Thursday, July 16, 2009

Unemployment: Peanut Butter and Jelly

Of all the economic trends, Unemployment seems the most important Political-Economy aspect at this point in time. Persistent high unemployment historically leads to a Political Anger Factor that unseats the powers-that-be.

Not discounting any other economic indicator, trend, or consequence, Unemployment rises to the top regarding importance. When John/Jane Q. Public can’t even put peanut butter and jelly on his/her table, everything else is of no Political-Economy importance.

If you were unlucky enough to live through the 1970’s, with price controls, increasing taxes, expanding government, over regulation, hyper inflation, 21% mortgage rates, 16% CD rates, and the drying up of consumer credit…..Unemployment was still the number one concern of households during the 1970’s.

Go back to the 1930’s. Unemployment was the number one concern.

Back to the future, the 06/2009 published unemployment rate is 9.5%. The true rate is likely 15% if you count the Self Employed and contract labor.

Lets call the collective attitude of the unemployed the “Political Anger Factor”. Historically the Political Anger Factor exponentially rises after unemployment reaches 10%. The Political Anger Factor is contagious as well. Those remaining employed begin to wonder how secure their job is given the large number of unemployed . That is, the Me-Next-Factor, which is the cousin of the Political Anger Factor, creates economic uncertainty.

What about the direction of Unemployment and the Political Anger Factor and Me Next Factor? On the rise?

Human Capital Unemployment is directly related to Capital. One must remember that Capital is unemployed at this point as well.

In the 1930’s, several of the lessons of the Great Depression never mentioned by Romer, Bernstein, Goolsbee and the gang are:

(1) Federal, State and Local taxes increased on consumers and businesses,

(1a) the increased taxes depressed Private Capital Formation,

(1b) Private Capital Formation leads to Private Sector jobs.

(2) Government Regulation increased significantly,

(2a) Government Regulation then affected business profit at the margin.

Hence Cap and Trade (a tax), Socialized Medicine (a tax), Additional Regulation (a cost), add to unemployment. Then the specter of increased Federal, State and Local taxes add to an employment freeze or employment reduction by employers. Increased taxes lower consumption by both consumers and businesses further accelerating unemployment. Increased taxes inhibit Private Capital Formation. That is, Private Capital Formation leading to Private Sector jobs is under assault.

Of course we do have the Stimulus Plan. The 800 billion, 100% financed by-the-way, Stimulus Plan based on Political-Political rather than Political-Economy. The most dismally designed Stimulus Plan of all time. You know, the Stimulus Plan that needs immediately recalled.

If one buys into the idea of Financial Sector Systemic Risk and the ensuing cascading effect, then one must understand that rising taxes and regulation causes the same cascading effect within the realm of Unemployment.

Hence the Social Policy (it can’t be characterized as Economic policy as its not based on Economics) coming from Political Leaders is creating an accelerated unemployment rate that will likely level off into a high and persistent unemployment rate. Hence the Political Anger Factor will rise significantly and persist.

A high persistent Political Anger Factor caused by high persistent Unemployment has historically unseated the-powers-that-be.

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