Fifteen Percent Unemployment For Two More Years

The chart that shows what the Congressional Budget Office believes the unemployment level will be is buried deep in the one of the charts in the new “The Policies For Increasing Economic Growth And Employment In 2010 And 2011”. The section shows that unemployment will remain above 8% until 2012.

The press is fond of reporting that 10% unemployment is really 17% in the US. The government has categories that include people who are no longer looking for work and those who work part-time but would like to work all of the time. Other reports show the numbers of the jobless who have been out of work for a protracted period so they no longer have unemployment insurance. Still other reports cover the jobs available every month for each person who is looking for a job.

The government avoids the conclusions that simple math and deduction would show, which is that unemployment above 8% for three or more years (the figure was above 8% for 2009) has a multitude of powerful negative consequences that would not exist if the jobless rate was that high for a shorter period like a single year.

The number of jobs open for people who want work is near a record level. It is easy to assume that the longer there is a large supply of workers, the more likely it is that businesses would begin to take advantage of that to get cheap labor. But, companies are finding that they can make do with fewer workers which may be why the productivity level has risen for several quarters. It is also reasonable to believe that an environment of high unemployment will cause businesses to be cautious about expansion when consumer and business spending are certain to be low. Chronic unemployment rarely provides a fertile environment for rapid, prolonged GDP expansion. Business executives will be cautious for a long time to come.

The longer people are unemployed, the more people who will stop their searches for work permanently. The able-bodied will simply become discouraged in larger numbers. The jobless will realize that they have less and less hope of finding a job in an economy when more people are out of work for protracted periods. The number of citizens in the US and the people who are not citizens that have looked for work for a year or two years or more will expand so that the total unemployment rate will remain above 17% even if the classic measurement drops to 8%. The composition of the total figure will simply be different. It will be weighted toward those who have looked the longest and are unlikely to find full-time work in the foreseeable future.

A long period of high unemployment will also mean that certain areas in the US will have double-digit jobless rates for five or ten more years. These will include portions of California, Michigan, and other sections of what was formerly the industrial Midwest, and troubled regions like Rhode Island which have lost most of the manufacturing base. These areas will be filled with municipal governments that become insolvent because their tax bases are so severely eroded.

Public pension funds in many of these regions will face high enough deficits that they will have to default on obligations to their retired workers. America will end up with large geographic areas which are equivalents of an economic Dead Sea. The deficit-burdened federal government will not be able to provide them meaningful aid.

The idea that housing will recover in 2010 and even 2011 is impossible if there is chronic, total unemployment above 15% through those years. The supply of homes is not dropping, and is actually increases slightly as hopeful builders commit themselves to adding inventory that will not be sold, or if it is the prices will usually be lower than they have been in years. The unemployed can rarely afford mortgage payments, particularly after their unemployment insurance runs out. Foreclosures and the number of unsold homes will continue to rise. People who do have jobs will worry about whether they will keep them in period when their friends or family are without work, and those still at work are not going to take the risk of buying a new home.

The behavior of banks toward consumers which has changed so profoundly in the last year will remain changed. Personal loans, credit card loans, and car loans are risky when joblessness is high. Financial firms will be wary about money and the availability of money will remain unusually tight. This is likely to impede the recovery of industries like auto and appliance manufacturing.

The terrible this about the CBO unemployment forecast is that the federal government, which has been the safety net of last resort for decades, will be wrestling with unprecedented deficits, low IRS receipts due to high joblessness, and tremendous annual debt service payments. The US will have lost much of its capacity to aid those in need because its own financial resources will be exhausted.

Anyone capable of thoughtfulness ought to hope the CBO is wrong.

Douglas A. McIntyre