Why Unemployment Remains So High—Posner

In 2007 and 2008, the U.S. unemployment rate was only 4.6 percent, though it started to rise after the financial crisis hit in September 2008, reaching 10.1 percent in October 2009. Since then it has fallen to 8.1 percent. The unemployment figure is not terribly illuminating, as it defines the unemployed as persons who are looking for a job, thus excluding those who have stopped looking because they don’t think they’ll find one; in the latest quarter, the unemployment rate fell (from 8.2 percent in the previous quarter) only because of the large number of persons who dropped out of the labor force, thus reducing the denominator in the fraction of unemployed. The 8.1 percent figure also excludes the underemployed. A further concern is that more than 40 percent of the unemployed have not been working for more than six months, and it hard to land a job after having been out of the workforce so long; work skills and attitudes tend to atrophy, making employers reluctant to hire the long-term unemployed. 

The current depression (calling it a mere “recession” that ended in June 2009 when GDP stopped falling strikes me as ridiculous) began almost four years ago. That employment has not recovered is not surprising. When the financial crisis struck in September 2008 the personal savings rate of Americans was only 1 percent, the reason being that the housing bubble had inflated the apparent savings of homeowners by increasing their home equity relative to their debt. The rapid plunge in the market value of people’s personal savings caused them to reduce their consumption spending in an effort to rebuild their savings. At the same time, the uncertainty of the economic environment and the weakness of bank balance sheets caused banks to restrict lending (other than to the federal government and a handful of other reliable borrowers), so credit for consumer purchases became harder to get, and this further reduced consumption spending. The Federal Reserve flooded the banks with money, but the banks hoarded the money. With credit scarce and consumer spending down, companies reduced production and so laid off workers, which further reduced consumer spending, both directly by reducing incomes and indirectly by increasing uncertainty about the economic future. 

When the downward spiral stopped, and consumer spending revived, companies were reluctant to hire back the laid-off workers because of continued uncertainty about economic conditions arising in part from the deepending economic crisis in Europe and slowing economic growth in countries like China, India, and Brazil. 

I do think the government could have broken the downward spiral earlier, and had it done so unemployment would be somewhat lower today, though I doubt it would be dramatically lower. The $800 billion stimulus (Keynesian deficit spending as a depression remedy) should have been larger, should have been introduced earlier (in the fall of 2008 rather than in February 2009), should have been designed differently, with a focus on financing projects requiring labor rather than on transfer payments (since much of the transferred money could be expected to be saved rather than spent—and in a depression one wants spending not saving), and should have been executed with a greater sense of urgency, as in 1933, when literally millions of the unemployed were put to work within months and the economy began a rapid recovery, though the recovery stalled in 1937 when the government increased taxes and reduced the money supply. 

In addition to restoring jobs during a depression, government can preserve jobs, as it did with the financial aid to the Detroit automakers, which saved hundreds of thousands of jobs at a particularly critical time (the first half of 2009). It now appears that the government should also have given financial aid to the states (which cannot create money to pay their obligations and thus can engage in deficit spending only with the consent of their creditors) to enable them to avoid having to lay off public workers, such as teachers, police, and firefighters—the states have laid off almost 600,000 of their employees during this depression. 

I don’t think there’s much else the government could have done to arrest the depression. Attempts at fundamental economic reform should not be made during a depression, because they create uncertainty, which increases the incentive of businesses and consumers alike to hoard rather than spend; hence the Administration’s health-care reform was mistimed. The extension of unemployment benefits, along with more generous means-tested benefits programs like stamps, may also have been a mistake, by reducing economic pressures on the unemployed to find work. On the other hand, these transfer payments, although an inefficient method of promoting employment (because as I said transfer payments may to a significant extent be saved rather than spent), do increase incomes; and some—probably most—of the increased income is spent, in turn increasing demand for goods and services and so production and employment. Obviously, however, indefinite extension of unemployment benefits cannot be the solution to the unemployment problem. 

A depressing possibility is that the depression has accelerated what may be a long-term trend to reduced employment in many industries. Until quite recently, the depression had fostered significant productivity gains, as employers tried to get more work out of fewer workers, as by speeding automation and adopting more efficient personnel management policies. By “accelerating” I mean adopting these measures earlier than they would have done without the spur of falling demand. So the depression may have brought forward inevitable changes in production that will result in reduced employment and earnings. Eventually the displaced workers will find jobs in industries not experiencing the same productivity advances, but the transitional period of high unemployment may be protracted. 

The fact that the unemployment rate was less than 5 percent before the depression may refute the suggestion of a long-term decline in employment. But remember that the unemployment rate can be misleading. If we look instead at the percentage of the working-age population that is employed, it has declined from its peak of 67.1 percent in 2000 to 63.6 percent this year—and the decline began before the onset of the depression.

