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Under the Microscope: Understanding Economics and the Unemployment Rate   

“She Sat like Patience on a Monument, Smiling at Grief.”

Twelfth Night, William Shakespeare

Introduction

     The unemployment rate is but one factor or variable in our economy. There are many others including:

  • Inflation
  •  consumer aggregate demand for goods and services
  •  governmental fiscal policy (spending and taxes)
  •  monetary policy (policies around the expansion or contraction of the money supply)
  •  private sector business practices including business contraction or expansion
  •  population expansion or contraction
  •  different industries
  •  technological development
  •  national and global politics
  •  Entrepreneurship
  •  skill sets and educational level of Americans today.

Then there is one important “juice of the economy” that affects everyone, and is known as Credit Availability. All these factors or variables affect each other to one degree or another.

A Sense of Bewilderment and Frustration

     Understanding the unemployment rate has never been a simple task. Complex interactive variables and a constantly changing economy sometimes seem to conspire to give the public a sense of bewilderment when trying to understand or figure out what is going on. It’s sad and disappointing when your close friends and/or family members just can’t seem to find a job. The Unemployment Rate is more than a statistic; it’s about real people, their lives, and their livelihood.

This bewilderment and frustration does cause anger creating a kind of collective social consciousness where everybody agrees on only one thing, namely: Let’s point a finger and play the “Blame Game.”

People want to blame the Congress, the President, or Democrats and Republicans in general, the Federal Reserve or its chairman, or the global economy when jobs are viewed as leaving the United States.

Economists aren’t too helpful sometimes because they cannot always agree on what is the best course of action for creating jobs or achieving full employment in the United States. Others prefer to blame labor unions, illegal immigration, Wall Street, or big business and/or small business.

As a blogger I can’t extricate the public from their frustrations, lack of knowledge, or prejudices.  However, one way I can help is to provide a more factual and theoretical basis for understanding what unemployment really is, and how it fits within the overall framework of what we call the economy. Under the microscope, here is some background which should help with understanding the economy.

Background

       Generally, astute observers might suggest that the problem of unemployment is somehow tied to the economy or business cycles such as (Expansion and Growth, Prosperity, Recession [or contraction], and finally Recovery). Other economists prefer the following descriptive terms: (Prosperity, Recession, Depression, and Recovery). The guy on the street might suggest that our economy simply involves only three cycles (The Good, The Bad, and the Ugly). All of this will become clearer later in this Blog.

Economic cycles, however described, do account for the lion’s share of the explanation of how the economy works, including how the Unemployment Rate fits in. Economic forces seem to have a life of their own. Nevertheless, other forces besides economic cycles are important.

The other explanation for the economy and unemployment rate relates to politics and government actions to deal with the economy and unemployment.

Current Economic Environment

     In the current economy the country does seem to be in a very long recovery cycle. Although business cycles always occur in the same order, the length of each cycle cannot easily be predicted.

Since much unemployment or underemployment occurs among the poor and the working poor, some people feel the replacement of lower skilled jobs with better technology and more jobs requiring higher skill sets has left the poor and working poor holding the bag. However, given that almost every profession experiences unemployment during a recession (engineers, scientists, teachers, highly skilled technicians, etc.) a reasonable person might conclude that unemployment affects everyone, not just the poor and the working poor.

Other targets for blame include: the rich and wealthy in society, poor planning of the job-seeker himself, and finally—the consumer for not spending enough money that would support and stimulate business. When business suffers as consumer demand ebbs, it creates the conditions that allows  a higher than normal unemployment rate.

How best can one unravel the various complexities of understanding the economy and begin to shed light on the unemployment rate? In an ideal world we all want full employment for our citizens. Unfortunately, no society ever lives in an ideal world.

     So what is the best course to understanding the complexities of the economy and the unemployment rate?

In a cosmic sense every variable affects every other variable to some degree. But in a down-to-earth way we have to remember the famous words of Jack Webb’s character Joe Friday in the hugely popular television series, Dragnet. “Just give me the facts, mame!”So, what are the facts?

