Welcome as it is, progress toward finally capping the Gulf oil leak has not resolved the biggest conundrum facing US President Barack Obama before the midterm elections.
That conundrum, which reclaims center stage in Washington this week, is this: Why is unemployment so high?
The whodunit has flummoxed economists in both parties for a year. Last year, as the new Obama administration grappled with the financial crisis, joblessness rose nearly two points beyond customary recession forecasts.
Part of the uncertainty concerns why. More consequential now, as the administration and the US Congress determine what to do, is whether the unemployment spike reflects a short-term or permanent shift in demand for workers.
“The stakes are enormous,” said Alan Blinder, a Princeton economist who advised former US president Bill Clinton, because the answers are “going to dictate the pace at which jobs come back.”
And that, in turn, may dictate whether Democrats keep control of Congress or surrender at least one chamber to Republicans. So long as the job market remains weak, even substantial achievements like the passage of new financial regulations will not alleviate voter discontent with the party in power.
With 8 million jobs lost since the recession began, “We’re climbing out of a gigantic hole,” Obama’s top political adviser David Axelrod said. “Until we fill the hole, we’ll get limited credit.”
Unemployment began rising steadily as Obama, then a US senator, wrapped up the Democratic presidential nomination in 2008. That May, the jobless rate increased to 5.4 percent; by December it reached 7.4 percent.
In January of last year, Obama’s economic advisers predicted that unemployment would peak around 8 percent if Congress passed their recommended stimulus program. As Republicans never tire of pointing out now, the rate hit 10.1 percent by October of last year and has fallen less than 1 percentage point since.
In part, the White House responds, that’s because contraction of economic output was much larger than expected in late 2008 and early last year. Yet the rise in unemployment far exceeded what economists would have forecast even had they known that. Under Okun’s Law, a formula for the relationship between output and unemployment described by the 1960s-era White House economist Arthur Okun, the jobless rate at the end of last year would have been around 8.3 percent instead of 10 percent.
“I don’t blame the administration for being off in these forecasts,” said R. Glenn Hubbard, dean of the Columbia Business School and chairman of the Council of Economic Advisers under former US president George W. Bush.
He called the unanticipated rise in unemployment “a mystery.”
Christina Romer, who leads the council now for Obama, said, “We’ve done a lot of things to look at possible explanations.”
Analysts examined whether the troubled housing market created “job-lock” by preventing potential employees from selling homes and moving toward new opportunities. They also considered whether extended unemployment benefits deterred others from going back to work. They concluded that such factors could not explain the magnitude of job losses.
Instead, their analysis pointed toward the effect of the financial crisis on business owners who reacted to the fear and uncertainty by laying off employees in extraordinary numbers.
The US$787 billion stimulus law has lifted employment by roughly 2.5 million jobs, outside analyses have found, but that has not been enough to reduce the unemployment rate substantially. Nor are there signs that business investment or consumer demand will do so soon.
A rapid productivity increase, as businesses got more output from fewer workers, raises the possibility that employers might rely on smaller payrolls long after economic conditions improve.
“That’s the million-dollar question,” Romer said.
She and Hubbard agree that such a permanent shift is unlikely. However, they disagree sharply on how to accelerate hiring now.
Hubbard suggests reduced business taxes. And he insists that Obama will deter small business hiring if he allows the Bush tax cuts for the highest earners to expire, since many of those earners run small businesses.
Obama advisers say extending those top-end tax cuts represents an inefficient way to spur hiring. They favor two measures that the Senate returns to this week: extended benefits for the unemployed, who they say are more likely to spend and spur the economy than top-earners are, and a new US$30 billion small-business lending program.
For Blinder that doesn’t go far enough. He favors New Deal-style hiring of workers onto public payrolls, since “we’re in pretty much a jobs emergency.”
At the White House, Axelrod says voters “aren’t necessarily prepared to turn back” to the Republicans he says “dug the hole” of joblessness to start with.
However, unless Democrats make that argument more effectively, the jobs emergency will remain a political emergency for Obama and his party.
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