This Simple Graph Explains Why Unemployment Refuses to Go Down

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Here's a short story with big implications. In May 2008, six months after the Great Recession set in, a typical family earning less than $90,000 a year spent $105 daily. One year later, in May 2009, they spent $59 a day.

Then in May 2010, they spent $59 a day. In May 2011, they also spent $59 a day.

Why is employment stuck above 9 percent? I just told you.


Daily spending numbers in dollars for families making less than $90,000 a year.

***

Call them whatever you want: headwinds, hurdles, brick walls. The U.S. economy faces more than a few. But the most important challenge is perhaps the simplest to explain. The workforce is stuck because people aren't spending as much money as they used to.

This isn't a niche interpretation. Small businesses say they'd hire more with more demand. Economists agree. But with inflation growing faster than wages, Americans' buying power is shrinking fully two years after the economy started growing again. "Big ticket" sales like homes, automobiles, washers, and dryers have all fallen by 25% since 2007, the New York Times reported in a story this weekend.

Two years ago, the government's solution to a weak private sector was to reduce taxes and to borrow and spend money to make families feel richer. It worked. Private sector income fell 8 percent in Obama's first year. But total disposable personal income including tax breaks and government transfer payments like unemployment insurance actually increased. We got socked in the stomach, but government softened the blow.

Today, government is helping deliver the punch. Since the summer of 2010, total government employment has collapsed to below private sector employment, as a result of fading stimulus and state-by-state austerity. And now we're talking about hundreds of billions in additional cuts from federal, state and local payrolls. More layoffs will come and with them, more headwinds, hurdles, and brick walls in front of a spending-side recovery.




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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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