     First we need to start with a few facts on the unemployment rate in America followed by an explanation of the various phases of the business cycle.

 

Unemployment Rate Data

 

The Unemployment Rate in the United States (January and December 2003-2013)

 

                               January                 December

2003                            5.8                            5.7

2004                            5.7                            5.4

2005                            5.3                            4.9

2006                            4.7                            4.4

2007                            4.6                            5.0

2008                            5.0                            7.3

2009                            7.8                            9.9

2010                            9.8                            9.3

2011                            9.1                            8.5

2012                            8.3                            7.8

2013                            7.9*

*As of August 2013 the unemployment rate in the United States was 7.3%, a level not seen since December, 2008. It went from a high of 9.9% in December 2009 to a low of 7.3% in August, 2013. This 2.6% drop in the unemployment rate occurred during the administration of President Barack Obama, who said “Yes We Can” while Republicans blamed him for the high unemployment. This was despite the fact they created the conditions that caused the unemployment rate to jump from 5.0% to 7.3% during the catastrophic economic collapse of 2008 which occurred during the last year of the Bush Administration.

Definitions and Concepts

    

 

Unemployment

 

There are four types of unemployment:

 

Structural Unemployment

     Structural unemployment is caused by the types of production and laws of an economy that govern whose skills are valuable in the marketplace.

Frictional Unemployment

     Frictional unemployment is associated with changing jobs, often because workers are searching for better opportunities or moving to new locations.

Cyclical Unemployment

     Cyclical unemployment is caused by changes in real GDP that are associated with the business cycle.

Seasonal Unemployment

     Lastly, seasonal unemployment is caused by changes in employment associated with changes in the seasons.

 

The Basic Business Cycle

The four phases of a business cycle are briefly explained as follows:

1. Prosperity Phase

When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.

The features of prosperity are:

  1. High level of output and trade.
  2. High level of effective demand.
  3. High level of income and employment.
  4. Rising interest rates.
  5. Inflation.
  6. Large expansion of bank credit.
  7. Overall business optimism.
  8. A high level of MEC (Marginal efficiency of capital) and investment.

Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity (buying and selling goods and services), it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

2. Recession Phase

The turning point from prosperity to depression is termed as the Recession Phase.

During a recession period, economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits.

The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. An increase in unemployment occurs with or following a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

Many people talk about a “mild recession” and even “severe recession.” These are all matters of degree and economists can endlessly debate which is which. However, almost no one wants to consider or talk about the more devastating type of decline called a Depression.

3. Depression Phase

When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.

The features of depression are:

  1. Fall in volume of output and trade.
  2. Fall in income and rise in unemployment.
  3. Decline in consumption and demand.
  4. Fall in interest rate.
  5. Deflation.
  6. Contraction of bank credit.
  7. Overall business pessimism.
  8. Fall in MEC (Marginal efficiency of capital) and investment.

In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point).

4. Recovery Phase

The turning point from depression to expansion is termed as Recovery or Revival Phase.

During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising (many economists assert that consumers are the driving force of any economy), production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This further increases investments.

The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated. There is an increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands. Revival slowly emerges into prosperity, and the business cycle is repeated.

Thus we see that, during the expansionary or prosperity phase, there is inflation and during the contraction or depression phase, there is deflation.

Economics and Employment in a Nutshell

     As our population increases there is more consumer demand. And, there are those that say that the driving force behind any economy is the consumer. This aggregate demand for goods and services causes businesses to have to keep up with consumer demand. Business does this by expanding or creating more products (inventory) and needed services.

This creates more money for businesses through profits and may require credit and acquiring loans to expand a business as well. In turn, business must hire more people.

Hiring people involves more money for salaries, insurance, office space, vehicles, etc. But here is the rub: In order for business to pay for all this expansion, they must raise the prices on goods and services. This, as everyone knows, is Inflation.

