The recession that took place in America in 2009 brought a lot of questions to the table in regards to the economy. According to the Bureau of Labor Statistics (BLS), unemployment reached a historic high of 10% in October of 2009, which ultimately lead to new legislation and policy reform. Since then nearly 6 million new jobs have been created, causing the unemployment rate to fall to its current level of 7.7%. This is all good news in regards to the American economy, but the big question still remains. How will employment stand up in the face of so much uncertainty surrounding the "fiscal showdown"? One thing is for sure though, the automatic sequester to cut government spending is certain to eliminate jobs in some sectors.
In February alone, the U.S. economy added roughly 236,000 new jobs. This is no doubt good news, but in order for the positive employment trend to continue, economic growth must increase. While unemployment has been falling and wages have been rising, the sequester still looms to push these positive trends in the opposite direction. Since we have been talking about fiscal and monetary policy in regards to the exchange rate, I felt it would be a good idea to look at the effects of the upcoming sequester on employment, interest rates, and the exchange rate.
It is uncertain what till happen to unemployment in the long run, but in the short run, many government funded industries will experience job losses due to the sequester. Since the major aspect of the sequester is to cut government spending, many of these cuts will be seen in the healthcare and defense industries, as they are greatly financed by the government. While the Federal Reserve has promised to keep its target interest rate at zero, it will only do so until the unemployment rate falls below 6.5%, and medium-term inflation must not rise too far over 2%.
These numbers all point to a positive future for labor, but not as bright a future for capital. As we have learned in class, labor wants low unemployment and capital wants low inflation and high interest rates. With the Fed targeting an unemployment rate of 6.5%, monetary policy seeks to keep interest rates low, while increasing the money supply. While interest rates remain near zero, it seems as if the government wants to shift the demand for capital towards an increased demand for labor. As these low interest rates will help the unemployment problem, they tend to make money worth less (depreciate) which ultimately causes inflation. Once the unemployment level has reached the Fed's target of 6.5% it will be interesting to see where the demand for capital is. I think that America seems to be fixing its battle with unemployment, however, once the unemployment rate reaches the Fed's target, I think that demand for labor will begin to decrease and the demand for capital will start to increase again.
Well done Nicholas, this is a great topic and well linked to other sources.
ReplyDeleteA note on the first link, the sequester article; I was very surprised to read such biased writing coming from the economist. The author of the article called the President, "Mr. Obama," he referred to the super committee as a "crack squad," (eloquent vernacular ay?), and to tie it back to Nicholas' posting, I think The Economist author had a poor disposition about the fact that our government is finally making the budgetary cuts that it would appear this author would be advocating for, judging by the former examples. He criticizes the President for not summonsing congress to discuss the cuts, then says the ball has been rolling on this bill since August, so its not surprising.
Moving on to Nick's prediction about the direction that the economy with head. I too believe that unemployment will continue to decline, even accounting for jobs that will be lost with the sequester. What I wonder is where the U.S. will generate job growth from. Will we continue to be a "personality profession" society, while outsourcing our services, manufacture, and technological needs. Or will we increase our trend of bring jobs from off shores back home and follow Germany's suit to become and revitalize our industrial economy once again? Further, will we forge the path in cutting edge research, discovery, and technology? Or shall Brazil, Russia, India, and China's slow and steady growth propel them into the future of multi-lateral economic success for the Easter world?
Lastly, operating on the assumption that 6.5% is an acceptable rate of unemployment is a fundamentally flawed rational in a democratic society that specifically defines itself by the freedom to pursue economic freedom (property). When was Ben Bernanke allowed to am mend the constitution? They way he has defined the unemployment rate, the constitution would be amended as such:
"We hold these truths to be self-evident, that 93.5% of men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness/(A job).--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of Mr. Ben Bernanke himself."
Also, I do acknowledge the logic behind the 6.5%, being the natural unemployment rate. Still, I believe it is flawed logic to govern an economy.
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