Republican candidates during the next two election cycles will, unfortunately, be aided by a high unemployment rate. Fiscal consolidation the world round will restrain growth. Already, the polls show Republicans winning by as big a margin as Democrats did in 2008, implying a reversal of the current situation, an 80 seat flip. While there is no reason to think the numbers will improve for Democrats, the longer unemployment stays high the worse Democrats’ prospects will look. High levels of consumer savings and reduced government deficits will be good for growth in the long run, but deprive it of the short-run demand required to get people back to work soon. Central banks all over the world are aware of the doubt in financial markets that they can withdraw their support and avoid high inflation. However, this is offensive to central bankers and they will fight against this notion. These banks are independent and tasked first with controlling inflation, not attaining full employment. They will begin raising rates before traditional levels of employment are reached, to the ire of Obama’s supporters. Weak demand and the anticipation of higher taxes and more regulations will restrain business investment, and the inventory rebuilding story is already over. To top it all off, even if the economy begins to grow fast enough to keep up with population and productivity growth, people who have exited the labor force will begin looking for work again, keeping the reported unemployment rate high. This is because U3 is the reported rate and does not take into account “discouraged workers” who have left the labor force until the market improves. U6, which does count these workers, shows real unemployment in the US over 15%. The unemployment rate in the US probably will not peak for several more months, according to most economists. This is due to the fact that economic growth is not keeping pace with productivity improvements and population growth, as I described in an earlier post. Roughly, the economy must grow 2.8% annually to hold unemployment steady. Current estimates for the second half of 2010 are for a 1.5% annual growth rate. White House Chief Economic Advisor Christina Romer now estimates that unemployment will not fall under 8% until the end of 2012, almost four years after Obama promised his stimulus would keep unemployment under 8%. Having majored in economics, I think these predictions are spot on, and they spell serious trouble for Democrats in 2010 and 2012.

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