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State of the Union (2011)

Presented by Malcolm Robinson

I was unhappy with President Obama's State of the Union Address last year and I am even more distressed this year by his refusal to address the number one problem our economy faces today - mass unemployment (I may be wrong but at least I'm consistent).

Figure 2Figure 1

At the moment there are 14.7 million unemployed Americans by the basic measure of unemployment reported by the government. This translates into a civilian unemployment rate of 9%. Let's take a look at Figure 1 to place the current unemployment rate in historical perspective. Notice that the pace of the present recovery lags behind the pace of the recovery from the last severe recession of 1982. In Figure 2, I have compressed the time frame to look at just the last five years to show you how far removed we are today from what we viewed as normal just a few years ago. For a broader definition of the unemployment rate (what 60 minutes called "the real unemployment rate"), look at Figure 3 and see that the U6 unemployment rate is presently at 16%. To see why this recession has been so bad for labor, let's look at Figure 4 and see that the median duration of unemployment spells (presently at 21.8 weeks) dwarfs the severity of all of the U.S.'s post WW II recessions and recoveries.

Figure 6Figure 5

It's possible to ignore this unemployment if you thought that the U.S. economy had fundamentally changed. This "structural" unemployment would be resistant to business cycle swings and would qualify as the new normal. I don't believe the data supports this position. If you look at Figure 5, you'll notice that in all industries, the unemployment rate is higher than it was in 2007. Unemployment has pretty much doubled across the board. With 14.7 million unemployed and 3.1 million job openings, there are 4.7 unemployed workers for every job opening (see Figure 6). We are living through a cyclic jobless recovery driven by our financial crisis.

By ignoring mass unemployment and focusing instead on deficit reduction and an upbeat view of America's future, the President ceded the narrative to the Republicans and validated their view that deficit reduction is the pressing issue facing the U.S. today. Well, isn't it? Shouldn't we cut back on spending today to save our fiscal future? Aren't we broke? -Speaker John Boehner said so, and as Shakespeare would remind us, Boehner is an honorable man.

Figure 7

We're not broke. If we were broke, no one would lend to us because they would know we couldn't pay them back. If they did lend to us, it would be at a very high rate of interest (Greece and Ireland, for example, can borrow today at a rate of interest 600 basis points higher than Germany is charged). Look at Figure 7, 10 year treasuries are currently at historically low values (The 10 year treasury is a good indicator, by the way, of where mortgage interest rates are headed.) If our deficit were a "problem", the government would be competing funds away from the private sector and driving interest rates up. This isn't occurring.

Figure 9Figure 8

In order to evaluate the President's proposals and the House Republican's proposal for deficit reduction, we need some more information on the budget which is contained in Figure 8 and Figure 9. Eighty percent of the budget is devoted to mandatory spending and to national defense. 20% of the budget, therefore, is considered discretionary spending. Both the President and the House focus their attention on this portion of the budget. Does this make sense? I don't think so. Let's look at Figure 10 and then Figure 11. Figure 10 is a little old; it comes from 2006, but I like it because it shows the impact of the budget on future interest payments. In 2006, it was evident that future interest payments would eventually swallow our economy unless mandatory spending was controlled and perhaps revenues got raised (Rob Portman must have understood this in 2006; he was director of the office of Management and Budget 2006 through 2007). So what is it that is driving our future deficit insecurity? It's not the 20% of the budget that the President and the House are concerned with. Figure 11 shows non-interest spending is projected to decline as a share of national output from its present value. Its Medicare and Medicaid growth - not Social Security, by the way, which grows from 4.5% to 6% of GDP and then stabilizes at that value in 2030. The great problem we face then as a nation is how do we restrain the growth of health care spending without compromising on quality and reducing incentives for beneficial future innovation? (I teach a First-Year seminar that examines this question.) I believe the Obama health care plan puts us on the correct future path to achieve these goals but only time will tell if I'm right. Look more closely at Figure 12. If all of the Bush tax cuts are allowed to expire and the Alternative Minimum Tax is kept in place, our fiscal future looks a lot less bleak. Obviously tax increases would solve a lot of our nation's fiscal woes but Republicans don't want to understand this. (The top portion of Figure 12 shows the future if the tax cuts expire; the bottom portion shows the future if the tax cuts are extended.)

Figure 13Figure 12

The Obama plan to partially freeze the budget is not going to solve our problems and is mainly a form of political posturing. The Obama policy proposal doesn't budge us off of our trajectory toward fiscal destruction. What he should do is explain how his health reform might help us achieve fiscal stability but he doesn't seem to want to talk about health reform. What about the House Republican plan to cut 60 to 100 billion dollars out of discretionary spending? The Federal budget is about 3.5 trillion dollars; these cuts can't lead us to budget balance today and also don't alter our future fiscal trajectory. (The budget cuts can be usefully paired with the tax cuts for the top 2% of all income earners passed last December. Republicans demanded tax cuts for the top 2% of all income earners. Now they want to cut Pell Grants, shrink Head Start and shred the social safety net Ronald Reagan promised he would never harm.) What is the projected impact of the Republican cuts? Goldman Sacks believes they will reduce growth from 1.5 to 2% in the 2nd and 3rd quarters of 2011. Up to 650,000 Federal Government jobs will be lost, according to Scott Lily from the center for American Progress, and another 325,00 jobs will be lost as aggregate demand shrinks. That's 975,000 jobs on top of the 460,000 jobs lost at the state and local level since January 2009 (see BLS data Figure 12 and Figure 13.) Given the state of the labor market, this is a reckless and cynical policy proposal which will cause terrible pain today without a redeeming future benefit. I will be even less optimistic about our future if the President doesn't seize the opportunity to fight back and change the narrative that's driving our politics today. The Republicans say they are only following the will of the people; I believe the will of the people would be different if the people weren't so poorly informed by their leaders.