The U.S. Bureau of Labour statistics reported the June unemployment numbers and they were not good principally because the government sector continues to cut jobs- a very bad policy in a recovery period and the private sector still refuses to spend its large surpluses on employment creation in the U.S. The combination is toxic for the unemployment rate which rose to 9.2 %. The U.S. economy is now 20 months on from the month in which unemployment peaked at 10.1 % in October 2009. How does this compare to previous recessions ? The following information is derived from the historical statistics available from the Bureau of Labour Statistics.
In October 1973 the U.S. unemployment rate reached a cyclical low point of 4.6 %. It then rose to a peak of 9.0 % in May 1975. 12 months later it had fallen to 7.4 %. 20 months later it had risen to 7.5 % .24 months later it had fallen to 7.0%. It only fell to the pre-recession low of 4.6 % 22 years later in November, 1997 !
In May of 1979 unemployment reached its cyclical low of 5.6%. It then rose to its peak in November 1982 of 10.8 %. 12 months later it had declined to 8.5 %. 20 months later it had fallen to 7.5%. 24 months later it had fallen to 7.2 %. the low of 5.6 % was not reached again until May of 1988.
In March of 1989 unemployment was 5.0 %.It then began to rise and peaked at 7.8% in June of 1992. 12 months later it had fallen to 7.0%. 20 months later it had fallen to 6.6% and 24 months later to 6.1%. It only fell back to its pre recession low of 5.0% in June of 1997.
In October 2006 unemployment reached its cyclical low of 4.4%. It then began to rise reaching its peak of 10.1% in October 2009. 12 months later it had fallen somewhat and reached 9.7 % .20 months later it is 9.2 % after having fallen to 8.8% three months earlier.
It seems clear that recessions always take some time for there to be a strong enough recovery to substantially lower the unemployment rate. This recession was clearly very severe and the unemployment rate has been very slow to fall in any sort of substantial way. The rate 20 months after it peaked still remains stubbornly high, in fact, the highest of any of the four we have examined. There is now clearly a case to be made for further job creating stimulus focused on infrastructure and other schemes which guarantee job creation in either the public or private sector.
For those who argue that the U.S. cannot afford to undertake these measures they need to be reminded that a deficit on the government side is matched by surpluses on the other side. The American federal deficit is someone else’s surplus. (See the discussion of this in Robert Eisner’s work How Real is the Federal Deficit, p.3ff.) For the economy to recover and employment to grow it is necessary to recycle those surpluses into investment and job creation. That is the function of deficit financed public investment. It channels idle surpluses of excessive liquidity that are trapped in the system as excess savings into creative investment. So long as the bulk of these surpluses are held by domestic savers as opposed to foreign ones the financing of the debt by tapping into the surpluses is a stimulus for the economy once they are spent on productive investments.It is important to understand that investment and spending creates future income out of which savings can follow.It is investment and spending that is the creative engine of the economy. More on this tomorrow.