Unemployment and the Fiscal Bluff

"For my part, whatever anguish of spirit it might cost, I am willing to know the whole truth; to know the worst, and to provide for it." --Patrick Henry
2012-12-07-digestGaming the numbers

November's jobs numbers are out and, though they're "better than expected," they're far short of a real recovery. The U.S. economy added 146,000 jobs in November, and headline unemployment dropped to 7.7 percent, the lowest rate since December 2008. But that number is deceptive.

The rate dropped because some 542,000 people left the workforce. If labor participation remained the same as it was in January 2009, headline unemployment would be 10.7 percent. The U-6 rate, which includes the underemployed and those who have given up looking for work, is 14.4 percent. Notably, the unemployment for blacks, who gave Barack Obama 96 percent of the vote, is 13.2 percent. Of the jobs created in the last five months, 73 percent of them were in government. Additionally, September and October numbers were revised down by a total of 49,000 jobs -- awfully convenient now that the election is over!

At least one person thinks that unemployment is a huge boon for the economy. House Minority Leader Nancy Pelosi (D-CA) says that unemployment insurance benefits -- which by the way cost $520 billion over the last five years -- "probably are one of the most important stimuli for the economy." So if more people become unemployed, the economy will grow even faster. Problem solved.

The Bureau of Labor Statistics did note one bright spot: "[O]ur analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November." That's good news, but Hurricane Barack and the fiscal bluff certainly are depressing the recovery, such as it is. Some 23 million Americans remain unemployed or underemployed, and millions more who are working haven't received pay increases in years to keep up with inflation. The economy is in a holding pattern while politicos in Washington preen and pontificate about the cliff.

The Congressional Budget Office (CBO) estimates that under "current law," i.e., if (when) we go over the cliff, the federal budget will still increase by 55 percent over the next 10 years, while tax collection will soar to an all-time high of 21.4 percent of GDP. CBO estimates, however, assume no economic change from higher taxes, which is unrealistic. In other words, higher rates won't necessarily bring in the projected revenue because businesses and consumers will change their behavior to avoid taxes. Government spending is also a tax in the sense that every dollar spent by the government must first be taken out of the economy.

A final fiscal cliff note: Barack Obama is demanding a return of the top tax rates to those in effect during the supposed nirvana of the Clinton years, and he's likely to get all the rates of Clinton's era. In fact, that's what former DNC chief Howard Dean said is necessary. "[T]he truth is everybody needs to pay more taxes, not just the rich," Dean admitted. "[W]e're not going to get out of this deficit problem unless we raise taxes across the board, to go back to what Bill Clinton had and his taxes." They're coming for the middle class, too, and some of them aren't afraid to say so.

 

To get spending to Clinton levels, however, the federal budget would have to be cut by an astounding 37 percent. According to Breitbart, "Adjusted for inflation, Clinton spent $2.24 trillion in 1993; that level stayed relatively stagnant, rising to $2.41 trillion in 2001." Obama is now spending nearly twice that. So instead of the $1.2 trillion in baseline "cuts" over 10 years outlined in the sequester, Congress would need to make real cuts of that much this year alone.

As we all know, there's a greater chance that pigs will fly.