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Unemployment Problems Persist

Unemployment Problems Persist

Perhaps the reason so few are saving is because the job situation isn’t exactly rosy, nor are income levels. According to the most recent report from the Bureau of Labor Statistic, the unemployment rate has dropped to 6.7% which looks on the surface to be good news. However, if you look a bit deeper, the source of that improvement is troubling. The labor force participation rate, meaning the proportion of the population either employed or looking for employment has continued to drop, see chart at right, and is now at mid-1970s levels. Without the drop in the participation rate, the unemployment rate would be around 13%, rather than just under 7%. Additionally, according to data from the Minneapolis Federal Reserve (see chart at right), the American economy is experiencing the worst performance for labor markets since the Great Depression.

 

Some argue that the decline in the labor force participation rate is primarily driven by the inevitable retirement waves of the baby boomers. However, the chart below illustrates that baby boomers are in fact participating in the work force at a higher rate than in decades.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Along with the grim jobs recovery, household income levels continue to struggle, with income levels close to those 20 years ago, see chart above. Bottom Line: The fiscal and monetary stimulus has been unable to get employment or income levels back to anywhere near the levels enjoyed during the start of the 21st century. So far the impact appears to be more visible in rising prices in the stock markets and more recently rising home prices.

We've Hit The Tipping Point with Over 50% Not Paying Taxes

My friend Dan Mitchell, senior fellow at the Cato Institute, had a frightening blog post today.  According to the Ways and Means Committee, 51% of households paid no income tax in 2009.  Click here for his piece.

This is a dangerous tipping point as with over half of households paying no taxes, the incentives to increase government spending are horribly skewed in the voting population.  Why not vote for increased spending when it costs you nothing…. at least not immediately?   As we’ve seen across the world, the entire economy suffers when the government consumes too much of the economy, but that doesn’t always sink in when an individual is at the polling booth, looking for the easiest way to protect their own short-term interests.

Aside from the obvious moral hazard of this type of code, skewing the tax burden so heavily towards the higher income earners makes for vastly more volatile tax receipts than would result from a more broad-based system.  Higher income earners tend to have more volatile income levels, thus their annual tax payments vary more.  Government typically does not cut spending when there is a decline in tax receipts, but rather continues to increase expenditures year after year, regardless of receipts.  Simple math leads one to recognize that a system which generates volatile receipts and a government that tends to spend above the highest tax receipt level, will generate deficits more often than not thus growing national debt will be the name of the game.  This is not a sustainable system.