What is Really Causing High Rates of Unemployment?

This is one of the most controversial topics of the day -- unemployment. One thing is clear: unemployment rates are high. I need to give a special warning before moving on that the opinions given in this post are not those of my employer and may not even be my own. I am simply positing that there may be some hidden causes that we have never considered. I'd like for you to think about them. Maybe, you will agree with what I am saying even if I don't agree with myself (I might agree with myself, I'm just not sure).

In order to understand this, we need to understand how the rate of unemployment is calculated. Essentially, it is a fraction the numerator of which consists of those people who are currently unemployed (you are considered unemployed if you are not considered employed AND you have actively looked for work in the previous 4 weeks) (you are considered employed if during the survey week you either worked for pay or profit or you would have worked except that you were on vacation, ill, having child-care problems, taking care of a family or personal obligation, on maternity or paternity leave, involved in a work dispute, or prevented from working by inclement weather) divided by the total number of people who are either employed or are unemployed. In other words, if you are not currently employed, but you are not looking, you are not in the fraction.

OK, I don't think I've really said anything controversial yet, but give me a chance.

Think about how unemployment rates are calculated. If someone had been looking for work for two years, but is so despondent that they have given up, they are no longer considered to be unemployed. Hmm?

So, who is responsible for the current high rates of unemployment? Is it former President Bush (43)? The Democrats would tell you that. Is it current President Obama? The Republicans would tell you that.

I am going to posit that the blame needs to go to four places (remember, I may not agree with what I am saying):

1. Financial Accounting Standards Board (FASB)
2. Pension Benefit Guaranty Corporation (PBGC)
3. The internet (no acronym needed)
4. The credit markets

I know. You think I've lost it. Stay with me for a few minutes. I'll tie this all together ... or not ... I promise.

Way back in the 80s, most American workers were covered by corporate pension plans, defined benefit (DB) plans if you prefer (for those young readers, DB plans used to be prevalent and 401(k) plans were virtually non-existent). Financial accounting (balance sheet and income statement) for these plans was done under APB 8. For the most part, that meant that a company recorded a charge to earnings for any contributions that it made to its plan. For CFOs, this was palatable. But, the FASB said that companies needed to switch to accrual accounting under FAS 87. Later (by about 5 years), the same FASB said that companies needed to switch to accrual accounting for postretirement medical benefits under FAS 106. So, what happened? Companies moved swiftly to get rid of their pension plans and postretirement medical plans. I'm not saying that FASB was wrong, I'm just saying that this is what they did and what happened, partially as a result of this action.

FASB didn't create quite enough turmoil to eliminate all the plans that were gone. But, the PBGC picked up where FASB left off. You see, the PBGC is a governmental organization, but it needs to be self-sustaining. So, the premiums that it receives need to cover the benefits that it pays to former participants in plans of largely bankrupt companies. The PBGC was a major influencer in the move to change the funding rules for defined benefit plans. Once upon a time, US corporate pension plans were generally funded on a projected basis. That is, an actuary would project benefits into the future, discount them back using a set of actuarial assumptions and assign some piece of the related obligation to the past, the present, and the future. The PBGC's thought was that plans needed to be funded in a way to limit the PBGC's liabilities. That meant market interest rates and accrued benefit funding. What it also meant, initially, was multiple competing funding rules that produced peaks and valleys in funding patterns for corporate DB plans. Later on, when projected funding went away entirely, companies saw funding as even less predictable. More plans disappeared. I'm not saying that the PBGC was necessarily wrong, just that this is what happened.

Now, what could the internet have to do with this. Recall that in the late 90s, everyone started to get on the internet. And, everyone included start-up firms that provided for online trading platforms. So, people started day-trading. And all was good, as the prices of tech companies went up, up, and away (remember the 5th Dimension?). But, more often than not, those day-traders spent that money. And, the day traders were far too in touch with the 5th Dimension, but they forgot all about Blood, Sweat and Tears (what goes up, must come down). Margin calls abounded and so did loss of capital.

And, then there were the credit markets. I bought my first house in 1985. I had to put 20% down. And, my mortgage payments (plus property taxes and homeowner's insurance) couldn't exceed 28% of my pay. Before that, I had applied for my first credit card in 1979. I got turned down, not because I had bad credit, but because I had no credit at all. Fast forward to 1999. You wanted a house, you took out a first mortgage for 80% of the value of the house and then a second mortgage for another 15% of the value of the house and perhaps a third mortgage for the last 5% of the value of the house or perhaps even more. And, remember that 28% that I mentioned. Forget about that. By 1999, you were qualifying for those mortgages so long as the sum of your mortgage payments, property taxes and homeowner's insurance didn't exceed 50% or sometimes 60% of your pay. And, that credit card that I couldn't get in 1979 ... in 1999, I could have gotten a deck-full (as in 52) of them if I had wanted. The application process? We'll send you a card and you activate it.

Well, we've seen the results of all of these unknowing conspirators, haven't we. 15 years ago, if you asked workers who were in their early 40s at what age they would retire, a fairly large number of them would have told you in their late 50s or early 60s. Those same people are now in their late 50s. Very few of them are retired. Further, very few of them think they can retire in the next five years. Sadly, an awful lot of them don't think they will be financially able to retire in the next 15 years.

So, what has happened? 15 years ago, we knew roughly how many people were going to be trying to enter the workforce today. We were worried, though, that with all the baby boomers retiring, there would not be enough new workers coming into the workforce to fill those jobs. Something happened along the way. The baby boomers can't retire. Instead of too many jobs for the workers, we have too many potential workers for the jobs.

I know that you want to blame it on Obama, or if not, you want to blame it on Bush. But, I am saying that blame may be misplaced. The Four Horsemen of the Apocalyspe (FASB, PBGC, internet, and credit markets) have come into town and ruined our ability to retire. And, with that ruin, has come significant underemployment. Perhaps when we listened to the 5th Dimension instead of Blood, Sweat and Tears, it should have been Richard Kiley singing "The Impossible Dream" (if it's before your time, check it out on YouTube, it's a Broadway classic). Perhaps it doesn't matter. Perhaps this is the new reality.