Why Does the Unemployment Rate Stay So High?

by Dave Schuler on May 13, 2011

The biggest domestic story today is the economy and the most troubling component of the phlegmatic recovery that has been in progress for nearly two years now is the persistently high level of unemployment. Here’s President Obama’s latest explanation for high unemployment:

“The reason the unemployment rate is still as high as it is, in part, is because there have been huge layoffs of government workers at the federal level, at the state level, at the local level,” he said. “Teachers, police officers, firefighters, social workers– they have really taken it in the chin over the last several months. And so, what we’re trying to do is to see if we can stabilize the budget.”

Of course when you actually quantify the net layoffs in government at all levels that have occurred since 2007 it turns out that the layoffs aren’t nearly so huge and that you can’t explain unemployment as being due to layoffs from government. This is no secret. If you don’t believe me just go to the Bureau of Labor Statistics and start prowling around. The number of government employees at all levels is actually higher today than it was in June 2007.

To be honest I think we’re asking the wrong question. Rather than the question of the title of this post I think we should be asking why was employment so high? For that I think there are some ready answers at hand.

  • We have had two successive bubbles
  • The logic of bureaucracy.
  • Demographics
  • 50 years of stimulus

Economic activity is higher during a bubble than it otherwise would have been. After the inevitable collapse of the bubble not only does economic activity decline back to the baseline level, it will be below the baseline because billions of dollars of capital are stuck in relatively non-productive areas. If you subsidize these relatively non-productive areas (as we have), that will induce capital to be retained in these areas further further reducing the potential level of economic activity.

My point about bureaucracy is something I’ve had some difficulty explaining to people who are economics-minded. All large organizations are bureaucracies. In a bureaucracy power and influence are measured by how many people you have reporting to you. Consequently, in a large organization employees aren’t laid off when their marginal productivity goes to zero. They’re laid off only when the company goes into survival mode as was the case for many, many organizations during the Great Recession.

Subsidizing old, established, large organizations is perverse. Such organizations have been reducing the number of people on their payrolls (unfortunately, disproportionately hourly personnel) for decades. Young new companies grow and add jobs; old ones don’t. And yet we are much more likely to subsidize old, established concerns than new ones. We’re subsidizing unemployment rather than employment.

That’s why I seethed when I read this:

Gov. Pat Quinn says the state of Illinois will provide $100 million in tax credits to Motorola Mobility as part of a deal with the company to keep its headquarters in Libertyville.

Under the deal announced Friday, the company will keep a workforce of about 3,000 at the facility. Motorola Mobility, a split-off company of Motorola’s cell phone and cable TV set-top box divisions, is committing to spend more than $500 million in research and development related to these jobs over the next three years.

Gov. Quinn signed Senate Bill 4 Friday expanding the Economic Development for a Growing Economy (EDGE) tax credit, which was a determining factor in MMI’s decision to locate in Illinois.

Here’s the dynamics of this. First, Illinois raises taxes on businesses and individuals. Then it gives tax breaks to large established firms to keep them in Illinois. But remember the seen and unseen. For each Motorola Mobility there are dozens or hundred of companies not influential enough to get a break from the state. And there are dozens or hundreds more companies that will never get started, leave the state, or reduce their hiring plans because of the state’s policies.

Another reason for reduced economic activity is demographics. I’ve posted on this subject extensively. The cycle of American life is something like spend, spend, spend, spend, save, spend, die. The oldest Baby Boomers are in their mid-60s—they’re either in their “save” phase or in their terminal “spend” phase. Note that a good deal of that spending will inevitably be on healthcare.

The youngest Baby Boomers are nearing fifty. Over the next ten years all of them will have entered that last futile “save” phase and some exited it. As I have documented in earlier posts, this cohort has been wealthier at every stage than the cohorts that have followed it. That means less economic activity except, possibly, in healthcare and healthcare produces fewer jobs per dollars spent than many other sectors of the economy (that’s what it means when you say that wages in a sector are higher).

Finally, we have been stimulating the economy via Keynesian stimulus and subsidizing at a furious pace for the last half century. The stimulus has come at the expense of future growth and the future is now. Subsidies mean that billions or trillions are tied up in relatively unproductive use.

There is no quick or painless solution to these problems. I’ve already given my prescription: stop subsidizing banks, housing, agriculture, healthcare, education, aerospace, munitions, automakers, highway construction, and on and on endlessly. The subsidies come in the form of direct handouts and tax expenditures. Both should be reduced. We are in desperate need of some creative destruction.

Be concerned for those who are truly in need rather than trying to spread money around to keep everybody happy.

Because there is no quick or painless solution we’re likely to do nothing. Economic growth will be frustratingly and bafflingly low (to some). And unemployment and under employment will remain excruciatingly high.

{ 7 comments… read them below or add one }

Drew May 13, 2011 at 9:38 am

Dave Schuler for President. Where do I send the first campaign contribution……….no strings attached.

PD Shaw May 13, 2011 at 9:39 am
Dave Schuler May 13, 2011 at 10:44 am

The time to tighten the grip on Sears was when it was planning to remove its headquarters from downtown. If I’d been king, the only way I’d’ve let them go is with the shirt on their backs and not much else. That could have been done by jiggering taxes or fees.

Sears must be the stupidest company on the face of the earth. They’ve missed nearly every major retail trend of the last quarter century. The rise of mail order. The rise of Internet sales.

They could’ve strangled Amazon.com in its crib. They could have been Amazon.com (in addition to being Sears). Heck, they were Amazon.com.

I have never understood why they let their catalog business go just when mail order was making a resurgence. Nuts.

Drew May 13, 2011 at 2:46 pm

“Sears must be the stupidest company on the face of the earth.”

Careful, there, Dave. Many others are now deceased.

“They’ve missed nearly every major retail trend of the last quarter century…..etc.”…………and so, stop the subsidy and let the chips fall.

I get accused of being cold hearted on issues like this. But let the chips fall. Mock horror of massive unemployment – as some commenters here and OTB would surely invoke – is just crap. We will adapt…….others will fill the gap….and quickly. To quote Paul McCartney – Let it be…..

steve May 13, 2011 at 4:04 pm

“Finally, we have been stimulating the economy via Keynesian stimulus and subsidizing at a furious pace for the last half century.”

Umm, just to quibble, I dont really think that is Keynesian. He advocated for paying down debt once the economy was functioning better. Post-WWII, we paid down debt, as a percentage of GDP, until 1980.

Steve

Dave Schuler May 14, 2011 at 6:49 am

He advocated for paying down debt once the economy was functioning better.

I’ve made this observation myself. I suspect that Keynes wouldn’t approve of the Keynesians.

Adam Hartung June 7, 2011 at 1:07 pm

Hey Dave,

I just wanted to say thank you to you and PD Shaw for bringing my Forbes blog article into your discussion on unemployment and the reduction of subsidies.

-Adam

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