Regarding the Unemployment Rate
I want to thank the Memphis Democrat for regularly publishing articles from our elected congressional Missouri and US House and Senate members. I appreciate the privilege of being kept informed of the current political workings by our representatives, MO Senator Cindy O’Loughlin and US Senator Roy Blount. I also get regular up-date emails from Mo Congressman Sam Graves. But I am afraid I have succumbed to the all-too-prevalent confusion and distrust of information that comes from exposing myself to multiple conflicting sources of information on the same topics. I know that in an election year particularly, when different parties are vying for our support, there will be a preponderance of offensive and defensive attitudes, each party trying to make its case for why they should be trusted to represent the American People.
Because one hears so much polar opposite information about important national issues, I have started to try and research specific points of contention on my own. My own “Diving Down the Rabbit Hole”, if you like. And with that in mind, I would like to address the recent article by U.S. Senator Roy Bunt published in the Memphis Democrat on Thursday, January 16, 2020, “It’s Been A Great Year For America”. It was nice seeing information that paints such an encouraging picture of the US economy and if I hadn’t become so distrustful of all the recent conflicting views/facts in the news, I would have been glad to applaud the current administration for all their good work. But times being what they are…
The really nice thing about Senator Blount’s article is that he addresses specific issues and provides supporting numbers. This makes it relatively easy to investigate, although numbers can still be open to interpretation. With that in mind, I would like to address the unemployment rate of 3.5%. Senator Blount cited several policies put into place by our current administration which he believes have led to the lowest unemployment since 1969.
First, I needed to understand what an unemployment rate means. I thought it meant the percentage of all persons age 16 to 65 who could not get a job. It actually means the percentage of employable civilians, age 16 – 65 who are currently unemployed AND ARE ACTIVELY looking for a job. About 63% of eligible workers in the US currently have jobs. This number has been as high as 69% in the 1990’s, but after the Recession of 2008, it has dropped to where it currently sits since 2014. That means that as of now, 37% of eligible workers are not working. Most of these unemployed people are not actively seeking jobs- they are going to school or are in training, or retired early, or are a homemaker, or on unpaid leave, or on strike, or have just given up on trying to find a job, to name a few reasons. The Dept. of Labor conducts two surveys to figure out the employment rate. 1) They call a percentage of households and ask if anyone is looking for a job. 2) They collect information about employment, hours and earnings from about 160,000 businesses in 400,000 workplaces. So the current 3.5% unemployment rate means that out of every 100 people they got data on, 3.5 people were seeking employment, 63 people were employed and 35.5 people, for whatever reason, weren’t seeking employment.
Speaking of the Recession of 2008 in which the unemployment rate was 9.9% in 2009, unemployment rates have dropped almost 1% every year since then, with the biggest drop between 2013 – 2014. Since 2015, the average drop each year has been around 0.5% bringing us to our current level of 3.5%. The Federal Reserve sets the “natural rate” of unemployment at 3.5 – 4.5%, and since they started tracking unemployment rates after the Stock Market Crash of 1929 leading into the Great Depression where the unemployment rate in 1933 was 24.9%, the US average has been around 5.5%.
So what was the chief cause of the Great Recession in 2008 and its high unemployment? And what policies where put in place to bring the recession to an end? To get some answers, first I had to research the Great Depression. It seems the Market Crash of 1929 caused the ruin of many banks who had invested their depositors’ savings heavily in risky stock market transactions. One out of every four Americans who had trusted a bank to keep their money safe lost their life savings during the Depression. So in 1933, President Roosevelt signed into law the Glass-Steagall Act which prohibited banks from using their depositor’s money for high-risk investments. This law worked pretty well until the US entered a more global market in the 1970’s. The bankers complained that with these restrictions, they could not compete against foreign markets. So eventually loop holes were found and exploited and then effectively the law was neutralized by the Financial Services Modernization Act signed by President Clinton in 1999. Unemployment was 4.0 that year.
With the restrictions removed on what kind of investments a bank could make with their depositors’ money, risky business became business as usual. Banks again started playing with Wall Street. A particularly lucrative market strategy was something called “sub-prime mortgage lending” where the banks supplied mortgages to people who were not considered good financial risks so they could buy a house during the housing boom and bolster the housing industry. These mortgages were then “bundled” and were bought and sold on the stock market as a commodity, with buyers mostly thinking they were getting a solid investment. But the market speculation was based on the housing boom and risky investments and when it all went bust in 2008, so did the mortgage companies, the banks and Wall Street. Unemployment went to 9.9% within a year as businesses faltered and people were afraid to spend any money or invest in any start-ups. Prompt response by the government (they had learned their lesson from the Great Depression that the government had to intervene hard and fast), led by President Bush, Jr, resulted in the approval of a $700 billion bail-out for the banks and security companies, as well as to some big auto makers who had got caught up in the mess. Fortunately, only $450 billion was needed to get these players back on their feet (the government bought up shares in the failing companies/banks/businesses and, by 2012, the government had actually made money by selling these shares off at the now higher market value). When President Obama took office in 2009, instead of returning the $250 billion left-over from the money approved by congress, (the government had borrowed mostly from Social Security and government retirement pensions with a portion borrowed from foreign countries), the American Recovery and Reinvestment Act was signed which, in the form of tax cuts, stimulus checks and public works poured out a total of $831 billion directly into the hands of consumers and small businesses. This effectively stopped the Recession within a year, but at the cost of driving the US deficit from $161 billion in 2007 to $1,413 billion in 2009. Congress also passed the Dodd-Frank Act in 2010 to again regulate the financial markets and protect the consumer from any further risk-taking activity by their bank.
So our current national 3.5% unemployment rate is definitely below the US average of 5.5%, but it has been heading that way since 2009. President Trump’s Tax Cut and Job Act did not go into effect until 2018. Are we really sure we can give the credit of the low unemployment rate to the current administration. Could we not just still be enjoying the $800 billion injection into the economy in 2008-2009? Now it does take some time for new policies to take effect, and the unemployment rate usually lags behind major changes. We might better see the results of President Trump’s efforts over the next several years. But just a little heads-up. Banks are pushing the current administration to repeal the Dodd-Frank Act as banks say it is too restrictive. Sound familiar? I can only say, fool me once, shame on you. Fool me twice, shame on me.