It was a matter of surprise for participants on a panel at the recent American Economic Association (AEA) meetings that unemployment had risen so sharply. The policymakers from Washington on that panel were the Vice Chairman of the Federal Reserve, Donald Kohn and Assistant Secretary of the Treasury of the United States for Economic Policy, Alan Krueger. Both are well-known economists.
The discussion was about time sharing as in Europe. That was the sentiment in the room. And Kohn had passed on the question to Krueger. Krueger, noting the unemployment surprise, was more inclined to work toward creating full time jobs. Still, the surprise was not explained. No one on that panel had any explanation, let alone hypotheses, as to why unemployment had gone up so sharply.
Understanding the economic condition is about observation. It is not about economic models first. The percentage of people unemployed, meaning technically those looking for work but cannot find it as a percentage of the total number in the work force, had risen from around 4 per cent in early 2007 to more than 10 per cent by the time of the AEA meeting in Atlanta in January 2010. Never mind those who dropped out of job search. When those are taken into account unemployment could be close to 20 per cent.
Clearly, the broad brush cause of it, confirmed by the gross domestic product numbers from the Bureau of Economic Analysis (BEA) is continued disinvestment in the economy. A parallel development was the credit crisis. The risky consumer and housing loans that were made out to the people were coming home to roost. All along, the caution of the Federal Reserve was financial education for the consumer and moral suasion for Wall Street.
Wall Street knew that they always had a safety net in monetary policy. If they got into trouble, the Fed would cut interest rates or come to their rescue employing ‘extraordinary measures’ as the Bernanke Fed calls them. The deadbeats of Wall Street had ensured that the entire United States government will mobilize to defend them both tangibly and intangibly with the hope that moral suasion will eventually work, never mind that everybody knew that it will not without the proper market mechanisms enforced by the government. Consumers, however, are not so lucky.
During the boom, good life on borrowed dime was the culture, fostered by the government and encouraged by the financial industry. Those consumers who were cautious, which includes most Americans, have managed to thus far dodge the bullet. The expectation that they may not be able to, even though many of them are still current on their debt payments, has led to Wall Street’s exuberance of fear. That concoction has led to the government’s exuberant largesse.
The reality, however, seems to be far more shrouded in deliberate confusion. When the government, in a bi-partisan manner, had to make the policy choice between saving consumers and homeowners or saving Wall Street, it provided lip service to the former and bailed out the business and law school buddies and former students of Ivy League college professors like Bernanke in New York. The intent was always clear: dump those consumers who did not understand the bubble and got themselves into trouble. Neighbors turned on neighbors in the name of individual responsibility exhibiting typical middle class American values, even as Wall Street was being paid-off trillions of dollars with nothing to show. The money was not trickling down soon enough for either well-paying jobs to return or for them to lower their debt burdens to increase their savings.
The unemployment was rising because the economic establishment was quietly purging all those consumers in the bottom fifth and quarter of the income ladder who were rendered delinquent by the bubble and focusing the recovery on the rest. The rise in unemployment was intended. It was signaled by the government when it stress tested the banks assuming around 10 per cent unemployment. It was not a surprise. Those consumers without the savvy or the wherewithal to navigate the ups and downs of the economy were allowed to fail and go bankrupt. Those financiers without the savvy and the wherewithal to navigate the ups and downs of the economy they themselves had engendered were bailed out, and perhaps for a reason: America wants to be Europe, as a bi-partisan matter.
The Democrats have been the Continentals and reformed European Jews since Wilson and the rise of socialism in Europe, the mishmash of everybody except the English whose integration into the society was subject to their own versions of social abuse just as that of the coloreds. The Republicans have historically been Anglophiles, since George Washington, emulating the British upper classes. The white social liberals who cannot go Republican are ending up in the ‘Live Free or Die’ camp of independents (the Reagan Democrats and the Clinton centrists). The coloreds and Asians are being claimed by black American political entitlement both on the left and the right, with that agenda being quietly led by this colored president. The politics of American society is in splinters.
The white boomer America in power is running scared as the 2050 census nears and this does not bode well for the future of the United States because it becomes the political fertile ground for bipartisan demagoguery.