Is the Economy Headed for a Depression?

Today, the Labor Department reported the economy lost 533,000 payroll jobs in November, after losing 320,000 jobs in October and 403,000 jobs in September. This was much worse than was expected and represents wholesale capitulation. The threat of a widespread depression is now real and present.

The economy has shed 1.9 million jobs since December, as the full weight of the banking crisis, trade deficit with China and burdens imposed by high-priced imported oil are bearing down on manufacturing, construction and the broader economy with unrelenting pressure.

Unemployment increased to 6.7 percent in November; however, factoring in discouraged workers, unemployment is closer to 8.7percent. Add workers in part time positions that cannot find full time employment and the hidden unemployment rate is nearly 13 percent.

The economy has been slowing since December 2007. The real question is whether the economy is in a recession or depression?

Recessions are like stock market corrections—after a time, equity prices rebound without government intervention. Federal Reserve interest rate cuts and stimulus tax rebates and spending have shortened the lives and eased the impact of post-World War II recessions, but those policies did not end them. The economy self corrected.

A depression is not self-correcting. Roosevelt Administration stimulus packages—huge deficit spending—eased the pain but failed to end the Great Depression. Roosevelt’s policies did not put the U.S. economy on a sustainable growth path, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks.

The challenges facing President-elect Barack Obama could not be clearer. The current economic slowdown has two structural causes—bad management practices at the large money center banks and the huge foreign trade deficit.

To accomplish lasting prosperity, President-elect Obama will have to fix the banks and the trade deficit. Obama must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses. Obama must make certain that banks do not continue to squander federal largess by padding executive bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives. Industry leaders like Citigroup have announced plans to move in those directions. Many of these bankers enjoyed influence in and contributed generously to the Obama campaign. Now it remains to be seen if a President Obama can stand up to these same bankers and persuade or compel them to act responsibly.

In addition, Obama must address the huge cost of imported oil and trade deficit with China or any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.

Ultimately, reducing the oil import bill will require higher mileage standards for automobiles and assistance to automakers to accelerate the build out of alternative, high mileage vehicles. Fixing trade with China will require a tax on dollar-yuan transactions if China continues to refuse to stop subsidizing dollar purchases of yuan to prop up its exports and shift Chinese unemployment to the U.S. manufacturing sector.

Near term, a stimulus package focused on infrastructure is critical for resuscitating growth. The recent round of tax rebate checks ended up in savings accounts or spent at the Wal-Mart on Chinese goods, and did little to create jobs or accelerate growth. Whereas projects to repair roads, rehabilitate schools and refurbish public buildings would create high-paying jobs at home and provide a legacy in capital improvements that assist growth now and in the future.

However, stimulus spending, alone, won’t fix what’s broke. It didn’t end the Great Depression. Japan has had a succession of stimulus spending over the last two decades and that has failed to restore its economic dynamism. Similarly, President-elect Obama’s massive stimulus package, alone, won’t fix the U.S. economy. He must also reach into the management of the banks, and dramatically reduce U.S. dependence on imported oil and the trade deficit with China. The alternative is economic stagnation or worse, a depression.

In November, wages rose 7 cents per hour, or 0.4 percent. With labor markets weakening, pay raises will be more modest in the months ahead.

The unemployment rate was 6.7 percent in November, up from 6.5 percent in October. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush took the helm. Factoring in discouraged workers, who have left the workforce, and those forced into part time employment owing to the lack of full time work, the unemployment rate is about 12.8 percent.

During the presidential campaign, declining real wages and fewer adults working gave Barack Obama’s proposals to redistribute income through the tax system a lot of traction. However, those policies will do little to correct the fundamental systemic problems that are destroying good jobs and squeezing middle class families, even if they would make them feel better for a little while.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost domestic manufacturing, solving the problems of the large money center banks to get mortgage money flowing and housing construction going again, and energy policies that more aggressively develop alternative fuel sources, conserve oil, and open up new domestic fields for conventional oil and gas production. Reducing dependence on foreign oil requires doing all things environmentalists want us to do and all things environmentalists don’t want us to do.

Politically correct promises to create millions of new jobs producing alternative fuels makes effective presidential campaign slogans, but realistic policies for governing require aggressive development of more conventional oil and gas, as well as nonconventional energy sources, and efforts to improve the energy efficiency of personal transportation.

