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NEED TO KNOW: ECONOMY

The Big Dodge

The unemployment rate is finally coming down. So what? There’s a bigger problem out there.

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What jobs? Frustration at an employment fair in Glendale, Calif.(AP Photo/Damian Dovarganes)

Political strategists generally see the nation’s jobless rate as the bellwether for President Obama’s reelection hopes. Not surprisingly, hearts fluttered hopefully in the White House last week when that stubbornly high number ticked down to 8.5 percent, the lowest since February 2009. But other analysts, including the former chief economist in Obama’s own Labor Department, say that the standard unemployment rate may not be the biggest problem. And not enough is being done to fix the real one.

The main issue for the economy, and Obama’s future, could well be the long-term unemployment rate—workers who have been out of a job for more than six months, in many cases a year or more, and can’t find a new one no matter how hard they try. They are deemed too old or their skills are considered too ill-suited to new jobs, their abilities having atrophied after months out of work. These workers represent 42.5 percent of the unemployed, a slight drop since the peak of 44.6 percent of September—the highest rate since the Bureau of Labor Statistics began counting in 1948. (The next highest peak was 29.3 percent in June 2009.)

 

“We just never had this problem before,” says Betsey Stevenson, the former Labor Department economist. “Millions of people who are potentially quite productive and have been out of work through no fault of their own for a long period of time.” At the annual meeting of the American Economic Association in Chicago, Ben Casselman of The Wall Street Journal reported an emerging consensus that the United States is now at risk of developing “an underclass of semipermanently unemployed workers, with severe consequences for productivity, public finances, and even social stability.”

In truth, this is not a new problem. The number of “left-behinds” in the economy has been rising over the past 30 years. (See “The Left-Behinds.") But it is only now getting noticed because of its severity—one of the enduring aftereffects of the Great Recession that technically ended two and a half years ago.

In part because of long-term unemployment, the labor market is far less likely to “clear” naturally this time around. As wages decline, new jobs should appear and be filled quickly, demand should return, and the nation should go back to a comfortable 5 percent unemployment rate. That isn’t happening. “We have never seen unemployment this high for this long,” says Heidi Shierholz, an economist at the Economic Policy Institute, who notes that jobless rates have now exceeded 8 percent for a record 35 months, surpassing the early ’80s recession mark of 27 months. At current growth rates, even with the unemployment rate heading in the right direction, the U.S. economy won’t get back to prerecession levels until 2019, she says.

 
“We have never seen unemployment this high for this long.” —Heidi Shierholz, an economist at the Economic Policy Institute

Despite these unusual conditions, there is little evidence that either Congress or the Obama administration is doing much to ameliorate them. “Washington is making the choice not to get us out of this as fast as it could,” Shierholz says. There is no political will to stimulate demand, despite broad agreement among economists that the government needs to create jobs. Virtually the only net new jobs appearing are for college-educated workers, yet budget-cutters are slashing education funding. U.S. job-training aid is the lowest of all the industrialized nations, yet Republicans are vowing to cut it even further, along with Pell Grants for low-income students. Stevenson says that the government is not focused on real solutions. “We have enormous increase in unemployment, but we have not increased our budget for unemployment services,” she says.

A similar inactivity bedevils the other great weight holding back economic recovery in 2012: the underwater housing market. This, too, is considered historic—a nagging mortgage and foreclosure crisis has prevented a resurgence of demand in a consumer economy that, because of stagnant wages, had become dependent on debt and refinancing for growth until the crash. Both the size of the housing bubble and its collapse were unnaturally large thanks to the scale of the housing and securities fraud that fed the mania. Many banks may still be technically insolvent because of the devalued mortgage-based securities and loans they have on their books. Even so, “from the beginning, all the proposals for relief were too small,” whether from the administration or Congress, says Diane Thompson of the National Consumer Law Center. “They underestimated the amount of fraud. And I think they overestimated the goodwill of the bankers.”

Congress and federal agencies continue to block large-scale mortgage relief, and the administration’s own plans are considered too meager. That’s one reason why the Federal Reserve Board in recent weeks has sought to take the lead as much on this issue as it has on stimulating the economy. The Fed recently gave Congress a white paper calling for a program to convert foreclosed homes into rentals, and New York Fed Chairman William Dudley has urged Fannie Mae and Freddie Mac to begin writing down principal on bad mortgages.

 

In sum, this is one of the most pathological recoveries in American history (a non-recovery, really). And considering government inaction, it is no surprise that both Obama and Congress—both Democrats and Republicans—suffer chronically low public-approval ratings. All of which will make this general election about far more than the unemployment rate.

This article appears in the January 14, 2012 edition of National Journal Magazine.

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