Youth unemployment? Or just unemployment?

A great WSJ op-ed on youth unemployment: who would have guessed; the culprit is President Obama!

In Campaign 2012, Barack Obama promised the youth vote a rose garden. What they’ve got instead, as far as the eye can see, is an employment wasteland.

To me, the problem seems pretty simple; it’s not a ‘youth’ unemployment problem, we have a general unemployment problem…Unemployment is still 7.5%, and the recent drop in unemployment is due, more than anything, to people leaving the labor force rather than any increase in the rate at which the economy is adding jobs.

Why do we have a general employment problem? Well, there was this funny little event in 2008–which happened to be the largest financial crisis since the Great Depression. As in most financial crises, a massive recession followed; consumption demand and business investment cratered–to counteract the downturn, the Federal Reserve cut interest rates to 0 but, against the zero lower bound, couldn’t do anything more to stimulate demand. As the global economy worsened, investors flocked to US treasuries, propping up the currency (and preventing an improvement in the net export position)–now, as any student of Econ 101 would know, GDP is composed of consumption, investment, net exports, and government spending. (C, I, E, G). When C is falling, I is falling, and E can’t fall because everyone in the world is buying US government bonds, Government spending has to rise or GDP will fall.

So, what did our friends in Congress do to counteract the largest recession since the 1930’s? They cut government discretionary spending to its lowest share of the economy ever and cut government workers. If, instead, we had added government workers at a rate similar to the rate after the last 4 recessions before 2008, unemployment would be 6.3% instead of 7.5% today. In fact, Obama has presided over the slowest expansion of government spending in 60 years; in inflation adjusted terms, Obama has had negative government spending.

So it seems to me to be pretty simple; an inadequate response to a large financial crisis led to a large unemployment problem. With a general unemployment problem and inadequate private sector demand, firms are naturally hesitant to add workers–it makes sense that they don’t add new graduates with no work experience. Fix the general employment problem, and youth unemployment will drop too–simple.

What does the WSJ say the problem is? They roll out pretty much every standard right-of-center argument in the book: regulation, entitlement obligations, and tax regimes that suppress innovation; in a word, all of the same issues we frequently hear are plaguing Europe. All of these differences between Europe and America notwithstanding, Germany, Sweden, Denmark, and Finland all had lower unemployment rates than America in the latter half of 2012. Sweden even has more billionaires per capita than the US–so, clearly the tax regimes and entitlement obligations in these countries that have such robust welfare states are not driving out all of the innovation and employment…

It would be funny how often the same arguments keep getting put forth in the face of so much contrary evidence, if it weren’t so tragic that (literally) millions of people are seeing their skills erode in the depths of long-term unemployment. This is the sort of adverse policy that will have implications on our long run growth potential for decades; the lost wealth potential is really too enormous to even comprehend and it’s ridiculous because of how simple it would be to solve this problem.

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