The unemployment rate has been 8.2 percent for three months now, creating concern that we are in a high-unemployment equilibrium. The unemployment rate is not a very good measure of the employment situation, because it excludes discouraged workers—persons who are not looking for a job. The number of discouraged workers actually dropped slightly in June. On the other hand, the number of underemployed workers rose slightly, causing the total of un- and underemployed to rise from 14.8 to 14.9 percent. Yet there has been a net increase, though a small one, in the number of new hires and in average wages. The safest observation is that no significant trend is visible in the data for the past quarter.
In another six weeks it will be four years since the financial crash that set off the steep economic downturn in which the nation and the world still find themselves. The downturn stopped years ago but the economy has stalled. Apart from the high unemployment rate, it is noteworthy that personal consumption expenditures per capita, corrected for inflation, are exactly where they were in 2007, before the crash, even though the savings rate, which soared in the immediate aftermath of the financial collapse, has receded to the low pre-collapse level, in part because of very low interest rates, which make saving money unattractive. It is noteworthy as well that inflation expectations are very low, implying that demand for products and services is not expected to increase significantly; an alternative possibility, however, is that producers have excess capacity because current demand is weak, in which event, given the current unemployment, producers may be able to hire workers to meet a surge in demand without incurring higher unit costs of production and therefore without raising prices.
Consumption drives the U.S. economy. If consumption is stagnant, there is no incentive to expand production. In the wake of the financial collapse of September 2008, companies slashed their work forces—and when personal consumption expenditures returned to their pre-crash level discovered that they could satisfy consumption demand with a smaller workforce, and still can, and if they do not anticipate higher consumption in the near term they have no incentive to expand their workforces. This seems to me the most economical (in the Occam’s Razor sense) explanation for the current high unemployment rate.
One can imagine an increase in consumer demand abroad stimulating export production and therefore employment in export industries, but foreign consumer demand is on the whole stagnant also, and our export producers face fierce competition from countries that are trying to increase their own exports. And U.S. federal and state government spending, while it plays an important role in maintaining private incomes and thus personal consumption expenditures, is not doing much more for the economy; government purchases of goods and services are down, and government at all levels is laying off workers and thus contributing to unemployment.
I am intrigued by the possibility that the economy actually stopped growing in about 2000 as a result of foreign competition, increased automation (which perturbed labor markets), decline in quality of education, economic mismanagement by federal, state, and local government (irresponsible spending and fraudulent accounting seem endemic characteristics of our state and local governments), inattention to serious economic problems such as our very badly designed tax code, and misallocation of resources, with excessive resources going into housing construction. An appearance of growing prosperity was maintained by public and private borrowing at very favorable rates made possible by the mercantilist policies of foreign countries like China, Japan, and Germany. House prices soared because housing is the product preeminently bought with debt, and the savings rate plummeted because home equity value was rising, while consumption soared as people took out second mortgages or home equity loans on their appreciating homes and spent the proceeds on personal consumption.
Still, the economy has righted itself to the extent that it is no smaller than it was before the crash; the contrast in this regard between 1929-1933 and 2008-2012 is reassuring. But how is it then that less labor is being employed? One possibility is that the shock of the crash accelerated a trend toward more efficient use of labor, as a result of greater automation (with low interest rates reducing the relative cost of capital expenditures and thus encouraging the substitution of capital for labor) and improved techniques of selecting and supervising employees. In the long run, more efficient production through more efficient utilization of labor should, by reducing costs and therefore prices, stimulate demand and therefore supply. But three months is not the long run; and thus far a rapid growth in productivity is not visible in the statistics.
The unusually uncertain political environment may be retarding employment. The reason is not that this is a presidential election year, but that the two political parties seem so far apart regarding policy. The Republicans in Congress will for understandable political reasons do everything they can to prevent the economy from improving before, and possibly after, the election, because they are committed to the position that Obama is responsible for the high unemployment rate. Romney may of course win, and no one knows what policies he would follow as president and with what effect and whether the Democrats would adopt the same obstructionist, scorched-earth policy as the Republicans have (probably they would). Nor is it clear, or even likely, that either party has a politically feasible program or prospect of meaningful economic reform. The impact of the Affordable Care Act that the Supreme Court has now upheld is highly uncertain. Political uncertainty is a retardant to economic recovery, but I would be inclined to place greater emphasis on weakness in demand in consequence of the sharp drop, triggered by the financial crash of September 2008, in household wealth and employment prospects.