Economists are scrambling to make sense of the drastic rise in unemployment and what it means for our long term economy. Former Federal Reserve Chairman, Paul Volker is saying that the "natural rate" of unemployment may rise above previous levels. The "natural rate" of unemployment is the rate at which it neither creates acceleration or deceleration in inflation. The previous high for "natural employment" was 5.5%. Now, in current conditions it may rise to 6.5% of even 7%.
This creates several added problems. First, it will cause a general decline in federal revenues which, in turn, will drive up the federal deficit to over $1 trillion. Next, the government will need to decide if they leave the rate of "natural employment" alone of try and stimulate more job growth, thus increasing the chance for higher inflation.
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