High unemployment levels have been at the top of the economic news since 2008.
New Mexico residents would benefit greatly from focusing on the relationship between the national unemployment rate and that of our state. Accordingly, the focus of this article is the chart on the right showing the U.S. and New Mexico unemployment curves spanning the era from 2000 to 2014. Examining the two curves leads to three conclusions.
• First, follow the U.S. curve. In April 2003, in the wake of the collapse of the dot-com bubble, the unemployment rate climbed to 6 percent from 4.2 percent in January 2001. A month later, the Bush administration responded by sharply cutting the tax rates of income, dividends and capital gains. (The earlier mini-tax cut in June 2001 did not help much.)
The success of President George W. Bush’s tax cuts was unambiguous: Four years later, in May 2007, the unemployment rate reached a low level of 4.4 percent. (Interestingly, in 2007 the deficit’s share of GDP attained a low level of 1.2 percent)
Pushed by the newly elected President Barack Obama, Congress responded with a $830 billion stimulus. The president and his economists promised that with the stimulus the unemployment rate never would exceed 8 percent. Yet, during the three-year period of 2009, 2010 and 2011, the rate has been hovering around 9 percent.The economy’s response to the mortgage-banking crisis was ugly. Unemploy-ment rose rapidly throughout 2008, reaching in January 2009 a high of 7.8 percent.
At long last, in October 2011, the rate fell below 8 percent and moved down at a snail’s pace, reaching 6.1 percent in June 2014. Recall that a 6.1 percent unemployment rate prompted Bush to cut taxes.
Obama and his economists ignored Milton Friedman’s seminal permanent-income hypothesis, stating that consumption depends primarily on permanent income, not on its transitory oscillations. The Bush 2003 tax cut, with a sunset provision on Jan. 31, 2010, succeeded because consumers perceived it as permanent. The massive Obama stimulus failed because its recipients correctly perceived it as transitory.
Conclusion: To stimulate a sluggish economy successfully, cut taxes for a long time period. A once-and-for-all gigantic stimulus will do no good.
• Second, eyeballing the chart reveals that the New Mexico unemployment-rate curve mimics the national curve. The practical implication is that forecasting the economic future of New Mexico should rely heavily on national data. (For obvious reasons, a similar analysis cannot apply directly in big states.)
While the national and New Mexico economies swing in harmony, New Mexico seems to be more immune from recessionary forces. This is partly true due to New Mexico’s excessive dependence on federal government spending.
During the recent economic disaster, the unemployment rate in New Mexico rose to relatively high levels but never reached the devastating national heights.
Consequently, activist governors could do harmful mischief even if they mean no harm – such as grandiose projects like the Rail Runner. At the same time, we should welcome governors who would protect our private sector from encroaching, excessive rules and regulations. A case in point is a governor who would veto raising the minimum wage, which would further raise unemployment.
• Third, obviously, a healthy national economy is essential for a strong New Mexico economy.
Conclusion: Follow common sense and send to Washington representatives and senators who have a handle on basic economic principles.
Here is an illustration: The U.S. corporate income tax rate is one of the highest in the world. The Obama administration has declared war on inversions (moving headquarters out of the country for tax purposes). However, common sense would show that lowering our statutory corporate tax from 35 percent to, say, 15 percent would repatriate most of our corporations abroad, and consequently give a huge boost to production and employment at home.
Such examples abound.
Original Article By: Micah Gisser