Posted on 12/05/2008 9:29:14 AM PST by mr_hammer
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.
Recession or Depression?
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.
Wages and Unemployment
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.
Manufacturing, Construction and the Quality of Jobs
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.
>>Yes, I’m aware of all that. My question is: what is the practical point of trying to sort out or claim we are in or going into a Depression?<<
The same reason you check the weather report to determine what to wear. It enhances the reliability of short and long term planning.
Is this now voodoo economics?
When you count the disabled, retired, students and those too young to work, the true unemployment rate is over 50%.
Who thinks we can't have inflation during a recession? You have a list?
Maybe my glasses are dirty, but I can't see any deflation of your chart.
THAT period was deflationary.
Disinflationary, not deflationary.
Yep and these metrics should only apply when there is a Republican President! When a democrat is in the White House we should count the family members of the employee as part of the employment forces even if they are not working.
But to work out your question. Well, they do not all mature at once. So, it is not like we have to come up with the money, just like that.
They could sell them quite quickly, to other parties who would then hold them.
Thus it depends upon the worlds appetite for T Bills, which right now, is very good.
I suppose the 2 trillion dollars will mostly come out of dollars from out side the US.
This would make dollars more valuable, as they have gone to China.
But what will the Chinese do with the dollars? Stuff it in mattresses? Maybe they will buy American wheat, farm goods.
At worst we will have to increase the yield on T Bills to find more dollars other than the ones the Chines got. For us it might well pull dollars out of private savings, banks, private investments. So interest rates will go up.
So, we would see higher interest rates, slower economy, China stuffed with dollars, and yet higher debts for us.
Maybe a stronger dollar, China investing in its capacity and exporting yet more and higher value goods.
I can not think more beyond that.
I think we have had inflationary recessions in the past, although what these clowns are doing today make James Earl Carter and his ilk look both wise and restrained. In fact, these bozos seem intent on making Robert Mugabe jealous.
Bush obviously thinks there is nothing the Federal Government can't or shouldn't supply. Bernanke obviously thinks there is no limit as to how large the money supply should be...no limit.
Lots of people think Obama is the smartest guy in the room. I wonder what he sees as a legacy maker, other than dead babies as far as the eye can see.
Nice chart, sink_rules. Keep the faith.
I couldn’t agree with you more.
No kidding. Why only today oil jumped from $42 to $40 a barrel (4 year low) while gasoline futures jumped from nearly 97 cents all the way to 90 cents a gallon (5 year low). Darn that Bernanke!
NO, but I have some links. Beginning with this one from the wall street journal http://blogs.wsj.com/economics/2008/01/04/which-is-the-bigger-risk-recession-or-inflation/
and I am extremely glad to hear you are not one of those who would be on such a list. Actually, I think most of these people know that the situation is not that you "cannot have both of them" but that they think the cure for recession is inflationary activity. My point is that the inflationary activity will lead to the need for interest rate pressure that will lead to semi-depression, or you have to let the currency go......, and you won't stop the recession anyway. Deflation is ugly, but inflation is deadly. Not much you can do to stop deflation, as it is part of the business cycle. You CAN stop inflation, though, by not being a damn fool and printing money it as a tool to alleviate deflation. It is like setting off a nuclear device on your lawn because you don't like the gophers.
Inflation is not deadly. We survive inflation on a daily basis.
Not much you can do to stop deflation,
Except increasing the money supply will stop deflation.
as it is part of the business cycle.
If it's part of the cycle, why don't we have it every few years?
You CAN stop inflation, though, by not being a damn fool and printing money it as a tool to alleviate deflation.
It's true, you don't stop inflation by printing money. Nobody is trying to stop inflation when the threat is deflation.
It is like setting off a nuclear device on your lawn because you don't like the gophers.
Worrying about inflation when deflation is the threat is like treating your hangnail and ignoring your heart attack.
I've been saying for awhile now that Obama is going to the be the nation's first black Jimmy Carter.
"Stagflation".
It's likely, but not certain: in the 1970's the US was a much larger portion of the world's economy than it is today. What happens when we have all the factories all over the world trying to prevent themselves from going under, all trying to sell to us? That's not inflationary.
On the other hand, you have the Fed spending money at a rate that even democrats get helicopter envy. That IS inflationary.
Which will win?
Read an earlier vanity of mine on the subject (from almost three years ago) here.
Kyrie Eleison!
Wouldn't this depend on whether you have lots of spare cash sitting around, or are heavily in debt?
If you have cash, you love deflation.
If you are in debt, you love inflation.
I’m not talking about individuals, I’m talking about the entire economy.
...however...
isn't the economic the aggregate behaviour of individuals?
(i.e. we didn't have a problem of "too much saving" during the Bush administration now ending, as Japan did during their L-shaped recession of the 90's.)
Kyrie Eleison!
“I believe a depression is a recession the government fixed.”
You just found yourself a tagline.
Yes. More people would be harmed by deflation than would be helped.
Thanks for your thinking on this....$2Trillion would buy a lot of acreage in Montana
http://www.chinadaily.com.cn/china/2008-07/04/content_6817936.htm
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