Wednesday, July 14, 2010

Misunderstanding the Recession

It should be no surprise that journalists have very little conception concerning the true cause of the high unemployment rates faced in America today. Accordingly, it also should be no surprise the the proposed remedy is absolutely worthless and counterproductive. An article in the news today, entitled "Why Everyone Suffers When Job Seekers Give Up", clearly misses the mark with its analysis of the economic realities.

Among the surprises in last month's job report was the downward slide in the unemployment rate from 9.7 percent to 9.5 percent. Most of the time, high unemployment rates are bad and low unemployment rates are better. But when the percentage of out-of-work Americans dipped in June, it was driven largely by a 652,000 drop in the labor force.

Some job seekers might see this, on its face, as a good thing--fewer labor force participants means less competition for jobs. The truth is much less helpful. When able workers drop out of the job market, their households make do with less income, and their long-term financial health may be threatened, as savings are depleted. The aggregate economy suffers, too, as it chugs its way out of recession--it loses their contributions as workers and their buying power as consumers.
The aggregate economy might suffer from workers abandoning their jobs and ceasing productive ventures, but the economy does not suffer at all from job seekers abandoning seeking jobs. Since they currently are producing nothing of economic value, their continuing to produce nothing of value results in no economic net change. It only reduces the amount of job candidates for the infinitessimally small amount of available jobs from a supermassive number to a merely extremely excessive one. How will companies ever find suitable candidates now?

The growth in discouraged workers is clearly correlated with the high numbers of long-term unemployed--as people who have spent a year or two looking for work unsuccessfully begin to lose the will to keep searching. With five job seekers for every job opening, and some jobs not likely ever returning, the search has been incredibly difficult for many. This is worrying, says Sung Won Sohn, an economist at Smith School of Business and Economics. "If you look at the total unemployment, about 50 percent are long-term unemployed ... and I suspect that a lot of these people are just dropping out of the labor force, saying 'this is just a waste of time,'" Sohn says. "It's not only an economic problem but a social problem as well. Many of these people are very able--they're in their forties, fifties, they still have quite a few years left in them."
Oh my, what a shocker! After unsuccessfully searching for a job for a long time, people are really giving up the search? I never would have guessed! How could they be so socially irresponsible? It's obviously not a waste of time to keep applying to jobs with a negligible chance of being hired and a slim chance of even getting an interview.

Discouraged workers can't help the economy move toward recovery, as they generally can't contribute to the aggregate demand without generating income, paying much in taxes, or consuming much, Autor says. Over the longer term, some discouraged workers will never return to the labor force and may depend on financial support from family members, or public programs such as federal disability benefits or Medicaid. "In addition to the losses these individuals suffer as a result of not remaining active in the labor market, their withdrawal is also an expensive proposition for the public," Autor says. "Prime age adults who exit the labor force permanently will generally receive considerably more in public benefits and transfer income than they will pay in taxes. Thus, in net, their withdrawal increases the dependency ratio, that is the ratio of non-workers to workers."
Now we're getting a little closer to the real issue. Although, a pivotal point is being missed. Not only are discouraged workers incapable of helping move the economy towards recovery, employed workers are similarly unable to help move the economy towards recovery. Our economy is lying in shambles because of the pervasive government intervention into the economy, the oppressive weight of taxes and regulations, and the global lack of understanding the long-term impact of debt, on a national or an individual basis. There is nothing economically wrong with discouraged workers depending on support from family members. However, when there exist public programs that support those who are not contributing economically to society, it distorts labor incentives. When the available jobs are extremely hard to get, and when there is incentive to give up and rely on government support, guess what choice people will generally make? The problem has two sides, but both sides have the same root cause. They are two sides of one coin. The reasons behind the lack of jobs and the reason why people can survive without jobs are one and the same: government intervention.

Retraining programs will likely be key to getting discouraged workers back into the workforce. "What's worrying is you have this sea of unemployed people who seem to not have the right skill sets for where jobs may be being created in this economy," says Joshua Shapiro, chief U.S. economist at MFR, an economic consulting firm in New York.
Of course, the solution advocated by our all-wise media is the same one propagated in society at large. If we just had more education and training programs, our economy would be better off. If people were better trained, or had more specialized training then there would be plenty of productive economic activities for everyone. As with most of the diagnoses and solutions offered by our benevolent social guardians, nothing could be further from the truth. The problem isn't a matter of education and training. Higher education is becoming increasingly useless in the modern economy. The reason we have an inadequate number of jobs is because incentives are distorted due to the government tinkering with labor prices, levying excessive taxes, creating an ever-increasingly incomprehensible labyrinth of regulations, and monkeying with the monetary system through the Federal Reserve System.

The solution is a return to true laissez-faire capitalism, where people can actually be rewarded for working hard and being innovative. Until there exist enough incentives for innovation and jobs for those who wish to be employed, it should be no surprise that people are abandoning the search for work. Until the systemic obstructions to the creation of jobs and economic innovation are removed, the incentives are distorted enough that people are simply going to play it safe. But, again, we the people are having the same tired cliches fed to us. More training, higher education and endless perseverance are the keys to individual economic stability. The problem couldn't possibly be a systemic or institutional one.


  1. Early on you seem to fall into the trap of assuming it's all about "creating economic value". All that economic value is worthless if we have an artificial system where it ends up being thrown away. The miracle of technology lets a small number of people create all the economic value that a larger number of people need. So it's silly to act like every single person needs to be creating something, or else they're economically worthless. If all the unemployed spontaneously started making widgets, what we'd end up with is a ton of widgets in our landfills and no real recovery.

    Laissez-faire capitalism only makes things worse, at least with the present setup. As long as you have a system where the economy rewards behavior which actively makes peoples' lives worse (rent-seeking, patent squatting, predatory towing, etc.), laissez-faire capitalism is an open invitation for every publicly traded corporation to engage in those behaviors to the hilt.

    The REAL solution is to guarantee everyone the very basics needed to survive with a little dignity. If there aren't enough jobs (due to technology) for everyone to have one, then that's a cold hard fact, and the way out is to allow those who don't get jobs to live a dignified life anyway.

    There's more to life than economic value.

  2. Silas, I don't think it's as simple as "laissez faire economics." True enough, the heavy hand of government is largely to blame for our current economic woes, but that's because the politicians are in bed with the business-folk. We've got a serious problem with crony capitalism, and as long as it persists, we're going to see largely the same problems.

    Xamuel - There is no way to "guarantee everyone the very basics," because nobody, but nobody agrees on what these "basics" are, least of all the people who are the recipients of them. European countries are having to backtrack big time on all their "guaranteeing the basics" economic policies because eventually, everyone wants a whole heckuva lot more than "basics." Further, the only way to get everyone "the basics," would be to start stealing a whole lot money from the productive members of society. We've already tried this kind of thing, and it was called the Soviet Union. It didn't work out so well.

  3. @Xamuel: I certainly don't believe that life is all about economic value. It is clear that jobs are about creating economic value. Therefore, when discussing jobs, economic value is the primary element of concern.

    @Duenes: The only reason businessmen are in bed with politicians is because politicians have too much power. If the government was limited and incapable of muddling the market, then businesses would have to succeed by natural competition rather than by fiddling with the rules and utilizing legal plunder. Crony capitalism only can exist when groups are capable of gaining political as well as economic power.