On Track for 14% Unemployment

Six months ago I caused a bit of a stir with the statement, "Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of (private business investment) is reversed." Well, if the next six months are a replay of the last six, the unemployment rate in June 2010 will be the equivalent of 13.4%.

Before I go any further, I need to point out that, given the way the government's "headline" unemployment rate is calculated, it can never reach 14%. This is because the civilian labor force includes only people who are working or have looked for a job in the previous four weeks. When the economy gets really bad (like now), unemployed workers get discouraged and give up looking for jobs. This causes the civilian labor force to decline as fast or faster than total employment. This, in turn, has the effect of keeping the "headline" unemployment rate artificially low.

Unfortunately, the American people don't experience government statistics-they experience reality. And, the reality is that we are on a straight-line path toward the equivalent of 14% unemployment. Here is what I mean.

In June 2009, the "civilian non-institutional population 16 years and over" was 235.7 million. Of these, 65.7%, or 154.8 million, were in the civilian labor force. Of these, 90.5% had jobs, yielding an official, "headline" unemployment rate of 9.5%.

The reported unemployment rate for December was "only" 10.0%. However, if labor force participation had remained at June's 65.7% level, the unemployment rate would have been reported as 11.5%-almost halfway to my prediction of 14% by June 2010.

During the second half of 2009, total employment declined by 2.2 million jobs. However, so many people became discouraged about their job prospects that the "civilian labor force" was 2.6 million lower than it would otherwise have been. This is why the December unemployment rate was reported at 10.0% rather than 11.5%.

According to last Friday's Bureau of Labor Statistics (BLS) report, total employment declined by 589,000 jobs in December. This is considerably higher than the average monthly job loss for all of 2009, which was 450,000. Accordingly it would not be unreasonable to project that, in terms of employment, the first half of 2010 will resemble the last half of 2009. If this occurs, unemployment (adjusted to a labor force participation of 65.7%) will reach 13.4% in June and 14% in August.

Economists in and out of the administration are proclaiming that, "the recession is over". This may be, but it doesn't mean that hiring will resume. The economy grew at a 2.2% annual rate in the third quarter of 2009 while total employment declined by 1.3 million. It is quite likely that the economy also grew in the fourth quarter, when total employment fell by almost 1.0 million. This process-rising GDP and falling employment-could go on for a long time. Here's an example of how.

When Circuit City went bankrupt, 34,000 people lost their jobs. However, no one has had to go without a flat screen TV because Circuit City closed. They just go to Wal-Mart or Best Buy. Competitors have been able to handle Circuit City's customers while adding few, if any, additional workers. Lots of struggling retailers could close and throw their workers onto the unemployment rolls without impacting GDP at all.

The huge Federal deficits are squeezing capital out of the private sector. When Circuit City was liquidated, the capital that was liberated went to pay off its debts. The banks and bondholders did not turn around and lend this money to Wal-Mart. Incrementally, they bought government bonds with it.

News reports say that the big banks are not making loans. This is not true. They are lending to the Federal government. They are doing this, not only buy buying government bonds directly, but by parking their reserves (which have increased by more than $1 trillion since the economic crisis hit) at the Federal Reserve, which is paying above-market interest on them. This allowed the Fed to buy $900 billion of mortgage-backed securities from entities like PIMCO, who turned around and bought-you guessed it-government bonds.

At the same time that it extracts capital from business, the "stimulus" bond sales are squeezing jobs out of the private sector. Unfortunately, most of the policy actions being considered to "create jobs" involve doing more of this.

Government is force. All government can do is to point a gun at someone and tell them that they can't do something that they want to do, or that they must do something that they don't want to do. Given that free markets are always trying to direct resources to their most profitable uses, any direct government intervention in the economy will make things worse. This negative impact shows up most quickly in total employment.

For example, there is talk of a program to force banks to lend to small businesses. Unfortunately, the capital the banks would lend under such a program would have to come from somewhere. The "jobs created or saved" by the new program would be trumpeted on "recovery.gov", but the jobs destroyed by draining capital from other areas would show up as lower total employment. This is exactly what has happened since the $787 billion "stimulus" bill was passed.

Recovery.gov claims that "stimulus" has "created or saved" 640,329 jobs since February 1, 2009. During this same period, the economy has shed 4.4 million net jobs and the unemployment rate (adjusted to a labor force participation rate of 65.7%) has risen from 7.7% to 11.5%. If we don't change course, get ready for (the equivalent of) 14% unemployment.