Christina Romer and the 1937 Warning - Rising Unemployment in the US

Yesterday the figures for may US unemployment were released and surprisingly the figures were higher than expected and reached 9.5% in June, the highest rate since 1983 (which means that 14.7 millions of people were unemployed). The worst is that job losses so far are greater than the numbers observed in last two recessions and the unemployment rate has been rising steadily in the current cycle. Clearly, a rising unemployment may increase the chances of another rounds of defaults (consumers may default on their debts) which may create balance sheet problems for the financial system.

By mid June, Christina Romer, the lead person of the Council of Economic Advisors of the White House, released a piece at the Economist warning the market that the United States and the Obama administration will not repeat the mistake of the 1937, when the United States wrongfully believed that the country was already out of the 1930s depression and the Federal Reserve started hiking rates and the Treasury suspended all the ongoing programs and fiscal stimulus because it became consensual that the depression was over and the recovery was at full force. Christina Romer in that piece wisely explains that the 'glimmers of hope´of the current situation in the United States are not strong enough to justify a suspension of government support. It is then premature to stop the Recovery Act spending, especially because it will still provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.

While some analysts believe that the US recovery will recover in a W format - that means it goes down and up and then goes on a sustained recovery - Christina Romer and the Obama administration are indeed trying to pave the way for a U shaped recovery. In other words, the recovery that is taking place in the US intends to be in full force and the government is using all the tolls available in the world (and clearly in macroeconomics) to avoid that those 'glimmers of hope' overshadow the reality that the United States is still on the road towards a full force recovery. In this sense, the Obama administration is correct in warning that they will not make the same mistake implemented in 1937, when the Fed started hiking rates and the whole previous efforts to boost the economy were somehow lost. In short, it does not come as a surprise that the US unemployment rate increased. Such fact only corroborate Christina Romer´s example that despite the 'glimmers of hope´the United States will continue to fight and to provide all the conditions to take the economy out of the recession using consistent policies and government support.