I was reading the blog of Greg Mankiw and he directed me to the following link. (Robert Barro) For those that do not know who Barro is, he is a very well known economist whose work can be accredited to the formation of the before mentioned Ricardian Theory. In his article, he is harsh on President Obama's method of handling unemployment. His reasoning is that Obama basically turned the unemployment system, which usually last for 26 weeks after being fired, to a program that has the possibility to last two years.
To his credit, he makes a good point. There is a disincentive for workers seeking work if they receive benefits. They may be pickier with the jobs they choose, rather than taking any job they can, prolonging unemployment. However, it is important to think about if there are really jobs out there. Let's break down GDP to see the shifts in our economy to compare it to the days of Reagan and his recession in 1983. In 1983, the trade deficit was close to 58 million dollars. Since that time, it grew to about 375 million in 2009. (Trade history.) This is not a big surprise, especially due to China and Germany emerging as international exporting powers. So fewer countries are buying our goods and services since the 1983 recession. Let us look at personal consumption. In 1983, the average household saved 9.3 cents per dollar. Last year, saving peaked at 4.3 cent per dollar. What this says is that more people are consuming, leading to a drop in investment. This happens because people save less, and the money that is foregone in savings cannot be lent out by banks. What this data is telling us is that fewer countries are buying our goods and services and we are consuming at a much higher rate than in the past.
This data is telling of the true American economy. America has transformed from the manufacturing center of the world to the buyers of all world products. This makes total sense; it is more rational to buy a good made in China for $1 than buy an American good for $2. This is possible because of the devaluation of their currency, and lack of worker's rights laws. They can afford to sell their goods for so cheap, and it has helped develop their economy. America is now a major service provider. The New York Times reported today that New York's economy is not as bad off as originally predicted. A big part of it is the reemergence of its financial sector. Bank and investment groups have been rallying and been hiring. Chances are if you are trained in finance, you will have an easier time getting a job than a person trained on an assembly line.
The major economic implication is if America can lessen its trade deficit, we can eventually see unemployment drop. If America can become a major influence in the world market, we can bring the manufacturing sector back to the states. If not, we can expect structural unemployment to rise. This would happen because finance is such a specialized field. The skill levels for finance and the struggling manufacturing sector are extremely different. There will have to be a transitioning period to allow people to swap fields (if manufacturing does not rebound in America) so they can be retrained in a new line of work.
Going back to the article written by Barro, has Obama created a disincentive for people to work. Yes, any government subsidy for unemployment makes people not look as hard for a job. What is mostly happening is people are being more selective in their job search rather than taking a job to feed their family.
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