This post discusses the natural rate of unemployment and the various reactions to changes in this number. Recently the natural rate of unemployment has increased, and many equate this rise to a band-aid covering a bullet hole. They argue that the natural rate of unemployment is stagnant, and raising its value is nothing more than deciding arbitrarily that the current unemployment rate is not a problem and adjusting statistics to reflect that. What advocates of this theory don't realize is that, like the business cycle, the unemployment rate has its natural peaks and valleys. The natural rate of unemployment takes into consideration the amount of people who are frictionally unemployed, and this can increase or decrease with changes in the market. Additionally, during and after a recession, like the times we are facing now, bouts of unemployment tend to last longer and structural unemployment is more of a factor in the overall unemployment rate. Both of these factors will increase the unemployment rate, meaning that this increase in the natural rate of unemployment is not as much of a cause for concern and some are making it out to be.
This idea of increasing the natural rate of unemployment to cover up the political repercussions of increasing unemployment can be related to poverty in America. It has been agreed upon by most economists, poverty experts, and politicians that many people living above the poverty line still live in poverty. As standard of living increases in America, the qualifications of partaking in our society become more expensive. The poverty line for one person under the age of 65 is $11,702. This easily can prevent absolute poverty (preventing starvation), but other commodities that American citizens have come to expect such as air conditioning or gas for a car probably will not be affordable. An approach to aid these people that are above the poverty line, but still having difficulties living on a day to day basis would be to raise the poverty line so they are able to receive benefits. However, politicians avoid this at all costs, because it would result in an increase of people deemed "impoverished" in America under their watch. Despite the fact that changing the poverty line might increase the quality of life for millions of Americans, politics get in the way, similar to the issue of unemployment. Politicians use the excuse of "increasing natural rate of unemployment" to help mask the truths of the results of their leadership. In many cases, politics are put before the lives of the people the leaders are in office to support. It is a slippery slope, but one we must try to travel.
In class we discussed the rate of growth of the economy as compared to the rate of growth of our population. When our output grows at a slower rate than our population, it is inevitable that the unemployment rate will go up. In order for unemployment to stop increasing, our growth rate must soak up the new population constantly entering the work force. This is a possible explanation of why the unemployment rate is so high, and also contributes to Taylor's point that the unemployment problem is cyclical, not structural. But this also makes it difficult to blame any one administration because of the many factors that contribute to this rate. By acknowledging that the problem is cyclical, he also makes it clear that the best way to the government to intervene is through fiscal policy. Redefining the unemployment rate standard will only hide the mistakes of the government and contribute nothing to the economy but false advertising. Taylor's frustration is warranted. The economy itself will not benefit from a new standard of unemployment, but rather the politicians that are supposed to fix it.
I don't think we're in danger of re-defining normal unemployment as over 7%, and I don't think John Taylor does either. What he seems to be worried about is the unemployment issue dropping out of the national political conversation, which I also don't see happening. Even if Obama didn't use the word "unemployment" in his inauguration speech, it's not as if everyone has completely forgotten that it's a problem. In any case, Taylor seems to blame Obama for not doing enough while Thoma blames the Republicans for thwarting his efforts, a standard example of how party politics isn't very helpful when it comes to economic policy.
Unemployment is an issue that absolutely needs to be addressed, but the fact that the President was reelected with such high unemployment means that politically speaking, its not an issue that takes precedent. As long as Republicans control the house, there isn't much that Obama can do to stimulate growth in the economy and lower unemployment. While 7% unemployment will never be seen as "normal," it will stick around for a while until we can either raise exports or spending, and hopefully create more jobs.
Poverty and unemployment, as was mentioned already, are very closely related. One of the biggest issues in the American system is that the poverty line, and the means of determining it, is completely antiquated. It has not been updated nearly enough to stay current with inflation and massive price increases over the years. These kind of issues are found across the board in national issues. It is similar to the idea that unemployment only represents actively searching people without a job. This is completely different from the actual number of people without jobs. These issues stem from the same root problem: in American party politics, you can take almost nothing at face value. That being said, I really do not think unemployment is going to disappear from national conversation. I also, personally, see no reason to argue about Obama's record with respect to trying to fix unemployment. The facts are the facts. Obama and his team have created and drafted bills, presented them to the house and the Republicans have filibustered and filibustered. During Obama's first term, when he had a Democratic Majority in the house, republicans in the senate filibustered 375 bills that the Democratic house passed. That is absolutely embarrassing. Unemployment can only become a real issue for which we are progressing towards a solution when both parties agree to work together and stop with these childish games.
