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Why is Unemployment Too Damn High?

After watching 3 PhD economists (Thomas DiLorenzo, Richard Vedder, and Josh Bivens) bumble through the question “Why is unemployment so high,” it is apparent that those who should know the answer to this question don’t.  Before I answer that question, I must define and correct some fundamental errors that 2 hours of wrestling in Ron Paul’s new subcommittee failed to address.


  1. The core of our nation’s monetary policy problems is NOT the Fed, it is fractional reserve banking which gives bankers undue control of and enrichment from the economy.  If we are going to insist on engaging in the fraud against man which is fractional reserve banking, the Fed actually helps to mitigate the damage of that fraud, and is for lack of a better word, “necessary” within that system.  So is FDIC insurance which Vedder went on record as opposing.
  2. Full employment is NOT the proper or real objective of economic policy, it is full prosperity.  Sound crazy?  Would you like to maintain the same standard of living as you do now by only working 6 months out of the year instead of 12?  Such would be the natural result of productivity gains in a free market system.  Full employment can be achieved any number of prosperity destroying ways.  Our hunter-gatherer ancestors were gainfully employed round the clock forging for food.
  3. Money has 3 basic functions:  a medium of exchange, a unit of account, and A STORE OF VALUE.  Pro-inflation monetary policy kicks out the 3rd leg of the stool and leads to all kinds of unintended consequences related to related to price distortions and price signaling, which leads into…
  4. Inflation doesn’t merely alter the general price level; it also (and most importantly) alters the RELATIVE price level.  If a 2% inflation rate were to merely multiply every single item in the economy by exactly 1.02, it wouldn’t make a difference at all.  It makes a difference, and regressively taxes lower and middle incomes, because things like food and fuel increase by 20-50%, while wages stagnate, and the price of a new TV falls 29% due to hedonic adjustments.


Now, to answer the question, “Why is unemployment so high?”


The short answer:  REAL incomes and the resulting total demand for goods and services have fallen.  It happened as abruptly as it did because unsustainable credit allowed total demand for goods and services to exceed real incomes for the better part of the 2000’s, and that credit quickly dried up when evidence started to show that these loans spelled financial ruin for their lenders.


More on fundamental point #4:  During expansionary “boom” cycles, prices and wages both increase, but not at the same rate.  Prices outrun wages (see The Relationship Between Wage Rates and Unemployment, by Emmett Welch, 1933).  In extreme and infrequent cases, such as the Great Depression, or our current malaise, this price/wage gap is quite high, consider how many times median annual earnings it took to buy a median house in most of the US by 2007.  Just as the average worker couldn’t afford to buy his own manufacturing output toward the end of the Roaring Twenties, by 2007 the average worker couldn’t buy a home in most of the country without lying about his income.


What is the correction to this expansion of unsustainable prices?  DEFLATION.  While wages do fall during deflation, prices fall faster so that REAL wages increase.  Of course, as Bevins pointed out, this raises the real cost of debt.  If you have a 150k mortgage, and your wages fall by 20%, your mortgage just got a lot more burdensome.  However, Bivens errors by not considering the escape route of default.  The US did away with debtor’s prisons over 150 years ago.  When loans default, it is the lender who loses the most.  Prices must fall to levels that incomes can afford if we are to get out of this mess.  Policy designed to prevent this natural cure from running its course prevents the economy from really recovering and is merely protectionism for banks under the guise of economic relief.


Bivens finished his list of errors by demonstrating a clear misunderstanding of Keynesian economics (his bread and butter) by conflating a change in the real money supply with a change in the nominal money supply.


Other contributing factors:


  • Anti-competitive regulation, mostly at the state and local level.
  • Bold-faced monopoly making through abusive intellectual property law
  • Regressive taxation through the payroll tax that chokes the income of the middle class
  • Chaining health insurance to one’s employer encourages longer work weeks, and discourages part time employment


While these 4 contributing items did not acutely precipitate our current malaise (that distinction belongs to credit collapse), their existence certainly is not helping any recovery.