We shouldn't be talking about deficit reduction with 10.2% unemployment

There's a potential disconnect between the Obama administration, the unemployment rate and the deficit, and I hope there's some sort of resolution or else you and I could be looking at high unemployment for some time to come -- not to mention a backslide on the greenshoots and economic growth we're beginning to see.

The unemployment rate jumped to 10.2% last month, the first time unemployment has breached 10% since 1983. While monthly job losses are significantly declining since early this year, 10.2% is still a scary threshold.

Meanwhile, the president said something the other day that might be good news were it not for the fact that we're in a recovery and jobless numbers are still very high. He said, "The government is going to have to get serious about reducing our debt levels."

The only problem with that goal, historically, is whenever deficit reduction takes precedent over economic recovery, the recovery takes a hit -- and then, so do we. In other words, if the president and Congress begin to tinker with deficit reduction, history proves that fewer jobs are created and the GDP can actually begin to tank again.

It happened in 1937. Conservatives in the Roosevelt administration convinced the president that deficit reduction should be addressed, and so that's exactly what he did. The result was a very poorly timed hit to the economy just as it was climbing its way out of the Great Depression.

What needs to happen at this point is more spending. Perhaps even another stimulus plan. One that's laser-focused on job creation. My hunch is that the Obama administration will set about the task of achieving this in bite-sized chunks rather than one big stimulus package.

History, more than anything else, indicates that this is the only way to get to 7%-ish unemployment without disrupting the economy, which can more or less endure a large deficit. For now.

Read Full Story

From Our Partners