If the Democrats are not willing to drill for more oil off shore and take on the automobile industry’s resistance to significantly higher mileage vehicles, the U.S. economy will be even more indenture to Persian Gulf oil exporters at the end of President-elect Obama’s first term than it is today.

Finally, diplomacy has failed to redress the currency issue with China. If President Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China’s sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.

Going forward, the economy will add some jobs for college graduates with technical specialties in finance, health care, education, and engineering. However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Construction employment fell by 163,000 in November. This is a terrible indicator for future GDP growth. Retailing shed 91,000 thousand jobs, and financial services lost 20,000 jobs.

Manufacturing has lost 85,000 jobs, and over the last 104 months, manufacturing has shed more than four million jobs. The trade deficit with China and other Asia exporters are the major culprits.

The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.

Ending Chinese currency market manipulation and other mercantilist practices are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade. Neither President Bush nor Congressional leaders like Charles Rangel and Chuck Schumer have been willing to seriously challenge China on this issue, and Senators McCain and Obama appeared comfortable with continuing their approaches during the campaign.

Now President-elect Barack Obama must alter his position, and get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they deprive Americans of jobs in industries where they are truly internationally competitive.

In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to the real income losses Americans will suffer during the Obama years.

Instead, were the trade deficit cut in half and the banks fixed, manufacturing would recoup at least 2 million jobs, U.S. growth would exceed 3.5 percent a year. Real wages and domestic savings would climb, and the federal government would receive more revenues to balance its budget or address other pressing domestic needs.

The choices for the new president are simple. It’s either renaissance or decline. Fix the banks, trade with China and energy policy or become America’s Nero.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

Only by revolution, and that is not going to happen.
Police( the standing army ) in every town.
A debted, and Basically, we are non owning workers, i.e., serfs. We aren't Minutemen on our self sufficient farms anymore.

I think what happens, happens outside the US and is communicated by, for us, the value of the paper currencies, the dollar.

If China goes south, they'll be selling everything they can to keep China from going up in flames. This action will be a year out. This winter will be rough, but China has the cash to buy food stuffs, and support 200 million urban poor.( We're talking cook the rat poor. Not American poor ). But by next winter, China will have to sell American financials and Treasuries to get dollars. They won't be buying Treasuries.

Next year is going to be hell. Cash will be king. Big King. The US will have to either print money, or Treasury notes like mad. The US will have to raise Treasury yields, sucking money/credit out of our and other economies. The dollar might continue to climb, making our exports in a world wide economy worse. Or we could lose our credit ratings and the dollar could fall, but against whom? How may Swiss Franks are out there?

China, with support of Paulson, the Democrats, and Republicans, might keep buying our Treasuries, devalue their currency, and keep their people working by more exports to us. (Maybe the money now to Detroit, is a last dinner out with the Uncle that has cancer. Goodbye, old friend. Goodbye Detroit, Ford, GM. Uncle Sam has a brand new bag, CHINA! Last Washington/Wall Street mover and shaker in the great CHINA-USA scam is a loser!)

Anybody know of an online economist article that explains why endless massive government borrowing will help with this, beyond political. Can all this borrowed and printed cash really jumpstart anything? I know MSM says we have to do it or else.

Karl Denninger is the best online pundit whose commentary will help you make sense of this bleak situation. His logical take is that the problem is excessive debt and that adding more debt is not going to help. He's all for letting all the bad debt default and is convinced that we won't have a functioning economy until that happens. All the actions of Paulson and Bernake will only prolong the pain and make it worse. You can find his website here: http://market-ticker.denninger.net/

Be sure to check the archives for November and December. Lots of good, insightful articles and advice.

Good luck.

How about something that proves the opposite? Friedrich Hayek won a Nobel prize in economics (1974?) for showing that this sort of intervention by a central bank (like the Fed) can't solve these sorts of problems (worse, they actually cause them).

The sort of people who believed that the bailout was necessary (unfortunately including some people on this site who should have known better) are simply ignorant of market economics. The only thing the "bailout" has done is turned what would have probably been a minor recession into a potential economic catastrophe.

Is this now voodoo economics? Are they going to use these metrics after Obama becomes President? Of course not.

I don't see that happening. Even Republicans were wacking Bush for the little tax cuts he did.

I watch the financial and I'd say even on Fox, half or more of the supposed economists and business types think Hoover did nothing, and FDR's programs ‘worked’.