The cyclical changes in the unemployment rate that Taylor seems to be commenting about relates directly to the Phillips curve. When unemployment rises, the inflation rate falls and then as unemployment falls, inflation rises. The natural rate of unemployment stems from this idea that there is an equilibrium of the two rates. However in the 90s, the correlation between the two seemed to be non-existant as unemployment fell to 4.2 percent and inflation also dropped to 1.5 percent. I think the opposite could be happening now as both inflation rates and unemployment rates have increased together. I believe it is up to the government to create more jobs and decrease this growing unemployment. Small businesses need to be freed from their high tax rates, so that they can begin to hire more people. I definitely agree that one party or person cannot be blamed for the rate of unemployment today in the same way one party or person cannot fix the unemployment rate. It is going to be up to both parties working together to create a bipartisan plan that can create more opportunity for the unemployed and the people that are out of the labor force.
I believe the brevity of both the article and the quote from John Taylor are a weak point in the authors argument that the high unemployment rate is cyclical not structural. It is not that I don't believe this to be true, it is just that I believe evidence rather than the opinion of another writer would be more convincing and would have set up the author to discuss appropriate fiscal policy changes that should be on Obama's mind. Though I know that politics play a large role in economists opinion of policy I felt as if the only purpose of the article was to say that someone with opposing views agreed with the author rather that addressing the actual issue or how that could/should shape future policy.
I do find it interesting that the "normal" unemployment rate used to only be 4%. However, I find this argument ineffective. I do think that the "normal" rate can change, as Lizzie said earlier, reflecting the business cycle. Obviously if there is less spending, companies must hire less, and therefore more people are unemployed. I think that it is unfair for him to blame the president for these issues. Despite whether I agree with Obama's policies or not, I do not think that the typical business cycle can be blamed on one person as this brief argument seems to be attempting. As Nicky stated, in order to fix this problem it will require both parties working together and really deciding what will work best. This argument seems too opinion based and does not provide enough facts to effectively prove that unemployment is cyclical and not structural.
I think it is silly for Taylor to act like Obama is turning a blind eye and the American people are becoming desensitized to high levels of unemployment. You don't have to focus on those who lack skills/ are uneducated, ask any recent college grad how easy a job is to come by. No one has forgotten the recession we recently experienced and no one believes the employment rate is something that can be swept under the rug without the nation's attention. At any rate, both of the contributors in this article seem to have a political agenda to be tending to. It can sometimes be hard to focus on the facts when a writer offers undisguised shots at another, but we should all find peace in the fact that neither economist seems to believe structural unemployment is the main problem at hand. If that were the case, there would be no telling how long it may take the market to adjust and jobs to open up.
If we take a step back from the specifics of this article I think we can return to the great economic debate of the importance of institutions. Economists like North and Weingast would see this unemployment as an issue that needs to be addressed directly and fixed by codification. Whereas Hayekians would see this as a necessary "trough" that Obama or anyone else in Washington can't remedy by simply signing a bill. Now obviously the real "solution" is some mixture of the two, and it is up to our nation's financial and political leaders to see the issue out not by just riding out the storm or seeking an immediate legislative solution but some mixture of these two.
I agree with Ellen, it is very interesting that the unemployment rate used to be only 4%, hard to believe by today’s standards. When Humphrey says, “so I am worried when people stop talking about today’s very high unemployment rates as if they were normal” I think that also needs to be viewed with a certain amount of perspective. We are in different times than we were during President Ford’s terms and we need to focus on our issues now rather than receding into past issues. I also agree with Nicky, as I believe we all should, that the two parties need to work together to form a solution rather than blaming each other.