Unemployment the Latest Figures From

Unemployment The latest figures from the Bureau of Labor Statistics show that the unemployment rate in the United States is at 7.8%, the lowest level since January 2009, the month that President Obama took office (BLS, 2012). The unemployment rate is one of the key talking points of the election, since it has remained persistently high throughout the past four years.

While some of the talk has focused on who is to blame for the rate, my role as advisor to President Obama is to set out a strategy for bringing the unemployment rate down. The first part of this approach is to study some of the economic theories about the unemployment rate, since there is considerable disagreement even among professional economists about the issue. Then, the political considerations must be discussed as well, since policy lies at the intersection of what is economically necessary and what can be achieved politically.

Finally, a recommendation will be offered to the Obama campaign for how to address the unemployment problem. Unemployment is a significant issue in the election, and the President often bears responsibility for the state of the economy. Most voters are unaware of the impact that the President actually has on the state of the economy and on unemployment in particular.

The unemployment rate in the modern, globalized economy is influenced by the health of the global economy, such that shocks in Europe or Asia can have an adverse effect on the U.S. economy. The policy to open the U.S. up to world trade -- and to take a leading role in fostering globalization -- is a bipartisan strategy that has been pursued consistently by the U.S. since the Reagan Administration.

Thus, anything the President proposes must fit with the framework of free trade and globalization, as these appear to have broad-based support among American voters, even ones concerned about unemployment and the decline of the American manufacturing base. Among economists, there are multiple views about how the root causes of unemployment and how it can be addressed at the Presidential level. One argument is that the President should push for more spending in order to facilitate job growth.

The root of this argument is that jobs can be created by government spending. There is some truth to this -- many jobs are government jobs that cannot be easily replicated by the private sector. Some examples would be firefighters, police and teachers, most of whom are on public payrolls. Tens of thousands of these lost their jobs during the economic downturn, because federal transfers to states (and by extension to civic governments and school districts) declined.

By increasing federal transfers to lower levels of government, the argument goes, more of these public servants can be hired. This view is supported by economists like Paul Krugman (2012) and Mark Thoma. Government spending on the military and its contractors is another form of Keynesian job creation, one that also creates well-paying jobs in American industry. This is in addition to monetary policy from the Federal Reserve, something over which the President might have influence, but no direct control.

There are competing views within economics, however, as to the effectiveness of this approach. Milton Friedman made the argument that while expanding spending and the money supply could lower the unemployment rate in the short-term, in the long run the unemployment rate would return to its normal rate as the economy adjusted.

Higher inflation would result from measures to expand the money supply -- which deficit spending would drive -- and once the economy adjusted to the higher rate of inflation and altered expectations for fiscal and monetary stimulus, the unemployment rate would creep back up again. Thus, the Friedman view holds that government spending does not have a long-run effect on the unemployment rate.

This leads to a conclusion that the way to deal with the unemployment is not to spend government money, but rather to create the conditions for private sector growth. This in turn leads to any number of policy proposals. Free trade is one that has been aggressively pursuing by the United States for years, but many also call for lowering taxes on business to encourage spending and growth.

Libertarian economists, whose work is often viewed with suspicion by other economists but is popular with some in the GOP, have their own theories about how to address unemployment. Shostak (2010) argues that expansionary policies from the White House and the Fed will not only fail to result in lowering the unemployment rate but will "set in motion economic impoverishment." Addressing unemployment would require instead an expansion of the pool of real savings.

This is based on the supposition that 'what matters for individuals is not whether they are employed as such but the purchasing power of their earnings." The policy prescription that flows from this analysis is that no expansionary action should be undertaken and indeed a tightening of the money supply would benefit the economy by constricting inflation. The most persuasive of these arguments is a combination of the first and second. These two policy prescriptions are, for the most part, not mutually exclusive.

The only aspects that are mutually exclusive are the reduction of corporate taxes and the increase in federal transfers to states, as this would increase the federal budget deficit. Otherwise, the White House can increase federal transfers to lower levels of government while simultaneously pursuing free trade and reducing regulatory burden on business. One can be both pro-business and pro-teacher/firefighter/police at the same time. The libertarian argument is weaker, for a couple of reasons.

The first is that it begins with a policy prescription -- which by definition will be libertarian in nature -- rather than deriving its conclusions from the analysis, it uses analysis to justify a priori conclusions about the role of government in the economy. Whether lower taxes on business is preferable to restoring public service jobs can be subject to intense debate.

However, there is evidence that the reason American businesses are not hiring is not because of their tax rates -- a minor decline in tax rates will not spur the closing of sweatshops in the Third World to open plants in the U.S. -- but rather because of a lack of demand. When the evidence shows that demand needs to be spurred in order to increase hiring in a majority service-sector economy, the government should adopt policies that will serve to increase demand.

The resulting jobs might not be the greatest, but that is a bigger-picture, longer-term issue than the current mission to reduce the unemployment rate. While increasing federal transfer payments might be the right course of action economically, it can be challenging to implement politically, as many oppose such action. It is the job of the President, however, to sell his plan to the American people, even those who would normally be opposed to a plan that increases spending (or for that matter increases free trade).

There is a strong case to be made against long-term unemployment, and there is a case to be made that protection services are essential to the maintenance of infrastructure, and education is essential to creating better jobs for Americans in the future. These are the arguments the President must utilize. He must convey that his vision is not just to lower the unemployment rate in the coming months, but to build a stronger America for the future in doing so.

He also needs to make the point that many critics are using false logic in their arguments. The idea that lower taxes will magically create jobs in America, at a time when American companies routinely offshore new hiring, is a falsehood rooted in an earlier.