I was a big WW II history nut. Now I am just a nut. Anyways, I read, as a kid, Cornelius Ryan's, The Other Side of The Hill. Basically, what the German Generals were thinking. So, then I started reading more scholarly works on the arguments of how the Reich should fight. The politics and economics outside of rational decision making was immense. Ditto Tojo and the Imperial War Staff.

Basically, they both were in fundamentally loser positions. Since, as an organization, they would not admit it, they took in all sorts of schemes. Right to the end.

That is where the US is. We have been made into an unproductive, anti-manufacturing state that rewards financial engineering and plundering by legal and political means.

Since, both parties are run and lead by elites that have grown up in this ‘system’, they can not, in sufficient numbers, conceive of anything else.

No different than many Germans and Japanese that knew that from the get go their situation was hopeless over time.

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We'll see. I hate to be so mechanistic, so Marxist.

We got into this by political distortions of economic activity, which is pretty much what governments do. The bigger the government, the longer, the more distortion.

We are now kind of like a heroin junkie, borrowed against the trust fund, and thinking that if only we shoot more, borrow more.....then next year is the “I-Get-Clean” year.

We want to believe our Junkie nation will get better. That this is the last time he does the junk. Yeah, sure, his Detroit friend also says he's just needs a fix and he'll get back to work on the cars.

It is kind of like the whole nation has financial Stockholm Syndrome.

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Stockholm syndrome is a psychological response sometimes seen in an abducted hostage, in which the hostage shows signs of loyalty to the hostage-taker, regardless of the danger (or at least risk) in which they have been placed. The syndrome is named after the Norrmalmstorg robbery of Kreditbanken at Norrmalmstorg, Stockholm, Sweden, in which the bank robbers held bank employees hostage from August 23 to August 28 in 1973. In this case, the victims became emotionally attached to their victimizers, and even defended their captors after they were freed from their six-day ordeal. The term Stockholm Syndrome was coined by the criminologist and psychiatrist Nils Bejerot, who assisted the police during the robbery, and referred to the syndrome in a news broadcast.[1]

My problem with the current situation is that almost everything Pelosi, et al, are doing is on the money side of the equation. I'm not going to waste everyone's time...again...telling readers that we are in the classical Keynesian Liquidity Trap. (Interested readers look into the LM-IS curve analysis.) The long and the short of it is that monetary policy like we see from Paulson and the Fed right now is like trying to shoot pool with a rope...it just doesn't work. Strong fiscal measure are needed and the crap Washington is coming out with (e.g., stimulus check) does nothing to solve the problem other than buy a few votes. Significant, permanent, cuts in both corporate and personal tax rates will go a long way towards solving the current economic mess. What Washington is doing is little more than fluffy window dressing.

Denninger and Michael Shedlock are the two best sources for unfiltered stuff. I am short on the major indexes from what they are telling me. Most of the sheep who watch CNBC or the other “hope and pray” types that tell you the market is going to come back “because” are going to get screwed. Once China decides it cannot prop us up any longer the game is up.

Liberalism, self-interest and greed has destroyed this country. We have far too many people who cannot take care of themselves or their families, things cost far too much due to government policies that have jacked the cost of everything from food to housing to automoobiles to education and too many people thought you could get rich from asset appreciation rather than savings, investment in things that produce goods and technological improvement.

Human behavior.

You think Pelosi, Frank, Dodd have any clue what you are talking about?

They are using what they got. State power.

It is the whole reason they are attracted to Washington. You think they are going to cut people lose? Not going to happen.

We are going to get more intervention, more central control. More push from Washington on outwards.

It is the way they think, feel, believe.

The Clowns are driving the bus.

That attitude is like saying that, if rape is inevitable, lay back and enjoy it. I say we go down kicking, screaming, scratching, and bitching in their faces as loud as we can. How many of you have called or written your representatives about things that piss you off? If you haven’t, then you’re simply laying back and enjoying the ride.

Recessions are like stock market corrections—after a time, equity prices rebound without government intervention.

A depression is not self-correcting.

Keynes was the first to show that sometimes, what goes down does not have to go back up. If another depression occurs, the least of our losses will be money. Obammy and Congress will make FDR look like Adam Smith.

Your point goes to my question: this matters why?

I admit I am interested in economics and take academic enjoyment in trying to understand technical data. But, except for the old joke about a recession is your neighbor out of work and a depression is you out of work, it escapes me exactly what the practical differences are and why they matter.

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