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Unemployment & the Economy
With Kirk Johnson
Heritage Foundation Economist
Friday, Nov. 2, 2001; 2 p.m. EST

Dr. Kirk Johnson, Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation, was online to discuss the latest unemployment numbers.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Dr. Kirk Johnson: Thank you for logging on to this chat on the unemployment rate and the economy in general. I'm looking forward to all your questions.

Delray, Va.: How much of this can be blamed on the terrorist attacks? How much can be blamed on the current and past administrations? Or is this a blameless correction in the market?

Thank you.

Dr. Kirk Johnson: The economy is undoubtedly reacting to a number of things simultaneously. First, even before September 11 the economy was already fairly anemic - the Gross Domestic Product (GDP) only grew by 0.3 percent in the second quarter. Second, most economists agree that the terrorist attacks either sent America into our current downturn or made it worse.

Presidential administrations always want to take credit for a good economy and blame someone else if it falters, but there really is not a substantial amount that the President can do to either grow or sink an economy. Pro-growth policies may be suggested by the President, but Congress must pass the bills before he can sign them. Also, Alan Greenspan and the Federal Reserve Bank Board of Governors' Open Market Committee wield a great deal of influence into the economy.

In short, a number of actors affect what happens to the economy, but two-third of the economy is directly affected by consumers and the extent to which they spend money.

Washington, D.C.: Is there a target or ideal unemployment rate? How significantly above that are we?

Dr. Kirk Johnson: Economists like to talk about a "natural rate of unemployment" that, depending on the economist you ask, hovers around six percent.

The single most important thing to stress about the unemployment figures released today is that the unemployment rate is still very low by historical standards. Over the last forty years, there have only been thirteen years where the average annual unemployment rate has been less than 5.4 percent, and four of those were from 1997-2000 (the other were 1964-70, 1973, and 1989). Even during the boom years during the Reagan administration, the average annual unemployment rate did not drop below seven percent until 1987.

The low unemployment rate over the last several years is certainly not the historical norm. That said, it has been very good for people who want to work, but employers were finding it increasingly difficult to find quality workers for a whole host of positions, especially low wage workers. The rising unemployment figures should taper off once the country rebounds from the current economic stagnation.

Washington, D.C.: Why would the Heritage Foundation be interested in unemployment?

Dr. Kirk Johnson: Because The Heritage Foundation is committed to building an America where freedom, opportunity, prosperity and civil society flourish. The higher the unemployment rate, the fewer people enjoying the fruits of prosperity, and we believe that all Americans should benefit in our prosperity.

Arlington, Va.: Dr. Johnson, even though the national economy is sliding into recession, how will the Washington, D.C.-metro region fare? It would seem that with all the fiscal stimulus and expansion of government, our area should be fairly well insulated, is this a good assessment? Thanks!

Dr. Kirk Johnson: The Washington, D.C. metro area is at least somewhat insulated from the ups and downs of the economy because of all the government employment in the region. However, our local technology employment has been slashed over the past months, just like the rest of the nation (as an example).

Also, local retailers here are, as a group, suffering from uncertainty, just like they are nationally.

So, the Washington region is not completely insulated from the ups and downs of the national economy, but having so much stable government employment helps modify the gyrations of the market.

One interesting factoid in today's unemployment figures that has not been widely reported: while most industries saw total employment drop, government employment on all levels increased last month by 24,000 jobs.

Boise, Idaho: Hello and Thank You Dr. Johnson.

I am just curious about the ability of the Federal Reserve to influence the economy right now. Banks don't seem to be lowering interest rates very much lately, even though the Federal Reserve does.

Thanks again

Dr. Kirk Johnson: The Federal Reserve can only affect certain interest rates. One of those that gets the most attention is the federal funds rate, which is the rate that banks use to loan money to each other. This rate is then linked to most banks prime lending rate.

Rates have been coming down since the Federal Reserve has been cutting interest rates. For example, Bankrate.com, which tracks most interest rates, reports that the average rate for a 30 year fixed mortgage was 6.61 percent in early August, but today that rate is down to 6.11 percent. Certainly Federal Reserve policy influenced this change.

Poolesville, Md.: Dr. Johnson,

For the past month or so we have been hearing about the tremendous hit the service industry took after the September 11 events. We seem to have fairly reliable numbers of people in the airline, tourism, and hospitality industries who lost their jobs in the past two months. How about unemployment rate in other industries? Do we have any numbers on that?
My husband and I were both laid off recently (in my case pre-September 11, in his case just yesterday). We both worked as business consultants around supply chain issues and software. Are there any predictions on how the sudden problems in the hospitality and airline industries will end up affecting the manufacturing sector (major users of consulting services)?

Dr. Kirk Johnson: Services took a tremendous beating last month. More than 110,000 people lost their jobs in the services industry last month. The Bureau of Labor Statistics tells us that this is the largest monthly decline in services since they have been keeping numbers on it, so therefore it is very significant.

Manufacturing is also taking a substantial hit. Some 142,000 individuals lost their jobs in manufacturing last month. Manufacturers are selling inventories rather than building new stock right now, knowing that consumers are not spending what they once did. According to a survey earlier this year conducted by the National Association of Manufacturers, two-third of large member firms were planning to work off excess inventories, an increase from late last year. Therefore, it's not surprising that manufacturing saw a loss of 142,000 jobs last month.

At some point, though, major manufacturers will exhaust their inventories and need to make more. It is at that point that I become more optimistic about manufacturing and other sectors up and down the supply chain. I see that beginning to happen in the first quarter of 2002. People are too nervous to do much before they see how Christmas will pan out.

Richmond, Ken.: You suggest that Presidential administrations can take very little credit or blame for the economy. But didn't President Bush verbally push us in a negative direction by talking about how bad the economy was so that he could get his tax cut passed?

Dr. Kirk Johnson: There's no proof that the President pushed the country into this recession because of his rhetoric. I do agree with you that he used that kind of rhetoric as a way to get the tax cut passed.

Bethesda, Md.: Dr. Johnson,

Please explain the best government fiscal policies to help us get out of the recession the soonest. I have heard guestimates like the second half of 2002. Is this realistic? And if so, what needs to be done?

Dr. Kirk Johnson: I believe very strongly that putting federal tax money back in people's pockets is an excellent way to get the country out of a downturn. The problem with the tax cut that passed earlier this year is that many of the provisions are not phased in until 2006 (or later). These provisions (dealing with tax rate changes and tax credit expansion, etc.) should be accelerated to 2001.

Also, this year the Alternative Minimum Tax (AMT) should be eliminated. It is an arcane tax that is being borne increasingly by the middle class, for which it was never intended.

Washington, D.C.: Didn't Reagan or the first Bush administration change the way unemployment numbers were generated? That drop in 1987 was mathematic juggling, was it not?

Dr. Kirk Johnson: The unemployment numbers are generated by the Bureau of Labor Statistics to be comparable over a number of years. Unemployment happened to be higher during the Reagan (and some of the Bush years) than it is today. I don't know of any economist that doubts the validity of these figures.

Dr. Kirk Johnson: Many thanks for joining me today. Please visit our web site at http://www.heritage.org for more on unemployment and the economy.