10% unemployment and rising

The Obama/Goldman Sachs administration has brought its bonuses back, but unemployment continues to ratchet upwards. The headline number today of 10.2% is dreadful.

The Economist is far to sanguine on the turnaround being imminent. Employment will not improve for a long while, maybe decades, because it is the only mechanism keeping a floor under aggregate demand. It is both ironic and fitting that a magazine calling itself "the Economist" exhibits the profession's disdain for accounting and financial operations. To wit:

Politicians will focus on how to respond to voters’ demands for action. On Friday Barack Obama was expected to sign into law a hotchpotch of stealth stimulus measures. They include some badly designed but popular measures such as letting money-losing companies claim tax refunds against profits earned up to five years earlier and an extension to the tax credit for buying a home. A third measure, extending unemployment benefits for some who have lost their jobs, will alleviate hardship and boost demand but will probably raise, not lower, the unemployment rate. Richer benefits encourage workers to look for a job rather than quit the search, and to turn down unsatisfactory job offers.

Rubbish.

"The US built all these houses, and is now richer in stuff than ever before as a consequence, and then everyone loses their job." Doesn't that seem weird to you? But at its heart, that is the argument freshwater economists make for the recession. The US's problems are purely nominal, the non-Govt sector wants additional financial instruments to add to its net savings, and the one entity capable of providing those instruments is either not doing it, or doing it in a way that poorly targets the non-Govt sector demand.

The best part of the Obama bill was the extension of unemployment benefits. Unemployment benefits (along with taxing labor) is an "automatic stabalizer" that drives deficits higher as unemployment climbs. Higher deficits mean more non-Govt sector net savings, and hence, higher aggregate demand. It is an ugly way to do it, but at least it moves the right levers in the right direction at the right time. There are far better alternatives, but they were rejected by economists right and left. So we do it through unemployment.

If unemployment benefits expired, then being out of work would no longer drive deficit spending as much. The result would be far higher unemployment as aggregate demand took another leg down. That path, truly, leads to another Great Depression.