Unemployment Differences in the States

There was an article on Yahoo describing the unemployment situation and comparing some of the statistics between the different states.  Some of the states with the highest unemployment rates include Nevada, California, and Florida.  The state with the lowest unemployment rate is North Dakota.  Can you figure out why this is?

The obvious correlation that I see is that the states with the highest unemployment rates are the ones that experienced the biggest boom and bust with the housing market.  When housing prices were going up at huge rates about 5 to 10 years ago, it was states like California and Nevada that saw the biggest housing boom.  Now that the housing boom has gone bust, these states have the worst unemployment.

A state like North Dakota, with the lowest unemployment rate, did not see a big housing boom in the last decade.  While prices were going up 20%, 30%, or even more in some areas, the price of housing in North Dakota was going up very little.  There was a minimal boom which meant a minimal bust also.

With my study of Austrian economics, along with just plain common sense, it is easy to see that the Federal Reserve was the primary cause of the housing boom.  The Fed artificially lowered interest rates and kept a relatively loose monetary policy.  Monetary inflation then translates into price inflation, but it gets directed into certain hot spots.  Housing was a natural place for this newly created money to go.

Low interest rates made borrowing cheaper.  In addition, a house is a hard asset and is therefore usually a good purchase in an easy-money environment.  In addition, the housing market is subsidized by the government in so many other ways, particularly when it comes to mortgages.  There are also other little things like the mortgage interest deduction on taxes that encourages home buying instead of renting.

The states with high unemployment actually show a real life example of the Austrian business cycle.  The Fed created an unsustainable boom that eventually went bust.  These were misallocated resources.  These resources, which included human labor, must now readjust.  This is the correction process.  This can take time, particularly when the government is interfering and trying to prevent the market from correcting the situation.

In conclusion, the Fed causes a lot of problems.  Libertarians particularly like to look at inflation and how it makes us poorer by making things more expensive.  But high unemployment in states that had a big housing boom and bust also illustrates the horrible effects of central bank policies.  The previous malinvestment that was caused by the Fed (mostly under Greenspan) is the primary reason that the employment situation is so bad right now.  It will continue to be bad in the future if the government doesn’t step out of the way and allow the correction to take place.