Mohamed El-Erian, chief executive officer of Pimco, says that 8% unemployment is “the new normal.” He bases that, to a large extent, on the fact the GDP growth will only be 2% over the next several years.
According to Bloomberg, El-Erian expects that “markets will revert to a mean, but it will not look anything like that of recent years.”
If the analysis is correct, the government’s stimulus package will not come even close to most of its goals, particularly saving or creating three million to three-and-a-half million jobs. With unemployment at 8% and consumer spending almost in certainly in a shambles, a recovery of business activity becomes an impossibility.
The most important fall-out from a long-term unemployment rate is that the federal and state government tax bases will not recovery. The US deficit will grow more rapidly than forecast. The Treasury will be forced to raise more money, likely driving up global interest rates.
If average unemployment is 8% for the next three or four years, there may be no choice for the Congress other than to press for huge budget cuts or face taxpayers who know that the financial burden on them is bound to rise.
Douglas A. McIntyre
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