Why high unemployment is terrible for the economy.

Why high unemployment is terrible for the economy.

Why high unemployment is terrible for the economy.

Moneybox
Commentary about business and finance.
July 2 2010 10:15 AM

Washington's Odd Jobs Attitude

Why high unemployment is terrible for the economy.

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Last week, I argued that the Federal Reserve doesn't seem to care much about high unemployment. Apparently, very few other people in Washington do, either. That's one way of interpreting the events of the last week. Congress is adjourning without extending unemployment benefits, in large measure due to repeated Republican filibusters. On Thursday, President Obama gave a major address about … immigration reform. All this on the eve of a jobs report that showed the economy lost jobs in June, due largely to the loss of temporary census jobs.

The economy is now presenting a strange dichotomy. The corporate sector has returned to rude health, with improved balance sheets and tons of cash. It has helped lead the recovery. But without the mighty American consumer, who generates 70 percent of economic activity, participating to the fullest degree, the recovery will seem anemic. Without a healthy jobs market, the recession-shocked consumer won't spend.

And yet Washington's response seems to be a collective throwing-up of hands. There are a few things the government can do about persistent long-term unemployment. First, it can lessen the pain it causes by expanding the safety net, extending unemployment-insurance benefits so that the long-term unemployed have a source of cash to help them stay current on rent, mortgage, and credit card bills. Second, it can respond to persistent long-term unemployment by enacting policies aimed at creating and preserving jobs. These can take the form of summer jobs programs, enhanced public works programs, aid to strapped municipalities so they can avoid layoffs, and tax cuts and credits for investment and hiring. 

But so far? Nothing. And the question is why.

First, there's the matter of the uncertain trumpet at the Fed. When I wrote last week that Federal Reserve Chairman Ben Bernanke didn't seem particularly bummed about high unemployment, a reader asked what I expected him to do. At the very least, he could have lent moral support to the need for further stimulus—if only out of self-interest. Maybe he wants to be remembered as the Fed chairman who presided over an era of European-level unemployment when skills eroded and several graduating classes entered a glutted workforce.

But the two branches of government responsible for initiating and implementing fiscal policy haven't acted with a sense of urgency, either. And politics clearly has a lot to do with it. On the fringes of the Republican right, there's some flat-out Randian lunacy—i.e., Nevada Senate candidate Sharron Angle arguing that laziness and a desire to live large off unemployment checks is responsible for her state's 14 percent unemployment rate. There's some parochialism. Sen. Ben Nelson, a Democrat from Nebraska, a state where the unemployment rate is about half the national average, joined the Republican filibuster of an extension of unemployment benefits—his constituents don't need it. In the broad center, there's a lot of serious hypocritical deficit-hawk nonsense. Along with many other senators, Nelson opposed the recent benefit extension on the grounds that it was immoral and wrong to enact a $19 billion spending package without offsetting tax increases or spending cuts. Funny how such probity never surfaces when legislators vote to spend much larger sums on the wars in Iraq and Afghanistan, on the Medicare prescription drug benefit, and on the Bush tax cuts. Meanwhile, on his Web site, Nelson regularly touts deficit-fueled stimulus spending being funneled to Nebraska.

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In the White House, there's probably a level of exhaustion and Zen-like acceptance—it pushed through a large stimulus package and monumental health care reform, two heroic measures that are working and whose benefits will continue to phase in over time. These efforts have exhausted the policy team and its congressional allies. And perhaps high unemployment is something we'll have to live with, given the way the economy has recovered from recent recessions. The president's budget notes that "even with healthy economic growth there is likely to be an extended period of higher-than-normal unemployment lasting for several years." A chart in the budget points out that after the 1991 and 2002 recessions, the turning points for jobs came five and seven quarters, respectively, after the trough in growth. If there's a sense that all modern recoveries will be jobless, as companies focus on productivity and offshoring, then further stimulus provides diminishing economic and political returns.

This sort of political maneuvering is entirely predictable. My suspicion is that too many people in Washington think it's smart short-term politics not to demand urgent action on unemployment. Centrist Democrats and the White House seem to have decided that pushing too hard for more stimulus will leave them open to Republican charges that they're boosting the deficit. Besides, it's too late to do anything that will have an impact before October, when voters make up their mind. They're probably right. Obama's plan seems to be to let the stimulus work, to triangulate between an angry left and an angry right, and hope and expect that the economy will be better in October 2012 than it is in October 2010. And he's probably right. Republicans have made the calculation that the weaker the economy and the employment market are in the next few months, the better their prospects for 2010 and 2012 are—and they're right, too.

But they're also wrong. Forget about the damage to the economy at large, or to those people who aren't working. For both parties, whether you're a deficit hawk, a tax-cutting obsessive, or an incumbent bent on re-election in 2010 or 2012—persistent high unemployment is poison. Payroll and income taxes—in other words, taxes paid by people with jobs—provide the lion's share of federal tax revenues. For Democrats, there's no way to cut the deficit or find revenue for new initiatives unless they grow. Should Republicans retake control of the House and Senate next year, their first order of business would be to preserve the Bush tax cuts that are set to expire—a move that would make already large deficits even larger and thus render significant tax-reduction impossible.

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