Monday, December 26, 2011

Mike Konczal on actual unemeployment

Mike Konczal ask about the actual reate of unemployment in light of the rather unusual conditions surrounding this recession — persistent high unemployment and underemployment, with a bulging drop in participation rate.

What is the Real Unemployment Rate, and How Could We Tell?
by Mike Konczal

This is doubly a disaster in that it is not only actual, in spite of widespread lack of recognition in the media, but it is also completely unnecessary, as MMT shows. The sectoral balance approach predicts unemployment when the combined saving desire of the domestic private sector and the external sector is not sufficiently offset by a deficit ("dissaving") of the government sector. This is explained by the identity stating that the balances of the government, domestic private, and external sectors sum to zero. Thus, if demand leakage to saving by non-government is not offset by government, then the figures will adjust accordingly, reflecting an output gap as business contracts.

The the sectoral balance approach is a macro approach and does not reveal how this will manifest in the economy wrt those affected. This is not only an economic phenomenon, but also a sociological and demographic one.

As Konczal observes, the present course of events is generational. This has generational implications broader than employment, as we see from restive youth not only in the US but also in various places around the globe. Spain, with youth unemployment above 20%, is a case in point.

The US has the financial capacity to counter its high unemployment by increasing its fiscal deficit in order to achieve a sectoral balance at optimal performance, which implies full employment. The US can do so because it is sovereign in its currency, so that the only contraint is availability of real resources. Availability of real resources is not an issue here, owing to the output gap and high unemployment. Under such conditions, injecting net financial assets into non-government by increasing the government's fiscal deficit in order to increase effective demand, which would spur investment, need not be inflationary.

On the other hand, Spain and the other countries of the EZ, have given up currency sovereignty in adopting the euro. As a result, they are no longer currency issuers but currency users and must obtain funding through revenue or financing.

The US, UK, and EZ are all experiencing generational unrest and restive youth. As currency sovereigns that issue their own currencies, the US and the UK have the means to deal with this issue directly by offsetting demand leakage to saving by increasing their deficits to make up for the leakage by increasing effective demand.

Presently, the EZ has not come up with a strategy for getting around its self-imposed limitations. Meanwhile, its policy of "expansionary fiscal austerity" (an oxymoron) is failing the people of many countries. This does not seem to be sustainable politically, even as TPTB kick the can down the road with temporary monetary fixes but continue to insist on a policy of austerity. Unless they change policy and strategy, their ad hoc tactics will fall short in dealing with the rising political problem. Time is running out for putting together a real fix before there are political explosions in Europe.

The same explosions will also occur in the US and UK unless the governments realize their ability to counter the situation and take steps to implement it. Time is not on the side of the status quo here.

Then there is the question of reform. If reforms are not instituted, another more serious financial crisis awaits. This is the elephant in the room that is being ignored. Another leg down from an already historically low level would be catastrophic economically, politically and socially.

Ignoring the sociological and demographic implications of the present situation is just marching toward the cliff.

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