Fed predicts unemployment rate of 7.5% in … 2012

Hope and change, my friends … hope and change:

The unemployment rate will remain elevated for years to come, according to a forecast released Tuesday by the Federal Reserve that addresses for the first time economic conditions at the time of the next presidential election.

It paints a grim picture. Top Fed officials expect the unemployment rate to remain in the 6.8 to 7.5 percent range at the end of 2012 and said it could take “about five or six years” from now for economic activity to return to normal. The jobless rate was 10.2 percent in October. …

The math is simple: The U.S. economy is capable of growing at roughly 2.5 to 3 percent a year, thanks to population growth and technological improvement, and needs to grow faster than that to create large numbers of jobs and significantly improved standards of living.

Following the last recession of comparable depth for example, in 1981-82, gross domestic product growth averaged a 7.8 percent annual rate for four quarters.

In this recession, by contrast, the five current Fed governors and 12 presidents of regional Fed banks expect growth of 2.5 to 3.5 percent in 2010 — which would be enough to bring the unemployment rate down only slightly.

“Business contacts reported that they would be cautious in their hiring and would continue to aggressively seek cost savings,” said minutes of the Fed policymaking meeting earlier this month, which were released alongside the forecast. The officials “expected that businesses would be able to meet any increases in demand in the near term by raising their employees’ hours and boosting productivity, thus delaying the need to add to their payrolls.”

Why did we experience a growth rate of over 7% in 1982?  Ronald Reagan cut taxes and reduced regulation.  He lowered the capital gains tax rate to encourage investment.  Reagan and a Democratic Congress also pushed through tax reforms on retirement accounts that created a broad investor class of Americans, allowing much more capital to flow into the market in the 1980s for investment and technological innovation.  Reagan also encouraged energy exploration and production by eliminating self-defeating tax treatments for new resources.

Why won’t we get it now?  Obama wants to hike capital-gains tax rates.  He also wants to increase tax burdens on multinational corporations based in the US, although he had to put that aside for a while.  Obama and the Democrats also want to escalate energy prices with an ill-advised attack on carbon emissions.   Obama’s skyrocketing deficits portend higher inflation, higher interest rates, or both in the next few years.  All of the price signals on taxes sent thus far by the White House and Congress have investors clinging to their liquidity.

So now we will have high unemployment rates not just through next summer, but probably through the next presidential election three years from now.  Looks like we’ll see a rebirth of the Misery Index, and a rerun of the 1980 election.  If we still have a 7.5% unemployment rate in 2012, Obama will join the Democratic leadership in the Senate on a train ride to political oblivion.

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