 As prices go higher consumer demand begins to lessen, and people get laid off when consumer demand begins to really tank. The sad truth is—as prices come down (deflation), the unemployment rate goes up. When the economy heats up again, then the expansionary business cycle causes businesses to once again hire more people. Near full employment (not real full employment) is achieved during the economic cycle known as “Prosperity.” The variability one finds in the unemployment rate is a direct result collectively of the four business cycles, and political factors as well.       

Political Influences on the Economy

     In the final analysis, a high unemployment rate is due to both political factors and the recessionary/depression economic business cycles. Economic business cycles are inevitable, but very difficult to predict how long each cycle will last. However, political factors make their own contribution to a high unemployment rate. And, everyone should be aware,  the order of economic cycles cannot be altered. Although timing of economic cycles can’t be predicted, they can be influenced by political factors. Such timing is heavily influenced by which political party dominates fiscal and monetary policies. These policies can be narrowed down to party-related tax policies, spending policies, monetary policies, and policies dealing with the availability of credit. All of these factors affect the unemployment rate.

Explanations for all these governmental actions can be found in a seven part series I blogged called, “Election Year Politics and the Economy,” back in 2012.

The Current Political Environment

     One question the public needs to think about is whether Republicans or democrats are better at tinkering with the economy and the unemployment problem?

At the present time that question is difficult to answer because the U.S. Government is in a state of crisis where efforts to help the unemployed or improve the economy have taken a back seat to politics and the shutting down of the government.

A hand full of Republican Tea Party members in Congress wanted and decided to hold the American people, and its government, hostage. It was a strategy created in lieu of the normal legislative process. As a result this caused a government shutdown. They did so primarily over just one issue—The Affordable Care Act. Until the government shutdown is really over, plans and resources to stimulate the economy and lower the unemployment rate—are evidently on hold.

So the public needs to start asking questions of Tea Party members now, long before the public goes to the polls in 2014. They might take this approach. Like Inspector Harry Callahan (played by Clint Eastwood) in the 1971 movie Dirty Harry, they might ask Tea Party members something like this: “So, you have to ask yourself this question. Do you feel lucky? Well, do you punk? The serial killer thought he was lucky. He reached for his gun and Inspector Harry Callahan blew him away.

Tea Party members, like Dirty Harry’s serial killer, may think they just might get lucky by holding the country hostage. Unfortunately, with recalcitrant Tea Party members controlling The House of Representative like domestic terrorists, they just might succeed. Polls indicate the Republican Party is going to get the most blame for the failed ill-conceived strategy to shut down the government and government services. The country is really pissed over the government shutdown!

Metaphorically speaking, the public after having been raped in 2013 by Tea Party members is going to get the last word, and perhaps poetic justice and revenge. It is my fondest hope that during the upcoming 2014 elections, the public, like the Terminator or Dirty Harry, is going to end the political careers of all Tea Party members who shouldn’t have been elected to Congress in the first place. However, the public has a very short memory. So, we’ll see what happens in 2014.

But a bigger question remains. How should sensible moderate Republicans or Democrats in general be viewed as to their ability to help improve the economy or help to lower the unemployment rate via job creation? In the upcoming congressional and senatorial elections in 2014 how should you vote if unemployment and a thriving economy is your uppermost concern?

To understand and answer the question, one needs only to look at past behavior of either political party. Again, who best can tinker effectively with the economy and the unemployment problem, Democrats or Republicans?

 

The Answer

     Since Democrat John F. Kennedy took office in January 1961, non-government payrolls in the U.S. swelled by almost 42 million jobs under Democrats, compared with 24 million for Republican presidents, according to Labor Department figures. Democrats hold the edge though they occupied the Oval Office for 23 years since Kennedy’s inauguration, compared with 28 for the Republicans. In addition, over the past 50 years, Republican administrations oversaw the largest decline in wages as measured as a percentage of the U.S. Gross Domestic Product (GDP).

If you really care about data and facts (not just value judgments), then it should be very clear to you who to vote for during the 2014 and 2016 elections.

