"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here).  "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here).  It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession.  Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions.  There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.

I remember 25 years ago when the unemployement numbers were this high.  I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS).  The economy was in terrible shape after several years of economy micro-rule under President Carter.  A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities.  The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed. 

In 1982, things didn't look good.  And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in.  A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy.  The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.) 

No one knew if it would work.  Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin.  But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.

Today is 2009, and while unemployment rates may look similar – not much else is like 1982.  Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools.  Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans.  There was a housing shortage, but people struggled to afford a home with interest rates that high!  And materials cost (due to inflation) was driving up construction costs more than 12-15%/year.  Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.

The signs of an impending collapse have been pretty clear for the last few years.  First, there was the "jobless recovery."  While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people.  There was even considerable surprise at how robust the economy was, given that it had no job creation.  But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual.  Those who did have jobs were taking advantage of low interest rates to purchase.  On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel.  The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500. 

Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come.  The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s.   But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth.  Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone!  Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking!  What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact.  Year after year of Lock-in produced weaker and weaker results.  And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.

All Locked-in systems become victim to these declining results.  It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up.  Markets shift and needs change.  People that once focused on buying a new car start focusing on how to retire.  People that once wanted great schools want better parking.  People that wanted cheaper and better restaurants want cheaper and better health care.  The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit.  Results slowly start declining, until eventually they fail to respond to old efforts at all.

Comparing our unemployment rate today to that in 1982 is an interesting historical exercise.  We can see similar outcomes.  And what's similar about the cause is that Lock-in to outdated practices led to declining performance.  That the practices were about 180 degrees apart isn't the issue.  Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions.  The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s.  Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009.  In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices. 

Today we need new ideas.  To overcome rising unemployment requires we look to the future, not the past for our recommendations.  We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long.  We must be willing to Disrupt old practices to try new things – and use White Space to experiment.  The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business.  Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).