Obama’s Unemployment Trap

Barack Obama’s unemployment trap, based on the level of wages offered and the tax paid on those wages, could help explain why a majority of Americans disapprove of the job he is doing in handling the economy.  Last week, when Christina Romer announced her resignation as the only woman in Obama’s Council of Economic Advisers, the U.S. Department of Labor reported more troubling news.1

 

Weekly jobless claims increased to 479,000, the highest level in four months, leading to new worries about the possibility of a U.S. economic recovery.  June data were revised to show that 96,000 more jobs were lost than the 125,000 originally stated, and only 31,000 private-sector jobs were added to payrolls, less than 40% of the 83,000 first reported.  In July, 71,000 new jobs were added instead of the 100,000 economists had expected, either number a fraction of the amount needed to keep up with new employees entering the workforce, not counting the eight million jobs lost during the recession.  The overall unemployment rate remained near double digits, 18.75% higher than the unemployment rate promised by Obama a year and a half ago and approximately double the natural rate of unemployment in the United States.2 

Two different policies, however, could be pursued by lawmakers in Congress to increase aggregate demand in the economy with a reduction in the number of Americans caught in Obama’s unemployment trap. 

The first is to allow teenagers in the United States – of whom more than one-fourth now find themselves stuck in Obama’s unemployment trap – the freedom to offer their services to work without being held back by the minimum wage.  Teenagers would probably be the first to understand such a strategy to reduce their high unemployment rate through the same basics of economics they learn in high school: a price floor set above the equilibrium price results in a surplus of supply.  With many 16 to 19 year-old workers living with parents or relocating to academic housing environments, there is a good possibility that teenagers would spend their new-found income to meet their growing demands, thus increasing aggregate demand in the wider economy.3 

The second policy is to keep the tax cuts enacted by President George W. Bush from expiring at the end of the year.  Analysts at Deutsche Bank have said that allowing the tax cuts to expire would eliminate the possibility for an economic recovery.  Tax cuts also stimulate aggregate demand by permitting individuals and families to spend their hard-earned money as they desire, without forcing them to hand it over for government spending.  But the biggest benefit of Bush’s tax cuts is how they increase the amount that small businesses have to invest in hiring new employees, thus decreasing the number of American workers caught in Obama’s unemployment trap.4 

“What made the unemployment of the thirties so disastrous and caused it to last so long was principally a lack of understanding of the dynamics of early-twentieth century capitalism,” says Columbia University’s John Garraty in Unemployment in History: Economic Thought and Public Policy, explaining how “ignorance and official incompetence” contributed to high unemployment during America’s second Great Depression.5 

With Obama pricing teenagers out of work and his recommendations to stifle hiring with higher taxes, Congress in the early twenty-first century can no longer afford to accept policies that are grounded in ignorance and official incompetence, catching so many workers in Obama’s unempolyment trap when a majority of Americans already disapproves of the job he is doing in handling the economy.6 

Source: U.S. Department of Labor

References 

1.  Graham Bannock, Ron Baxter, and Evan Davis, The Economist Dictionary of Economics, Fourth Edition (Princeton: Bloomberg Press, 2003), 392.  Ronald Grey, “Romer’s Resignation,” Ideas for Presidential Leadership, https://ronaldgrey.wordpress.com/2010/08/06/romers-resignation

2.  Jeff Baxter and Lucia Di Leo, “Initial Jobless Claims Show Surprise Increase,” The Wall Street Journal, August 6, 2010, U.S. Watch.  Motoko Rich, “Nation Lost 131,000 Jobs as Governments Cut Back,” The New York Times, August 7, 2010, A1.  Jackie Calmes, “Top Obama Adviser on Economics to Step Down,” The New York Times, August 5, 2010, Business Day.  David Brauer, “The Natural Rate of Unemployment,” Congressional Budget Office, http://www.cbo.gov/ftpdocs/80xx/doc8008/2007-06.pdf

3.  Gregory N. Mankiw, Principles of Economics, Fifth Edition (Mason: South-Western, 2007), 113-131. 

4.  Bannock, Baxter, and Davis, The Economist Dictionary of Economics, 373-374. 

5.  John A. Garraty, Unemployment in History: Economic Thought and Public Policy (New York: Harper & Row, 1978), 2. 

6.  Peter Hart and Bill McInturff, NBC News/Wall Street Journal Survey, http://online.wsj.com/public/resources/documents/wsjnbcpoll-06232010.pdf.

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