Wow, I didn't realize my sabbatical has lasted this long! And there's so much to catch up on! I've been busy doing some rather tedious research on your behalf that I will be sharing with you over the coming weeks. But first things first.
I popped up my browser a few days ago only to see the following headline: "US jobless rate takes biggest jump since '86!" OMG! The sky is falling! One more piece of evidence that things are terrible! I clicked through to the article to find that the national unemployment rate had soared - soared - from 5% to 5.5%!
Now certainly that's not good news, particularly if you're one of the unemployed. But, as is so often the case, all of the news articles seem to lack historical perspective here.
The fact is that the unemployment rate has never been, and will never be, zero. There are a lot of reasons for this. But economists talk about something they call the "Non-Accelerating Inflation Rate of Unemployment," often abbreviated "NAIRU." The theory goes that there is a threshold of unemployment where, if governments try to push the unemployment rate any lower, the inflation rate tends to accelerate. Economists being economists, there is no agreement on exactly what the NAIRU is, and it may in fact be a different number at different points in history, but it is generally agreed to be somewhere between 4.3% and 7.3%.
So...is an increase from 5% to 5.5% a reason for caution? Yes, it probably is. Is it a reason for breathless, "the sky is falling," reportage? No. Particularly when the cost of energy has gone sky high over the last couple of years. It is, I believe, at testament to the incredible robustness of our economy in recent years that we have been able to absorb the spike in energy prices without having the economy go totally into the toilet long before now.
The fact is that over the last 50 years, the national unemployment rate has seldom been under 4%, and has spent most of its time between 4% and 6%. (See http://en.wikipedia.org/wiki/Image:Us_unemployment_rates_1950_2005.png) My younger readers may be interested to know the following: Inflation was just over 8% in 1975 - the second highest peak in the last 50 years. It was already starting to fall when Jimmy Carter was elected in 1976, dipped briefly below 6% in 1978 - his second year in office - then climbed steadily back up through the remainder of his presidency. When Ronald Reagan was elected in 1980, it was already nearly back to 8%.
The popular wisdom, reinforced by most of our media outlets at every opportunity, is that "Reaganomics" - the concept that cutting taxes would actually lead to greater tax revenues through the economic growth that would result from letting people keep more of their own money - didn't work and should therefore never be tried again. But the reality is that after peaking at almost 10% in 1982 (the highest rate in the last 50 years), Reagan's policies took hold, and the unemployment rate fell steadily thoughout the rest of his presidency, and stood at about 5.75% when he left office.
Nothing lasts forever, though, and the economy always has, and always will be, cyclical. President Bush the Elder had the misfortune to take office just as the cycle was turning. During his presidency, the unemployment rate rose from just over 5% to just over 7.5% - leading to the legendary "It's the economy, stupid!" theme of Bill Clinton's successful campaign in 1992. Unemployment was already falling when President Clinton took office in 1993, and, regardless of his other shortcomings, he did manage to not screw up the economy for most of his presidency. In this, he was helped considerably by the fact that the Republicans took control of Congress in 1994 and prevented the enactment of flagrant new government spending programs, e.g., "HillaryCare."
In the year 2000, the dot-bombs started going off, and the economy started to turn again. After hitting a low of roughly 4% in 2000, it jumped to 5% in 2001. President Bush the Younger was of course blamed for this, although he had little or nothing to do with it. (See my earlier post on the phenomonon of "hysteresis.") Of course, we all know what happened in 2001. The terrorist attacks just greased the slope that the economy was already on. Fortunately, the much-maligned "Bush Tax Cuts" were enacted, and, despite what you may have been told, they worked. After peaking at just over 6% in 2003, the unemployment rate started falling steadily again.
So what should we take away from this history lesson?
- The economy is cyclical. It will always have its ups and downs, and it doesn't turn on a dime. It takes a while before the results of any particular economic action will actually show up. This is, in fact, a cause for some concern, because it is entirely possible that the run-up in fuel prices simply hasn't had time to ripple through the entire system yet - we just don't know for sure.
- At the moment, however, the sky is not falling. The 5.5% rate of unemployment is still pretty darned good by historical standards, and is well within the generally accepted range of the NAIRU - although, again, that's not to minimize the hardship if you're part of that 5.5%.
- The historical evidence of the last 25 years shows that "supply side economics" actually does work, and tax cuts actually do spur economic growth, and do increase tax revenues as a result. That should cause at least a momentary pause for thought when you hear the Democrats promising that if they are elected this year they (1) will not increase taxes, but (2) will allow the "Bush Tax Cuts" to expire. This is disingenuous at best, and downright dishonest at worst, because allowing the tax cuts to expire would actually result in a HUGE tax increase, which is NOT what you want to happen at a time when the economy is hitting a rough spot in the road.
- If the economic cycle is indeed turning, then whomever takes office in January of 2009 is going to face a delicate balancing act to avoid a recession. If the Democrats get their way, and taxes do in fact go up, the next four years probably won't be pretty, and, since most of the electorate apparently doesn't grasp the principle of hysteresis, President Obama would get the blame. The Senator from Illinois should be careful of what he wishes for, because I don't think that would be the kind of "change" the American people are looking for.
Thanks for listening.
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