default rates—and their balance sheets are probably weaker than they appear to be). Anxiety increases not only the savings rate, but also hoarding—banks and other businesses accumulate cash, and individuals invest their savings in low-risk forms that do not fuel business investment (an example is a federally insured savings account, with the bank investing its deposits in Treasury securities). With money circulating slowly and inflation as a result negligible, long-term fixed-interest-rate debtors, such as mortgagors, obtain no relief from their debt burdens. The huge state and local debt, together with the enormous federal debt, have created economic uncertainty compounded by what appears to be political paralysis in dealing with public debt, and by the hard-to-predict impact of the health reform law and other Administration initiatives on business. Together these factors may be creating a high-unemployment, low-growth equilibrium that could persist indefinitely.
What is to be done, if anything? The ideal solution—which is unattainable—would be to combine a short-term stimulus with long-term fiscal and regulatory reform aimed at reducing governmental deficits and increasing economic growth. With interest rates very low and much savings in inert forms (such as the $1 trillion in excess reserves held by the banks), there is an argument for the government’s borrowing those savings and putting them to work on projects that would require labor, and thus reduce unemployment. But not only is a further stimulus politically impossible (in part because of the poor design, execution, and explanation of the large stimulus program enacted in February 2009); it would take too long to put into effect to avoid a risk of its crowding out private investment when the private economy begins to grow more rapidly.