Why Unemployment Will Remain Above 10%

In a Reuters.com blog post, James Pethokoukis offers a quote from Wachovia economist John Silvia:

In recent years, permanent layoffs have surpassed temporary layoffs and this is reflected in the rapid rise in the mean duration of unemployment. In addition, the disparity of unemployment by education levels signals that the demand of employers for more highly educated workers does not fit well with the available supply of workers. Current policy initiatives have perverse economic effects. Health care mandates will likely raise the cost of labor and thereby discourage hiring.

Second, the increase in the minimum wage has clearly negatively impacted hiring teenage workers evident in the recent increase in teenage unemployment rates. Cap-and-trade will likely increase the cost of energy and transportation for employers and thereby reduce any funds left to hire workers. At present, the uncertainty about potential micro policies is more than offsetting any positive impact on jobs from the fiscal stimulus.

Mr. Silva is correct in his summation. I live in Metro Baltimore. Most of my neighbors are small business owners and the 3 reasons they give for not hiring more people at the moment is

1. Government seizure of health care...and the soon to skyrocket costs associated with it.

2. Possible passage of cap and trade that will immediately raise the costs of doing business with it's associated new taxes and fees.

3. Rise in the minimum wage that puts pressure on all those who make (even slightly more) than that to get raises.

When you add these three things together what do you get? An economy that will spiral further into depression. Unfortunately, "the powers that be" in the Obama Administration are following a Keynesian model of economics that says you must spend more, more, more! in order to leverage an economy out of depression. Unfortunately, this is a flawed model. FDR's efforts at Keynesian economics stifled the economic rebound in 1934/5 when it was just beginning to emerge from the Great Depression (WW2 got the world out of the depression, not Keynesian Economics). Nor will that model work now, especially as it targeted the wrong areas of the economy. The recent Congressional Budget Office Report, states that

"Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of [the stimulus]."

Had the "stimulus package" actually been targeted at infrastructure projects on the whole, it might have been much less of a failure than it has. Unfortunately, the vast bulk of it has been spent of issues that have had zero direct impact on the economy (direct payments to states, medicare supplement payments, etc). Thus it's impact has been...negligible, unlike what the Administration claimed when it stated that it needed this package to offset growing unemployment.
Additionally, a spin off effect of that has been to suck funds from the non-government credit market by taking funds that would have gone to business in the form of loans, both to small business (which needs loans in order to produce goods and services) as well as large companies (who need it for the same things, just on a much larger scale). Thus, those funds were syphoned off into long term government bonds and are now as unavailable to business as if they didn't exist.

Unemployment will continue to rise until late 2010, and won't reach the peak employment levels of 2007/8 until 2013 or later.