Labor market conditions continue to improve

The ongoing improvement in labor market conditions is about three years old now, and there are no signs that it is about to end. The U.S. economy is inherently dynamic; people and businesses adapt to adversity and cope with changing fundamentals. Resources have been shuffled from the housing sector to other sectors (e.g., mining and export-oriented industries). Costs have been cut, productivity enhanced, and profits have soared. All of this despite the efforts of politicians to stimulate the economy by transferring trillions of dollars from those who are working to those who aren't. (Over the past three years the increase in federal government transfer payments has been on the order of 4% of GDP—about $600 billion a year.)

As the top chart shows, corporate layoffs have already been cut to the bone; they don't get much lower than this. As the second chart shows, there is still room for improvement when it comes to layoffs in general, but at today's level (367K) we're not too far away from what is probably the minimum level of weekly claims (300K).

None of this is very surprising. What's different this time around is that we have yet to see much of a rebound in the economy (the output gap is a huge 13%). We're still waiting for the next shoe to drop: a surge in new investment and new jobs. For that we need more confidence in the future, and one good way to get that is for the federal government to stop trying to help. (Remember Reagan's famous quote: "... the 10 most dangerous words in the English language are ‘Hi, I’m from the government and I’m here to help.’") We need to simplify our monstrous tax code so that it stops distorting economic decisions; we need to lower corporate tax rates so that our businesses can be more competitive with those of other countries; we need to reduce marginal tax rates (by lowering and flattening our tax structure) in order to increase the incentives to work and invest; we need to reduce regulatory burdens in order to reduce the costs of starting and running a business; and we need to shrink government in order to free up resources for the more-productive private sector.