A Jobless Recovery

It is certainly possible to recover from a recession--and still have unemployment on the rise. Indeed, the unemployment rate is a classic lagging indicator in economic growth and recover.

In this most recent recession, we may have the mother of all jobless recoveries. Just look at where things stand at the moment.


Do you remember one of the Administration's goals--from my last blog?

According to the Romer report, Certain industries, such as construction and manufacturing, were likely to experience particularly strong job growth.

We just learned from the Bureau of Labor Statistics (BLS):

• Since December 2007, employment in construction has fallen by 1.5 million.

• Employment in manufacturing has contracted by 2.1 million since the onset of the recession.
  

In a recent Advance Realty and Rutgers report, America’s New Post-Recession Employment Arithmetic, there are several ugly conclusions:

• The Great 2007–2009 recession is the worst employment setback in the United States since the Great Depression.

• In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs.

• The recession followed a very much-below-normal economic expansion (November 2001–December 2007) that was characterized by relatively weak private-sector employment growth of approximately 1 million jobs per year. Recall from my previous post that the $787 billion stimulus package was supposed to create almost all new jobs in the private sector.

• As of August 2009, the nation had 1.3 million (1,256,000) fewer private-sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

• Total “employment deficit” could approach 9.4 million private-sector jobs by December 2009.

Here is the real hurt: The “Harsh Arithmetic of the Employment Deficit” means that we will not likely return to 2007 employment levels until 2017.

Unemployment Rate Keeps Going Up

Earlier this year (January 21 blog) I reported on the research done by Christina Romer, chair for the Council of Economic Advisors. On January 9 she released a 14-page document on "The Job Impact of the American Recovery and Reinvestment Plan."

Here were the goals--which by the following month lead to the passage of the $787 billion economic stimulus plan:

• Create 3-4 million jobs by the end of 2010.

• Certain industries, such as construction and manufacturing, were likely to experience particularly strong job growth.

• More than 90 percent of the jobs created would be in the private sector.

A graph was produced by this council--and it forms the basis for comparing what was estimated then--and what has occurred now with regard to unemployment in the US. It is not a healthy picture.


In early February, the US unemployment rate stood at 7.6%. Congress and the Obama Administration were working on a stimulus bill that would seek to cap unemployment at 8 percent. Unfortunately for many, many Americans those rosy predictions have not panned out.

Indeed, there was question at the time whether this stimulus package would indeed work. Do you remember the issues??

• 26% of the proposed spending would take place after 2010--probably long after the recession has ended. Now while the current recession has not been declared "over," it appears the US will resume GDP growth--the key indicator that we've exited this latest recession.

• There was considerable pork barrel spending that had nothing to do with job creation.

  I might add that if not technically "pork barrel," there definitely has been spending that does not stimulate job creation in any significant fashion...and also money has been spent just to spend the money, while more legitimate projects will not be shovel ready until engineering work is completed in the future.

  If you would like some documented support, please review my June 30 blog article.

• More time was needed to debate this 1,071 page bill--and it was one of the first in a series of bills in Congress that were never fully read by legislators.

This blog article sets the stage for other articles that I will release in the near future.

Creating Money Out of Thin Air

The Federal Reserve pumped an extra $1 trillion into the financial system by purchasing Treasury bonds. They did this earlier this year. This represented a significant effort to bolster the economy--and help the US get out of its recession.


This amounts to creating vast new sums of money out of thin air--just as this man standing next to $1 billion in $100 bills sees.


This action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.

The idea is to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.

The Fed’s action is an expansion of its effort to bypass the private banking system and act as a lender in its own right.

There are risks, however, in doing this. It could dilute the value of the dollar and set the stage for future inflation.

The Fed rarely buys long-term government bonds. The last time was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.

But these are trying times. The US is in a severe recession. Job losses are high and lost housing wealth is significant.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability, says a Fed spokesman.

Capitalism or Socialism

It seems we have been hearing lately that the US is turning into a "socialist" nation. Could that be? Well, before you decide, it would be worthwhile to examine what these terms mean!

It was none other than Karl Marx who popularized the word, capitalism, as a term of derision.


