Unemployment and the next Big Deal

I had a discussion recently about unemployment and how it related to the effectiveness of the "$700,000 million" (chop it up any way you want, but it's a seven with twelve, count 'em, twelve freaking zeroes behind it) bailout/rescue package. We discussed the current rate of 6.1% and how it would be a grave concern if it rose to something like 7.5%. Obviously, an upward trend in unemployment is cause for concern, but we concluded that the media may be largely overhyping unemployment to create undue fear when you view the statistic through the long lens of history. Unemployment during the Great Depression reached 25% and didn't drop below 10% until the start of WW2; a terrible situation to be sure, but one that may have been exacerbated by FDR's policies. Consider the ten highest monthly rates of unemployment in the post-WW2 era:

11/1982 10.8
12/1982 10.8
10/1982 10.4
01/1983 10.4
02/1983 10.4
03/1983 10.3
04/1983 10.2
05/1982 10.1
05/1983 10.1
06/1983 10.1

If you were to only look at unemployment, you would conclude that Reagan's first term was pretty disastrous for the economy, especially considering the average rate was a little over 7.5% when you look at the month by month statistics. However, consider what happened with GDP growth from 1981 to 1988:

1981 2.5
1982 -2.1
1983 4.3
1984 7.3
1985 3.8
1986 3.4
1987 3.4
1988 4.2
Average: 3.4

Recession in '82, but excellent growth throughout the rest of Reagan's presidency. By the time he left office, unemployment was around 5.3%. Now let's look at the Bush I/Clinton era:

Unemployment
1989 5.3
1990 5.6
1991 6.8
1992 7.5
1993 6.9
1994 6.1
1995 5.6
1996 5.4
1997 4.9
1998 4.5
1999 4.2
2000 4.0

The month by month breakdown results in a 5.6% average for these twelve years.

GDP Growth
1989 3.5
1990 1.7
1991 -0.5
1992 3.1
1993 2.7
1994 4.1
1995 2.2
1996 4.5
1997 4.5
1998 4.2
1999 3.9
2000 4.3
Average: 3.2%

Putting all the mind-numbing figures together, here's how the composite unemployment/GDP growth figures look:

Reagan
Avg unemployment: 7.5%
Avg GDP growth: 3.4%

Bush I/Clinton
Avg unemployment: 5.6%
Avg GDP growth: 3.2%

A good statistician would glean much better information from these numbers than me, and I freely admit that it might not be fair to compare eight years to twelve by lumping Bush I and Clinton. In fact, to be completely forthright, the average numbers under Clinton were 5.2% unemployment and 3.8% GDP growth. However, my point stands which is that even 10%+ unemployment for a year didn't prevent us from making a remarkable recovery in GDP growth and employment. I would actually contend that what Reagan had to deal with was the consequences of the policies of Nixon, Ford, and Carter, and that the temporary pain was the result of a drastic shift in economic policy that required the markets and economic institutions to adapt. I would also contend that we have been the beneficiaries of those policies through today. I believe Reagan, by and large, greased the wheels nicely for Bush I and Clinton. Reagan didn't react to bad economic conditions by calling for greater government regulation, stimulus packages, or nationalization of private institutions. That had been the trend for years, and it hadn't worked. He instead cut taxes, lowered interest rates to make capital available, and allowed the market to flourish. His philosophy was to get the government out of the way so that the greatest number of people would benefit as the result of economic growth.

My concern is that today, we panic at a 6.1% unemployment rate, declare the current financial situation the worst crisis since the Great Depression, and demand that the government empty the treasury to save capitalism. When we start setting arbitrary thresholds, whether it's unemployment, LIBOR, foreclosure rates, home value depreciation, or anything else, to determine when the federal government comes to the rescue, we begin to throw ourselves down the slippery slope.

There are numerous commentators, only hiding their glee with some difficulty, now declaring the end of Reaganism and the beginning of another "Deal." We are led to believe the FDR saved capitalism during the Great Depression, that Lyndon Johnson cured our nation of poverty and racism with the Great Society, and that now Barack Obama is the next Big Deal, here to save our helpless nation from destroying itself. A great nation doesn't need great government programs. It may take decades to determine whether spending (Investing? Really?) $700,000,000,000 of the nation's wealth was economically beneficial or not, but I believe it has potentially paved the way for a generation or more of a gargantuan federal government that seeks to ensure, not promote, but ensure the welfare and prosperity of the nation, which it will ultimately fail to do.

Another Depression?

“Lots of other places—from Britain to Australia—took a hit in 1929 but, alas, they lacked an FDR to keep it going till the end of the Thirties. That’s why in other countries they refer to it as ‘the Depression,’ but only in the U.S. is it ‘Great’.” —Mark Steyn

If America's financial situation continues to worsen, what kind of policies will the next president enact to reverse it? Will he look to the example of FDR and increase the size of, and dependency on the federal government, or will he force the government to shrink in size and get out of the way of the people? Anyone who believes that our current financial troubles are the result of an under-regulated free market and not the malfeasance of our elected officials are seriously misguided in my opinion, but if they get their way in this election, they will act on their incorrect assessment and plunge the country into another deep, prolonged depression.

In difficult economic times, the appetites of the government must be curbed so that people can allocate their scarce resources as efficiently as possible, as they see fit based on their intimate and up to date understanding of their own circumstances, not at the whim of a bureaucrat. In times of plenty, the government's size has swelled enormously, resulting in the porcine behemoth we now have in Washington. As the real economy shrinks, it is imperative that the federal government do so as well. Unfortunately, when a politician sees the budget for one of his pet projects threatened because tax revenues are falling, he doesn't care much about why the money's no longer there, just that his precious program must be preserved at all costs, even if that means raising taxes. The true wealth of America is under assault from the government that is supposed to protect it, and unless our next president can convince Congress to reduce the size of government, it risks killing the goose that laid the golden egg.

Cavuto: Blood sucking government zombies!