Dec 13, 2013
Happy Days Aren’t Here Again
Posted on May 17, 2010
By Moshe Adler
The torrent of good news started before the first bailout dollars had even been paid. First, we were told that the bailout would prevent a significant increase in unemployment, and President George W. Bush even balked at extending unemployment benefits. Then we were told that without the bailout, the unemployment rate would reach 25 percent. Less talk about the unemployment rate followed when the story changed and we were told that the recession was actually over, since “the economy” was growing. Next we were told that we had turned the corner because the rate of unemployment was already decreasing. And finally, when the April unemployment figures were released on May 7 and showed that the rate of unemployment increased from 9.7 percent to 9.9 percent, the bad news appeared beneath headlines that announced the arrival of what was apparently the best news yet. “Economy Gains Impetus as U.S. Adds 290,000 Jobs,” read the headline in The New York Times. In the Los Angeles Times, the headline was “April Hiring Surge Largest in Four Years.”
How can higher unemployment be reported as good news? By pointing out that among the unemployed were 195,000 people who in March were classified as discouraged workers but in April joined the labor force. The growth of employment—290,000 jobs after all were added—caused the rate of unemployment to increase, because it drew the discouraged workers into the labor force. But this argument is misleading.
In fact, the number of the unemployed in April increased by 255,000 workers. This means that in addition to the discouraged workers, 60,000 workers who lost their jobs had also joined the ranks of the unemployed. While some discouraged workers did start seeking work, more of them stopped: In April the number of discouraged workers actually increased by 203,000 people. As a result, the rate of unemployed job seekers and discouraged workers together increased even more than the official rate of unemployment, from 10.3 percent to 10.6 percent. It is clear that in April things were really bad no matter how you count, provided that your count is complete.
But to fully appreciate just how misleading April’s “good news” has been, it is useful to examine the trajectory of the unemployment rate since April 2008, when the unemployment rate stood at 5 percent. The following May, the rate increased to 5.4 percent, which, according to today’s logic, should have been interpreted as fantastically good news, because the number of formerly discouraged workers among the unemployed increased by 357,000 workers in that month. Nevertheless, the rate of unemployment increased steadily, month after month, from April 2008 until October 2009, when it reached 10.1 percent, and it has been hovering close to 10 percent since.
What about those 290,000 new jobs, then? Seven million U.S. workers hold more than one job, and when one member of a household loses her or his job, another may be forced to seek work. Both are reasons that the number of people who need jobs could grow more than the number of jobs; to ignore this is to display a worrisome level of ignorance. Without these new jobs, things would surely have been even worse, but this does not change the fact that in April the rate of unemployment increased.
The claim that without the bailout we would have had 25 percent unemployment is a boogeyman. During the Great Depression, the unemployment rate did reach 25 percent. But the claim that the subprime crisis is similar to the Great Depression is spurious. The Great Depression started with a stock market crash. Why did this crash occur? To this day nobody knows, and one reason that nobody knows is that it was not limited to one industry, but affected all. It is not surprising, then, that the Crash of 1929 led investors to doubt that investments in almost any industry would bear fruit. The subprime crisis, on the other hand, was limited to one segment of one industry, and not only do we know what caused it, we also now know that it was fully anticipated by major market players. In what way are these crises similar?
The subprime crisis has led to a doubling of the rate of unemployment and caused millions of families to lose their homes. Not only has the bailout failed to prevent either disaster, but justifying it by invoking the Great Depression shook consumers’ confidence and probably played a major part in exacerbating them.
The solution to the high rate of unemployment is for the government to raise taxes, perhaps to the levels that existed during the presidency of Dwight Eisenhower, who, after all, was a five-star general and knew how to get things done. This money would be used to create jobs, but at the same time it would of course also give us the services that we desperately need, from a good public education system at all levels, to a housing program that assures every family decent housing for reasonable costs, to Social Security benefits that would permit old workers to retire and would obviate our need to gamble our retirement savings on Wall Street.
But let’s start by stopping the camouflage and by showing the real numbers in our newspapers so a meaningful national conversation about the economy can begin.
Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. His book “Economics for the Rest of Us: Debunking the Science That Makes Life Dismal” just won an IPPY (Independent Publisher Book Awards) Gold Medal.
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