Regime Uncertainty and the Obama Administration—Why Unemployment Remains so High
Report by Howard Myers
If you didn’t join us the evening of February 6 you missed a great evening. The event was co-hosted by Hillsdale for the second February in a row.
Dr. Wolfram explained that although we are no longer considered to be in a recession we still have high unemployment. A primary definition of a recession is two quarters in a row of a declining GDP which ended in June of 2009, however we still have a high unemployment.
With the economy growing very slowly and unemployment still well over 8% (what we really need is 4.5% to 5%) the real problem is long term unemployment.
In March of 2008 we had 1.3million people unemployed for 27 weeks or longer and in Aug of 2009 we had 5 million unemployed for 27 weeks or longer. This was brought home to him as he had lunch earlier in the day with two high school friends, one unemployed for two years and the other for 14 months. Of the unemployed the median is 21 weeks with 42.9% unemployed for 27 weeks or more.
What does not show up in the unemployment numbers is those employed part time because they cannot find full time work. In January of 2012 we had 8.2 million people in this category. In addition there are a vast number of the discouraged workers that have given up and are no longer counted.
Dr. Wolfram believes one reason unemployment has lasted so long is the uncertainty of the taxes and regulations. Private investors are reluctant to risk capital if they don’t know what the health care costs are for new hires or tax rates. Dr. Wolfram referred to an article written by Robert Higgs in which he described the collapse of private investment due to drastic changes in taxes, fees and regulations. This lack of certainty led to continued unemployment. The article was written in 1997 regarding the Depression in the 1930’s and argues that this lack of private investment is the primary reason for the prolonged depression in that era.
Dr. Wolfram made a compelling argument that without some confidence in economic stability private investment is not going to flourish.
Consumption is actually not down with the recession, private investment is. And if a company is going to expand and hire people private investment is required.
One source of uncertainty is the Affordable Health Care Act. (Obamacare) This is 2200 pages long and generated 28,000 pages of regulations. As Pelosi said, we have to pass it to find out what’s in it but apparently we still don’t know all that is in it. We do know it will cost you more to hire people.
Follow this with the Dodd Frank Act, the impact of which is still unknown since it isn’t fully understood. It still isn’t clear how to comply with most of the provisions.
So what do we do when we want to expand but don’t know the health care costs, premiums, taxes, financing, etc? We hire people part time.
With all these unknowns why would anyone expand?
Why would you buy a house when you don’t know what the government is going to do? What program will they come up with next?
Unemployment was high in the 1930’s for the same reason it is high today.
Our public debt is 10.1 trillion dollars or 67%of GDP. The only other time we have exceeded 50% is from 1942 to 1956. On top of that we have the unfunded liabilities. The Medicare and Social Security is reported as 38 trillion dollars but the auditors believe this is understated but even at the lower number it is staggering.
A major reason we don’t have a lot of inflation right now is that banks are holding 1.5 trillion in excess reserves. Normally they hold no more than 2 billion. When they start lending this out the inflation will increase.
The GDP increased by 2.8% in the 4th quarter but would have to be well over 3.0% to be able to drop unemployment.
Dr. Wolfram feels that the unemployment rate will remain around 8% this year and no real positive changes will happen unless there is a change in the white house.
If it were up to him what would he do?
Dr Wolfram answered over 30 questions during the Q&A and his entire presentation was very well received. It was a great evening.
Check out our past presentations!