Is 6% Unemployment The Best We Can Do?

Discussion in 'Economy' started by expat_panama, Jun 21, 2011.

  1. expat_panama
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    expat_panama Silver Member

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    As the economy continues to tank "unexpectedly," a new rationale has emerged: "Structural" problems are to blame, not policy errors - an idea as dangerous as it is foolish.

    The most recent example of this kind of thinking comes from Mark Zandi, the widely quoted chief economist at Moody's Analytics and an adviser to President Obama on stimulus.

    Speaking recently to columnist Robert Samuelson, Zandi estimated that "full employment" - the jobless rate below which inflation begins to rise - is now 6%. A few years ago, economists agreed it was 5% or less.

    But what does 6% "full employment" mean? We've lost 6.9 million jobs from the peak, but if Zandi's right, with unemployment at 9.1%, we'll have serious inflation when we recoup just 4.8 million of those jobs. With 14 million looking for work, that's an alarming idea.

    The problem is, this idea lets Washington off too easy.

    To begin with, "full employment" - what economists call the Non-accelerating Inflation Rate of Unemployment, or NAIRU - doesn't have a single, commonly agreed upon level. One economist thinks it's 6%, another 7%, another maybe 4.5%. It's a moving target.

    What concerns us is that this will become the new normal. "Nothing can be done," goes the mantra, "it's a structural problem. We've done all we can." Well, the "structural problems" were actually caused by bad policies. Zandi, a Democrat, should know this. He wanted an even bigger stimulus than the one we got.

    Stimulus didn't work, and we aren't creating enough jobs to bring the jobless rate down. Rather than changing their strategy, he and his colleagues now seem to tell us this is just how the economy is. Live with it.

    Well, the real reason we have high unemployment is because of Washington's costly repeated mistakes, including $700 billion in TARP spending, a regulatory clampdown on banks and Wall Street, $830 billion in "stimulus" and $2 trillion in Fed money-printing.

    Undo those mistakes, and the economy will get better, businesses will hire and that 6% "full employment" rate will magically shrink.

    But not with more stimulus, that's for sure.

    Zandi, you may recall, once estimated that every dollar spent in stimulus would create $1.50 in economic activity and lots of new jobs. Didn't happen. Output is $750 billion below where it would be if the economy had recovered normally. And the number of U.S. jobs is still 6.9 million below the peak in 2007.

    Evidence from around the world suggests that "stimulus" shrinks economic activity by taking resources from productive uses in the private sector and putting them to use instead in the unproductive public sector.

    So what can we do to end this structural impasse? Cut spending, for one. Our government now sucks up $1.5 trillion a year to fund its deficits - money that could be creating millions of new jobs in the private sector.

    For another, costly regulations, new health care mandates and the possibility of much higher taxes have businesses feeling besieged. Stop the assault on profit makers and job creators and they'll hire again.

    America's problems creating jobs aren't a result of structural shifts in the economy that no one could foresee. They're a result of bad policies, plain and simple.

    This is an editorial from Investor's Business Daily and is available here.
     
  2. expat_panama
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    expat_panama Silver Member

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    The average unemployment rate between the '00 election and the '08 election was 5.2%, and the press called the economy the worst since Hoover. The average since the '08 election has been 9.3% even after 5 million people gave up and left the labor force. The press blames Bush.
     
  3. Jroc
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    Jroc יעקב כהן Supporting Member

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    The new Obama norm is over 8% as long as Obama is in the Whitehouse it's not going to drop below that.
     
  4. Mr Clean
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    Mr Clean Gold Member

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    And what's the next guy going to do to change that?
     
  5. william the wie
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    william the wie Gold Member

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    Non wartime NAIRU has been 5.8+% since the Truman administration. The only thing that has changed has been the ways inflation is measured.
     
  6. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    I'd take 6%. Wouldn't be satisfied with it, but I'd take it. I do think if UE gets that low we probably will have an inflation problem with all the excess money floating around. And the jobs created are most likely to be lower end wages, the income inequality will grow, and liberals will have a cow about it on a regular basis.
     
  7. expat_panama
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    expat_panama Silver Member

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    That's just it, ten years ago everyone was saying it should be 5%, for example this OECD study from 2001or this 2003 Fed Report that included this graph--
    [​IMG]


    So now leftist party 'Ministry of Truth' has rewritten history to kick the historical Non-Accelerating Inflation Rate of Unemployment (NAIRU, AKA "full employment") up to 6%. This is serious. When the unemployment rate goes up we save up to handle a few months without income. Now that the records on historic NAIRU levels are going up we'd better be prepared for longer time periods.
     
  8. william the wie
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    william the wie Gold Member

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    Up until the 1960s the official NAIRU was legally and as a matter of policy kept at 4%. I know we go around on this in a generally amiable fashion but political attempts to reduce risk reduce risk adjusted returns more so but not a lot more so. The US should debate something along the lines of the Australian superannuation scheme or Chilean pension system and get out of the just so government stabilization policy game.
     
  9. expat_panama
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    expat_panama Silver Member

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    First you said:
    Then you said:
    Either you've made up one or both factoids or you're not quite explaining something here because the two quotes contradict each other.

    Something we have to bear in mind here is that both price trends and employment levels are market driven and beyond government control. Legislators have no say in what NAIRU should be, all they can do is guess what it might be from day to day.
     
  10. Jroc
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    Jroc יעקב כהן Supporting Member

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    Cut business taxes, remove restrictions on energy exploration and production, remove these stupid restrictions on our farmers in Cali, cut spending, repeal Obama care, quit printing money. Should I go on?
     
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