Wednesday, September 8, 2010

Subprime housing collapse makes economy look worse than it is; extended jobless benefits have caused jobless rates to rise

A year after the US economy stopped falling, we are still mired in "the worst labor-market crisis since the Great Depression," writes Laura Tyson in The New York Times. Voicing the consensus of the left-liberal economic establishment — she's reportedly a leading candidate to head up President Obama's Council of Economic Advisers — Tyson argues that the US unemployment rate, still stuck at 9.6 percent, is reason to try "a second fiscal stimulus" to raise "aggregate demand." She's wrong in a number of illuminating ways.

First, the highest unemployment rates are highly concentrated in relatively few states — largely the ones with the highest home-foreclosure rates. That suggests that the root problems are localized, lingering debt woes — so a nationwide quick fix designed to entice people to borrow more and save less is doubly off-base.

Two-thirds of the states have jobless rates lower than the national average, which is an amalgamation of 3.6 percent unemployment in North Dakota and 13.1 percent in Michigan.

For most of America, this has not been the worst postwar labor-market crisis. True, the unemployment rate did reach a postwar high this year in three states hit hardest by the boom-bust cycle in housing — California, Nevada and Florida. Unemployment also hit postwar peaks in Georgia, North and South Carolina and Rhode Island in 2010 and in Kansas last year. For all other 42 states, however, unemployment reached higher peaks during the recessions of 1976 or 1982.

Tyson's second problem: This stubbornly high unemployment is not simply the result of sluggish growth.

Industrial production has been rising steadily for 13 months — the same 13 months in which the unemployment rate has been above 9 percent. Manufacturing, consumption and business investment have all been recovering — yet the unemployment rate has been higher than it was when the whole economy was collapsing.

The president's Council of Economic Advisers agrees that unemployment is about "1.7 percentage points higher than would have been expected given the behavior of real GDP." But the reason is clear: The US has for the first time extended jobless benefits beyond one year, to nearly two.

In "The Stimulus for Unemployment" on this page last November, I explained how extended jobless benefits have had the predictable effect of raising the duration and rate of unemployment. Citing academic studies, some by economists in the Obama administration, I estimated that extending benefits to 99 weeks had raised the unemployment rate by about two points. (The CEA's 1.7 percentage point estimate invokes the same math, but without explanation.)

The long duration of benefits alleviates the pressure to accept a less-desirable job too quickly; as a result many people spend longer between jobs. That boosts unemployment rates because more people wind up being recounted, time and again, in monthly surveys.

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