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 INTRODUCTION

The purpose of this and the next Blog is to describe an economic portrait of the Middle-Class in America, and the growing middle-class worldwide. Most of the emphasis will be on the middle-class right here in America. Part I defines the middle-class, and Part II will describe the middle-class in relation to economics and economic principles.

If there is a theme running through both Part I and Part II it is that the middle-class, particularly in America, is very privileged and economically very well off. A secondary, but no less important theme, is that the middle class with its Robin Hood Politics, is totally unjustified in discriminating against others from other social classes. After all, rich people, poor people, and middle class people all want the same things in life. They all have their personal dreams and desires.

Related to this topic is an interesting observation, that is, whether we talk about “crime in the streets” (A predominately poor and working class phenomena), or “crime in the suites” (a predominately upper-class phenomena) the middle-class have their own form of crime (subtle perhaps, but crime nonetheless). That crime is differential and progressive taxation, i.e., Robin Hood Politics. Property crimes have as their purpose the taking of things that don’t belong to someone. Life is about the choices we all make. Sometimes people who make poor choices early in life still nevertheless want others to pay for their mistakes. Today, there is a new twist to this phenomena.  Rather than politicians following good, solid economic principles in a free market economy, they largely abandon or ignore them in deference to the whims of middle-class voters and political party ideology.

Therefore, it is important to explore what economics is all about and how it ties into the observation that social distribution of wealth is patently unfair to everyone who believes it is the individual who is responsible for his own life, and all the decisions one makes. The notion of re-distributing the wealth through differential taxation of people in higher income groups is a short-term ineffective fix that won’t alter the fact that lower income and middle-class people cannot acquire the things they want unless by stealing from others through the tyranny of the majority. How can they best get the things they want? Well, economic prosperity should be the goal of our society. We shouldn’t try to eat the rich since they, particularly among entrepreneurs, make it possible to increase more prosperity, including increased prosperity of the middle-class. The best way for society to work toward abundance and greater prosperity for everyone—is to realize that it is wealth creation and prosperity in a free market economy that really matters and, by the way, the only thing that matters if people want to get the scarce resources they don’t currently possess. For the middle-class who engages in “Robin Hood Politics,” all that does ultimately, is to shoot themselves in the foot. Robin Hood Politics is a clumsy and incompetent way to achieve the goal of middle-class economic prosperity.

THE RELATIONSHIP OF CHARITY TO ECONOMIC PROSPERITY

Where do you think all the vast amount of money for charity and helping the less fortunate comes from in this society? Who do you think gives more money to charities in the first place—Democrats or Republicans?

America is unparalleled in economic prosperity and the 20th century proved that. It is economic prosperity that makes charitable contributions possible at all. We even try to help others worldwide with support such as in places like Haiti, or Chile. It is our economic prosperity that makes all of that possible. Check out the facts. Republicans give more money to charity in the United States than do Democrats. But, regardless of who gives more, the underlying ability to give at all is based on economic prosperity. We all live in a very rich nation as nations go.  But, before we get ahead of ourselves lets look at the facts. Who is the middle-class? How are they defined? What is the economic reality we all live under and why are economic principles so important to understand? Society needs to comprehend and understand economics.

Burying one’s head in the sand isn’t going to help anyone. It is crystal clear that Robin Hood Politics and government tinkering with the economy is at best counterproductive, and at worse, an affront to the values of individualism, self-reliance, hard work, determination, rational and intelligent thinking, and, above all, taking responsibility for one’s own life.

 CONNECTIONS

      Back in August, 2009 I wrote an article on the dynamics of class warfare from a political independent’s point of view. I considered it then, as I do now, class warfare to be the last bastion of discrimination in America. Our tax laws reflect that, and our politics reflect the underlying discriminatory beliefs about people with differing amounts of income and wealth. I’ve also previously written in this Blog about upper class greed in an article titled, “Greed is Their Creed,” where I discussed the Barney Madoffs of the world, and other white-collar offenders at the top of the social ladder.

