On the Sunday talk shows (February 7, 2010), we heard a lot of psycho-economic-babble about why the unemployment rate remains high. Many of the explanations came from the mouths of supposedly knowledgeable commentators. Complex explanations were offered which ranged all the way from the huge size of the national debt to fears about the cost of the proposed health care legislation and to concerns about possible taxes on business.
Actually the explanation is much more elementary: The personal savings rate increased to over four percent in 2009 from the three percent range or less in 2008. Presumably the higher-than-previous savings rate has persisted into 2010. That is a one-third decrease in purchasing power that has been removed from the economy. While decreasing the national debt, giving tax cuts to business, or removing the uncertainty about health care costs may influence the unemployment rate in the long run, none of these factors will directly and immediately increase the spending for goods and services which is the ultimate driver of the economy. Hiring will readily begin as soon as businesses have orders on their books to fill regardless of the psycho-economic cloud overhead. People will start buying goods and services at a more brisk rate once they feel that their future will be more secure, and that won’t happen until they see that they and more of their neighbors have jobs again. This is what makes the problem a vicious circle.
Actually the explanation is much more elementary: The personal savings rate increased to over four percent in 2009 from the three percent range or less in 2008. Presumably the higher-than-previous savings rate has persisted into 2010. That is a one-third decrease in purchasing power that has been removed from the economy. While decreasing the national debt, giving tax cuts to business, or removing the uncertainty about health care costs may influence the unemployment rate in the long run, none of these factors will directly and immediately increase the spending for goods and services which is the ultimate driver of the economy. Hiring will readily begin as soon as businesses have orders on their books to fill regardless of the psycho-economic cloud overhead. People will start buying goods and services at a more brisk rate once they feel that their future will be more secure, and that won’t happen until they see that they and more of their neighbors have jobs again. This is what makes the problem a vicious circle.
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