In the past week, we have heard over and over from several politicians that it is wasteful to not attack unemployment. Unemployment is not only bad for the usual and obvious reasons, but now we are learning that if we do not attack unemployment quickly, its negatives will ossify. Long term structural damage will be the result of moving too slowly. They argue that we must move quickly to full employment.
How can one argue with laxity when it comes to unemployment? You don't have to know someone enduring the hardships of unemployment to see how devastating that condition can be. Loss of income. Loss of pride. The list of negatives is too long to list here.
One can argue how to best reduce unemployment. I have a friend recovering from surgery. I wish she could get rid of that cast and go dancing tonight. Even if we could remove the cast and go dancing in her kitchen (it is Covid you know), it wouldn't be a good idea. It is going to take time for her foot to heal. I am trying to learn to speak Spanish. I'd love to speak Spanish to others. But I am definitely not ready for that yet either.
Things take time. And while our politicians might have good hearts when it comes to the unemployed, I wish they also had good brains too. Unemployment has always been referred to as a lagging indicator. Those words mean that the unemployment rate lags the economy. When the economy recovers, it takes a while before employment catches up. There are lots of reasons for that. But the primary one is uncertainty.
Imagine going through a recession. Your firm had to cut back output and it had to lay off workers. Profits became losses. Not a good time for anyone. Then the economy starts to recover. More people are buying your goods. Many firms react cautiously. Is the recession REALLY over? Let's wait and see before we start making big investments -- let's wait before we start hiring a lot of employees. If the recovery is a flash in the pan, you don't want to have to reverse all those decisions. For the time being we have plenty of inventories to satisfy the new demands.
In a nutshell -- unemployment is a lagging indicator.
In the 2008-9 recession, employment dropped from 137.7 million to 129.9. It took 5 years (2014) for employment to return to 137.7.
Now let's look at the graph below. I won't discuss every recession (indicated by vertical bars) but notice the lagging unemployment rate. You see the lag, but first notice the unemployment rate at the beginning of a recession. For example, before the 1975 recession the unemployment rate was around 5%. After rising considerably after that, it came down but never got back to 5% even by 1980.
Before the 1990 recession the unemployment rate was around 5%. It took until well after 1995 to return to something near 5%.
Again, before the 2007 recession the unemployment rate was around 5%. It was after 2015 before it got back to that range.
Stand back and look at the map. Since 1972, how many times did the unemployment rate fall below 6%? 5%? Not many.
Is "full employment" a realistic target?
Look at the chart another way. Look at those nice time periods in which we did get the unemployment rate down. How long did that phase last? And then what happened?
Reminds me of dieting. It is one thing to have a sensible diet. It is another thing to try to fit into those jeans you wore in high school. So your diet works and you fit into them one more time and then what? Soon you are back to wearing that mumu.
In February 2020, employment was 152.4 million. It fell to 130.3 million. As of December, it rebounded to 142.6. It ain't back to 152.4 yet -- but it's only been one year!
Why and how do today's anxious politicians today think they are going to use a huge stimulus to move us quickly back to unemployment nirvana? Do they plan to continue raising the national debt and keeping interest rates at zero for years? If so, how many years? If they overdo the stimulus, then what? If my friend tries to walk too much on her healing foot, then what? I think we know the answer to both questions.
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