About 100 years ago, capitalism took on a more neutral term to describe an economic system that had these important features:

• Property owned by people, ie, private property.
• Exchange between legally free individuals.
• Production and distribution of goods & services operate primarily through the market mechanism.

Let's take a look at these three elements in context of the current interventions coming from Washington.

Private property: There is now US government ownership of some banking, insurance and auto companies. While President Obama says it is not his goal to be a long-term owner of such companies, this is one factor that gives rise to thoughts of "socialism."


Exchange between legally free individuals. In a capitalistic economy, people choose to work for a company, in exchange for wages paid to them for their labor.

In the Middle Ages, even in recent times, this is contrasted with serfdom and slavery, in which labor is extracted by political superiority or ownership of people.

In today's world, we find Washington exerting influence over this process--again, a reason some may say we are slipping into "socialism."

For example, a great stir erupted by the populist rhetoric from Congress in February regarding the control of executive bonuses for those working for companies who received a bailout. This was so serious that several companies, notably banks, rushed to pay back TARP bailout money that was forced into their organizations last year by then Treasury Secretary Hank Paulson. Now days, most companies wish to steer far clear of any federal intervention, or "support," seeing this a a two-edged sword.

Furthermore, we witnessed President Obama personally interceding to ask for the resignation of GM chairman and CEO, Rick Wagoner. Wagoner probably had it coming, but the White House usurped the rights of GM's Board of Directors.

We now even have a compensation czar in the White House in Kenneth Feinberg.


Production and distribution of goods & services. Adam Smith in his Wealth of Nations talked about an invisible hand moving to determine the prices of goods based on the collective demand of consumers.

Lately, we have the US government telling us what we are going to buy--and how we are going to consume. This is another factor that causes some to cry out, "socialism."

Specifically, production by GM will be "green cars." I like green cars. I like the new Volt. But really, will many Americans buy the Volt, an electric car, when it is priced at $40,000?

The administration is also putting the squeeze on automakers to be more fuel efficient, by raising CAFE standards. These are the rules governing gas mileage for fleets of cars produced by auto makers. This will mean two things:

• Much higher sticker prices, as these new cars will require sophisticated technology and materials to increase gas mileage, and
• Smaller vehicles.
  

I can report that when I drive down the Wisconsin highways, I see LOTS of SUVs, trucks and larger vehicles, driven by people heading to work in the morning.

I anticipate they will hesitate to buy their next vehicle, at a much higher price, when they realize it is going to be considerably smaller--all in order to achieve a "greener" environment.


Speaking of "green," our government is also directing how we will obtain energy in the future. It will mean higher costs for all of us, and those earning less, or on a fixed income, will be affected the most.

When I drive through the Midwest, I see windmills being erected for power in Iowa, Kansas and many other states. Here is a photo of a farm in California.


I like windmills. But realistically, it will be a few decades before they take over as a major source of electricity. Even T Boone Pickens realizes this--as he recently announced that he is canceling his massive windmill project in West Texas.

Our current leadership seems to disdain nuclear power. Countries like France use nuclear as their primary source of energy to light homes and run factories.

Surprisingly, a few nuclear construction permits are underway in the US...after over 30 years without any new construction in our country.

Also, we have lots of oil and natural gas in the US and off our shores. The federal government is generally against drilling in the most profitable spots--and continues with a weak argument that oil exploration companies should continue to look for this natural resource in authorized areas of the US, unfortunately where the prospects for failure are greater.

These are all examples of our government dictating the type of production best suited for the US economy--and in essence, attempting to predict which scientific means will be most suitable for the US, its economy, its companies, its workers & their employment prospects and ultimately, its consumers.

Socialism refers to a theory of economic organization advocating:

• State ownership and administration of the means of production and distribution of goods, and
  
• A society characterized by equal opportunitiesmeans for all individuals with a more egalitarian method of compensation.
  

We are a long ways from a pure socialist economy, but you can see why some Americans are voicing concerns about how they feel our government may be over-reaching, in the name of financial rescue or a green society, in order to achieve broad domestic and political goals.