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A U.S. Economy
In the Shadows

May 4, 2015

In the past ten years, the American economy has gone through a systemic change.  A recent head-line captures one of the effects: “Record 20 Million families on food stamps in 2013.”

One economic indicator -- food stamps -- jumped above record levels during the 2008 recession and reached a climax in 2013 at a little above 47 million.   It then retreated slightly in 2014 and has stabilized at near records levels.  The number of people on food stamps is indicative of the number of workers who aren’t able to find sufficient employment.

Why? Job market statistics provide lots of insight into the real economy over these years.  The headlines of government jobless numbers and rates fail to expose the nature of the underlining economy.   They report two keys headline numbers once a month and gloss over what is really happening. 

The first statistic is called U-3, and is defined as the percentage of those who are actively seeking work and who are unemployed.  From 2009, that rate quickly climbed from 5% to 10% and has been gradually dropping reaching approximately 5.5% last month.  A key thing to look at in this statistic is that it’s limited to only those who are actively seeking work.  It doesn’t  include those who are long-term unemployed and have given up hope and quit looking altogether.

During the same period, another measure, U-6, which is defined as the U-3 figure plus the short-term discouraged unemployed and the part-time workers who are seeking full-time employment.  This indicator has also followed a similar pattern, abruptly raising in 2009 to 16% and gradually falling to 11%.   Again, this doesn’t include those who are long-term unemployed and have given up hope and quit looking altogether.

Unlike in past years, the demand for food stamps hasn’t fallen with U-3 or U-6 rates. 

There’s a third number indicator that is kept by the private sector and known as the “Shadow Rate.”  It’s calculated by adding long-term discouraged unemployed to the U-6 number.  Like the first two, it jumped sharply in 2009 to over 20% and has been slowly climbing ever since reaching just short of 25%.  This is the first time that this number hasn’t followed the trend of the other two official government numbers. 

Put simply, the “Shadow Rate” tells us the American economy hasn’t created the same quality jobs as in past economic downturns.  The real numbers lie in the shadows, not in the politically driven headlines.  

Some propose higher minimum wages.  Higher wages without requisite productivity buys nothing except guarantees of inflation and ultimately higher unemployment.  We’d like to see less meaningless government intervention.       

The goal here should be to increase economic productivity.  If we look at Cuba, Venezuela, and Russia we can see that the planned economy approach just doesn’t work.  That was further proven under President Nixon when he tried to impose wage and price controls.  The way to increase productivity is to increase freedom.  The two go hand-in-hand.  So let’s start having less government meddling in the economy and allow the free market to operate.  The answer is less control and more freedom, not the other way around!

Mark, Bill and John