Because the middle class in America dominate as a majority, one of the often unexpressed, yet socially blatant attitudes of this group is also, unfortunately—greed, and a willingness to engage in “Robin Hood Politics” by discriminating against people from other social classes or social conditions.

For example, middle class people will get angry about the demographics of changing neighborhoods, or halfway houses for drug offenders that are placed in their neighborhoods. Yet they barely raise an eyebrow when some politician struts populism to the extent and willingness to disproportionately tax the rich (everybody who makes over $250,000) or even just higher income upper middle class individuals. Most politicians (almost universally democrats but a minority of republicans) who create our laws, buy into this discriminatory ethos from the middle class. Why? The reason is that the middle class is their base for currying favor among society’s largest group of voters. All that matters to politicians is their getting elected or re-elected.

The thrust of my article last August looked at data and the dynamics of social class from primarily a sociological and psychological type of logical analysis. This article will be to support my earlier article. But, emphasis will be instead on key economic principles, economic insights, and economic data on income distribution.

Economics is sometimes called the ‘dismal social science’ because its laws and principles give special treatment or quarry to no one. It doesn’t take sides; it simply tries to explain economic principles with economic data. Thus, it is an objective way to view the world.

 LET’S DEFINE THE MIDDLE -CLASS

The American middle class is an ambiguously defined social class in the United States.  While the concept remains largely ambiguous in popular opinion and common language use,  contemporary sociologists have put forward several, more or less congruent, theories on the American middle class. Depending on class model used, the middle class may constitute anywhere from 25% to 66% of households.

One of first major studies of White Collar: The American Middle Classes, was made by sociologist C. Wright Mills in 1951. Later sociologists such as Dennis Gilbert of Hamilton College commonly divided the middle class into two sub-groups. Constituting roughly 15% to 20% of households is the upper or professional middle class consisting of highly educated, salaried professionals and managers.

Constituting roughly one third (33%) of households is the lower middle class consisting mostly of semi-professionals, skilled craftsmen and lower level management.  Middle class persons commonly have a comfortable standard of living, significant economic security, considerable work autonomy and rely on their expertise to sustain themselves.

Everyone wants to believe they are middle class…But this eagerness…has led the definition to be stretched like a bungee cord and used to defend/attack/describe everything. The Drum Major Institute places the range for middle class at individuals making between $25,000 and $100,000 a year. Ah yes, there’s a group of people bound to run into each other while house-hunting.—Dante Chinni

Members of the middle class belong to diverse groups which overlap with each other. Overall, middle class persons, especially upper middle class individuals, are characterized by conceptualizing, creating and consulting. Thus, college education is one of the main indicators of middle class status.

Largely attributed to the nature of middle class occupations, middle class values tend to emphasize independence, adherence to intrinsic standards, valuing innovation and respecting non-conformity.  Politically more active than other demographics, college educated middle class professionals are split.  Income varies considerably from near the national median to well in excess of $100,000.

Household income figures, however, do not always reflect class status and standard of living, as they are largely influenced by the number of income earners and fail to recognize household size. It is therefore possible for a large, dual-earner, lower middle class household to out-earn a small, one-earner, upper middle class household.  The middle classes are very influential, as they encompass the majority of voters, writers, teachers, journalists, and editors. Most societal trends in the US originate within the middle classes.

WORLDWIDE CHANGES IN THE MIDDLE CLASS

In February 2009, the Economist magazine announced that over half the world’s population now belongs to the middle class, as a result of rapid growth in emerging countries. It characterized the middle class as having a reasonable amount of discretionary income, so that they do not live from hand to mouth as the poor do, and defined it as beginning at the point where people have roughly a third of their income left for discretionary spending after paying for basic food and shelter. This allows people to buy consumer goods, improve their health care, and provide for their children’s education. Most of the emerging middle class consists of people who are middle-class by the standards of the developing world but not the rich one, since their money incomes do not match developed country levels, but the percentage of it which is discretionary does. By this definition, the number of middle class people in Asia exceeded that in the West sometime around 2007 or 2008.

