Main Street

Not Just a Lagging Indicator

The whole “unemployment is a lagging indicator” thing – which you hear whenever the stock market goes up a little and some people want to declare the economy just peachy – is one of my major annoyances.
Tim Fernholz has more on why high unemployment isn’t “just” a lagging indicator.

First, it hurts the long-term economy. High unemployment makes it harder for parents to provide adequate nutrition (childhood poverty has skyrocketed during the recession) and the other necessities of a supportive learning environment. It also limits opportunities for higher education. Both of these effects hurt the potential of future American workers. Private investment also suffers, as does entrepreneurial activity. While expensive policies to blunt a recession are often cast as a balance between present benefits and long-term costs, in reality the early positives are often helpful in the long run as well.

Easy to say (if not easy to live through), but what to do about it? Fernholz has some answer for that, too.

During last year’s debate over the stimulus, one of the major victims was aid for fiscally strapped states. All but one state government can’t run a deficit, and during times of recession, states are forced to cut spending and raise taxes. These moves, though, only hinder economic recovery. Forty-eight states face a $350 billion shortfall over the next two fiscal years, according to the CBPP. States are addressing this shortfall with funding cuts for schools, police and fire departments, and social services, as well as with tax hikes that hurt consumer spending and thus the economy at large.

The answer is a flexible package of federal aid money to state governments, targeted to the hardest-hit areas, that will limit state-level tax increases, provide critical services, and help create jobs. The initial down payment for the outlays can come from the $86 billion returned by banks that received bailout funds, emphasizing that this is the government’s effort to help Main Street as well as Wall Street. No doubt conservative governors and members of Congress will still oppose the effort, but arguments against helping the unemployed, reducing the tax burden, and making investments in teachers and firefighters will likely fall on deaf ears.

Tags: unemployment