Comments

[John]

Posner has had it right from the beginning. These libertarian evangelists would hate living in a world where their advice was actually followed (although they'd find a way to say the problem is we're still not being "Austrian" enough). I'm unemployed and plan on spending my time re-reading Overcoming Law. (Just finished Economic Structure of Tort Law.)

[TANSTAAFL]

Posner writes: "I don’t think there’s much else the government could have done to arrest the depression."

Quite the contrary, the government could stop slow-walking regulatory approvals for job-creating domestic energy projects such as the Keystone pipeline and offshore drilling in the Gulf and Atlantic continential shelf, and stop hurling up imaginary environmental horrors as barriers to oil and gas fracking. In addition, instead of bailing out bank shareholders and executives, the government should have used the TARP money for direct mortgage relief to underwater borrowers, allowing the residential real estate market to clear and resume functioning normally. Further, the government should have immediately cut the corporate tax rate (now highest among OECD nations), improving the economic incentives of U.S. companies to hire and their competitiveness with foreign companies in lower tax nations. These examples are not exhaustive, merely illustrative. Had the Obama administration taken these steps, among others, rather than spouting divisive class warfare rhetoric as a poor substitute for national policy, many more people could be back to work today.

[Social Security Lawyer]

What we need is an impetus for long term growth.

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I agree, the unemployment rate can definitely be misleading. I strongly believe the depression just accelerated the long term trend of reduced employment.

[Thomas Rekdal]

Judge Posner always has interesting things to say. If he did not, I would not check in every week. But this week is disappointing.

He says we did not have a big enough stimulus early enough. Well, we'll never know, will we?

He says we did not spend the stimulus on the right things. No kidding? (See the U.S. Constitution, Article I).

He says automation is destroying our job market. Grim outlook. Maybe, maybe not.

Here's my take: The origin of the problem is that we spent too much, both privately and collectively. We did so because we lost sight of the fact that this is not a good idea (a moral problem, not an economic one). It will take a long time to pay for our sins (how long I cannot say, because I am not an economist). But when we are done paying for our sins, things will be just fine, because we are a (reasonably) bright people, have lots of resources, and a (mostly) free market. Cheer up.

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Tans? Where did the real conservatives and conservators go? or were we always a nation of boosters willing to rape the environment?

Your "XL pipeline" was rerouted by request of Repubs in Nebraska. Now a new route is being considered....... and last I heard, being found lacking. Do you stop to weigh "fast tracking" against the acquifers of our breadbasket?

The rest seems "talk radio" as few pay the "highest corporate rate". There likely is SOMETHING that might be done to improve how and when it's paid, but I've not heard much consensus.

The well named "TARP" needed to be flung over the reeking mess as fast a possible... and getting assistance out to "underwater mortgagees" is a slow process in any case, and when their "robo-signed papers" have been chopped into confetti it's much worse.

And please! do remember the TARP was flung during the waning days of the Bush admin, with then Senator Obama being the stand up guy in the room as McCain fumbled with "notes" and Bush "having lost control of this meeting" left the room.

Just this week they're talking seriously about programs.... but some for the GSE's and something else? or nothing? for others?

"Oil?" and Keystone? Look, the Brit Pets' Gulf "whoopsie" was a $40 BILLION event for them and many of the Gulf are hardly "whole" as yet. The Admin was right to have a moratorium and take a look at, perhaps, sloppy procedures after an oil admin with little regard for regulation had been in office for eight years. Keystone is $7 billion, spent over several years... it's hardly an atom in a $15 trillion economy.

But! we will continue to be barraged by this stuff until November, eh?

[Jack]

Thomas:

The items you mention of Posner this week are dead on.

The stimulus was too small. Provably so and the shortcut is what we see.

Automation, not "China" IS the job killer of MFG.

"Good or bad?" "Good" would be that of the long bandied about "shorter work week". But! the dollars for that have been taken by those of the top one percent....... thus! unemployment and no retirement!

The fact that the unemployment rate was less than 5 percent before the depression may refute the suggestion of a long-term decline in employment.

"Moral problem?" During the false housing boom it was child's play for realtors and mortgage lenders to point out the facts of home prices running away and that they'd be better off stretching out to buy now rather than miss the boat. Were some "too greedy?" Likely, but most were just trying to house their family. Immoral?

If so, our "sins" in the private sector have been that of building too many homes....... and as you say that will, for the most part, sort itself out over time....... but perhaps some considerable time.

And Ha! in the Fed sector? Though it cost us $2 trillion has the failure of the "Bush tax cuts" to "increase revenue" finally put The Laffer Curve to the death it has long deserved? Will we again tolerate big lied into a costly war and NOT passing the hat to pay for it? And has the word "deregulation" become a tad suspect as should be the case?

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