Source: U.S. Department of Labor
The U.S. Department of Labor released recent data showing that jobless claims have slightly decreased to 228,000. But the number of Americans applying for jobless benefits has topped 200,000 for nine consecutive weeks and looks worse than previously reported. The advance seasonally adjusted insured unemployment rate was 1.3% for the ending week of March 25, unchanged from the previous week’s revised rate. The changes in the jobless-claims formula do not affect monthly employment report that comes out Friday. The U.S. government certainly uses a different process to adjust those figures, and that has already been updated. Why do high jobless claims remain a serious problem?
Higher jobless claims can slow down the economy because it indicates that more people are out of work, which can have a ripple effect on various aspects of the economy. When people are unemployed, they have less disposable income to spend, which can lead to reduced consumer spending. This, in turn, can lead to decreased demand for goods and services, which can lead to businesses cutting back on production, laying off more workers, and ultimately causing a downward spiral in the economy. Isn’t that what the Federal Reserve wanted?
The Federal Reserve has been raising interest rates as a strategy to tame inflation. While this strategy has generated some positive results, as inflation is cooling off, this decision did not come cheap. It came at a cost, and the cost is to slow the labor market. Indeed, the Feds projected to increase unemployment in order to bring inflation down. Fed Chair Jerome Powell is convinced that increasing unemployment is necessary to reduce consumer spending because consumer spending will reduce demand for goods and services, which in turn will reduce prices for those goods and services.
Additionally, when there are more people out of work, there are fewer people paying taxes, which can result in reduced government revenue. Yet, President Biden wants to increase taxes to fund his various government programs. If there are fewer people working, thus fewer people taxes, does it mean that he will have to increase taxes on those who are still working? If that’s the case then the middle-class, which is already in trouble as it makes up most of the jobless claims, will suffer even more. President Biden will surely claim that a tax increase will only be applied to the super wealthy, but let us not forget that the super wealthy have the resources to legally avoid paying taxes; a privilege that ordinary people do not have.
Ordinary people pay taxes on the money they make while wealthy people pay taxes on the money they spend. Most of the wealthy make money from their investments, and the money tied to their investments is not taxable until those investments are realized for a profit. Hence, the tax burden falls on the middle-class. President Biden will probably seek to increase corporate income tax as a means to increase government revenues and as a means to make wealthy people pay more taxes than the middle-class. If he does so, corporations will be incentivized to run their operations at a loss. Rather than turning a profit, which will be taxed, corporations will adjust their finances so that their expenses exceed their revenues. In that case, they won’t pay corporate income tax, and the tax burden will once again fall on the middle-class.
The bottom line is that when the economy is slowing, raising taxes is not the best course of action in an attempt to stimulate growth. If the government takes from people while their purchasing power is already reduced because of inflation, then they have nothing left to spend. The economy will be exacerbated as a result of bad policies that prolonged the pain that everyone had to endure.