Thursday, July 9, 2009

Unemployment doesn't always peak at recession ends


HT: James Pethokoukis

The unemployment rate peaked long after the end of the prior two recessions (1990-91 and 2001). The Obama administration may be starting to worry that the current recession could play out the same way. And they should worry, particularly if they consider what the past three recessions all had in common: ineffective fiscal policies.

Bush Sr. famously raised taxes in 1990, and the breaking of his no-new-taxes pledge coupled with a relative weak recovery helped elect Clinton in late 1992. Bush Jr. championed an ineffective stimulus policy in 2001 (mainly tax rebates), and the economy suffered through a "jobless recovery" until he passed a genuine tax-cutting stimulus bill in mid-2003, after which the economy almost immediately boomed. And now Obama has overseen a raft of tax rebates and income redistributionist policies, and his spending plans all but guarantee higher taxes.

I've argued that the current recession is most likely over, but I don't see a strong recovery, nor do many people. Unless we get a rather strong recovery, the unemployment rate is unlikely to peak anytime soon, and I've said before that it could be a year or so before we see any significant improvement in the job market.

The best way to solve this looming disaster for Obama's approval rating is to recall the current stimulus bill and replace it with a genuine stimulus bill, one that relies mainly on cuts in tax rates for workers, investors, and businesses.

12 comments:

Eric said...

Interesting Post.

My question is don't you think the "looming disaster for Obama's approval rating" is a good thing if you are opposed to his statist policies?

Scott Grannis said...

Of course I do. See earlier post (Obama in free-fall?). Either Obama changes his ways or political opposition will make it very difficult or impossible for him to proceed.

pjwash said...

Given the recent increase in the federal minimum wage, we should note that 70% of states with highest min wage all land in the top 10 in unemployment...Is there a correlation?

Love the Blog..

djakel said...

I can give you the exact plan that will accomplish your solution: Eliminate ALL personal and corporate federal income, savings, investment, and social security taxes and replace them with a 23% federal sales tax with a prebate for necessities(aka the Fair Tax Proposal).

Then, we can pass the Fair Tax in each state at about a 10% rate.

We instantly become the most attractive country in the world for investment capital. Employees take home their GROSS pay and only pay taxes when THEY CHOOSE to buy something. New investments will pour in and jobs will skyrocket. The icing on the cake: criminals, and former tax cheats cannot escape paying taxes any longer. That's about a 10-15% tax cut for us honest taxpayers.

Of course, we must still reduce spending no matter how we tax our citizens, but at least taxation would become totally transparent, making tax rates much harder to raise.

If you are not on board with this plan, please tell me why.

Scott Grannis said...

pjwash: the minimum wage is indeed a bad idea. Did you know that about 2% of workers in the U.S. earn minimum wage? It is a law that harms all those who are trying to get their first job but don't have training or education. If they could start out earning less than min. wage they could get experience and then move up.

Scott Grannis said...

djakel: I have no problem with the Fair Tax. Either a Fair Tax or a flat rate income tax with no deductions would be nirvana in my book.

Mark A. Sadowski said...

Scott,
With all due apoligies, Duh! Of course the unemployment rate is a lagging indicator. That being said it is very likely that the unemployment rate will go much higher before the economy stabilizes. I expect unemployment to go double digit this summer and to go as high as 12% nationally and possibly as high as 20% in California (let's face it, California sucks!) before this is all over. But resistance to doing anything about this is hampering efforts on ameliorating its disasterous effects.

JonCatalán said...

Maximum unemployment should be around when the economy bottoms out. For example, the highest rate of unemployment during the Great Depression was 1933, just around when the economy bottomed out (or most malinvestments were cleared by the market).

ronrasch said...

The minimum wage makes a high rate of unemployment among persons with disabilities even higher. In Ohio at 5.50 an hour many employers would willingly higher teenager with disabilities and accept a lower productivity level until my students learned their jobs and good work habits. It was a win win transaction ditto for typical teens many of whom are less motivated than teens with disabilities. Even before the recession the $7.00 minimum wage law & rising has made entry level jobs for my folks much harder to find.

ronrasch said...

Scott, could it be the the risk premium is higher because the federal government will not get a good return on the bad asset purchases and consumers are tapped out (housing will not return quickly and may continue to sink. You are my favorite blog John Hussman is second he states "Given current household leverage from mortgage and consumer debt, coupled with the inability to access mortgage equity withdrawals (that largely fed spending increases during the most recent economic expansion), my concern continues to be that unemployment will behave as a leading indicator rather than a lagging one" I think you and he both see inflation kicking up with periodic upticks before it gets rolling. John sees it happening in a couple of years. You have your fingers on the pulse of credit flows to let data decide if the markets start using the money the fed has supplied. I understand the mortgage resets are coming this year which will put downward pressure on home values and keep consumers from borrowing. If you agree with the consumer retrenching, then will "borrowing" by consumer be put off for a while? I know that you are going to allow market data guide you in this call.

Scott Grannis said...

As I've said in other comments, I just don't think "credit" or deleveraging are important. This recession started with a big financial panic over counterparty risk. No one knew who could be trusted. Transactions ground to a halt, inventories accumulated, production was cut back, cash flow was lost, and jobs were lost. The panic has now passed and inventories are declining, production will ramp up and jobs will begin to return. The economy will have undergone a painful transition away from housing and towards (.... ? --I'm not sure yet).

ronrasch said...

Scott, I know that you are a supply sider as am I. As you so correctly pointed after the initial hit of the market freeze up, the economy was starting to comeback without any stimulus. I wish pundits would focus on this insight. I might give Obama's popularity free fall and extra push. However, the stimulus bill crowding out funding for productive investment, an onerous regulatory climate, the prospect of higher taxes-all of this even without cap &trade with expensive health care reform crowd out productive investment in the USA.
So, if the mortgage resets come and the production we both look for has not kicked in fear may not abate. America will eventually triumph but not before we vote the Keynesians out of office.