The Economist article pointed out that in many emerging countries the middle class has not grown incrementally, but explosively. The rapid growth results from the fact that the majority of the people fall into the middle of a right-skewed bell-shaped curve, and when the peak of the population curve crosses the threshold into the middle class, the number of people in the middle class grows enormously.

In addition, when the curve crosses the threshold, economic forces cause the bulge to become taller as incomes at that level grow faster than incomes in other ranges. The point at which the poor start entering the middle class by the millions is the time when poor countries get the maximum benefit from cheap labour through international trade, before they price themselves out of world markets for cheap goods. It is also a period of rapid urbanization, when subsistence farmers abandon marginal farms to work in factories, resulting in a several-fold increase in their economic productivity before their wages catch up to international levels. That stage was reached in China some time between 1990 and 2005, when the middle class grew from 15% to 62% of the population, and is just being reached in India now.

The Economist predicted that surge across the poverty line should continue for a couple of decades and the global middle class will grow enormously between now and 2030.

A DYNAMIC CAUSAL THEORY OF MIDDLE CLASS AMERICA

In 1950 an important sociology book came out called—The Lonely Crowd. In it was a significant sociological analysis written by David Riesman, Nathan Glazer, and Reuel Denney. It is considered — along with White Collar: The American Middle Classes, written by Riesman’s friend and colleague C. Wright Mills — to be a landmark study of American character.

Riesman, et al. identified and analyzed three main cultural types: tradition-directed, inner-directed, and outer-directed. They traceD the evolution of society from a tradition-directed culture — one that moved in a direction defined by preceding generations. Tradition-directed social types obeyed rules established a long time in the past, and rarely succeeded in modern society, with its dynamic changes.

This earliest social type was succeeded by people who were inner-directed. They discovered the potential within themselves to live and act not according to established norms, but based on what they discovered using their own inner gyroscope. Inner-directed people live as adults what they learned in childhood, and tend to be confident, sometimes rigid.

After the Industrial Revolution in America had succeeded in developing a middle-class state, institutions that had flourished within the tradition-directed and the inner-directed social framework became secondary to daily life. Instead of living according to traditions, or conforming to the values of organized religion, the family, or societal codes, the new middle class gradually adopted a malleability in the way people lived with each other. The increasing ability to consume goods and afford material abundance was accompanied by a shift away from tradition or inner-directedness. How to define one’s self became a function of the way others lived.

Gradually an outer-direction took hold, that is, the social forces of how others were living -what they consumed, what they did with their time, what their views were toward politics, work, play, and so on. Riesman and his researchers found that other-directed people were flexible and willing to accommodate others to gain approval. Because large organizations preferred this type of personality, it became indispensable to the institutions that thrived with the growth of industry in America.

As Riesman wrote, “The other-directed person wants to be loved rather than esteemed”, not necessarily to control others but to relate to them. Those who are other-directed need assurance that they are emotionally in tune with others.

By the 1940s, the other-directed character was beginning to dominate society. Today the triumph of this type of social personality is complete. If one applies the outer-direction criteria to everyday actors as portrayed in modern culture, for example, Death of a Salesman or How to Succeed in Business Without Really Trying, or the classic How to Win Friends and Influence People, the other-directed person is easy to identify.

This defined the middle class that no longer had the material need to cling to past life standards to form a cohesive society. But since the other-directed could only identify themselves through references to others in their communities (and what they earned, owned, consumed, believed in) they inherently were restricted in their ability to know themselves.

Riesman’s book argues that although other-directed individuals are crucial for the smooth functioning of the modern organization, the value of autonomy is compromised. The Lonely Crowd also argues that society dominated by the other-directed faces profound deficiencies in leadership, individual self-knowledge, and human potential.

Riesman and his co-authors (Nathan Glazer and Reuel Denney) did not come up with the title; the publisher did.

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