Persistent High Unemployment Rates Hamper Recovery

Despite some positive economic news, unemployment rates have yet to come down. At Olympia Business Watch, Jocelyn McCabe provides the numbers.

Here in Washington state, we've lost 4.3 percent of total jobs, putting us in about the middle of the pack (28th), comparatively speaking.

Today's Wall Street Journal underscores the fragility of the recovery and the likelihood of continued high unemployment.

In Reason.com, Veronique de Rugy explains why the stimulus money didn't spur job creation. A snippet won't do her work justice - read the whole thing - but here's the crux. Citing research by Robert Barro of Harvard and Valerie Ramey at the University of California - San Diego, de Rugy reports that the problem stems from government spending crowding out private spending.

Both studies found that government spending crowds out the private sector, at least a little. And both found multipliers close to one: Barro’s estimate is 0.8, while Ramey’s estimate is 1.2. This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four. What’s more, Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases.

Why this crowding out of private spending? Government spending comes from three sources: debt, new money, or taxes. In other words, the government can’t inject money into the economy without first taking money out of the economy.

I like the way she frames it in her conclusion:

... government spending doesn’t boost national income or standard of living. It merely redistributes it—minus the share it spends on the bureaucracy that collects and spends our tax dollars. The pie is sliced differently, but it’s not any bigger. In fact, it’s smaller.

If government spending isn't the answer, more private debt won't by itself solve the problem, either, says Jeff Cornwall.

Debt is not the answer.  Certainly access to credit is important over the long-term, but we have structural problems in our entrepreneurial economy that are tied to high and complex taxes and over regulation.  But easy access to credit right now will make matters worse for many of these small firms by adding debt load to their overhead and doing nothing to improve their sales or their long-term cash flow. 

Incredibly - and counter-productively - policymakers appear tied to economic policies designed to impose more regulation, more debt, and higher taxes on a private economy desperate for relief. It's past time to reverse course and adopt pro-competitive policies to create jobs and stimulate demand.

UPDATE: White House economist Christine Romer just testified that the unemployment rate is unlikely to end 2010 much below its current level.