–  Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. –

Call it a paradox of plenty. In the world’s wealthiest country, home to more obese people than anywhere else on earth, almost 50 million Americans struggled to feed themselves and their children in 2008. That’s one in six of the population. Millions went hungry, at least some of the time. Things are bound to get worse.

This the bleak picture drawn from an annual survey on “household food security” compiled by the U.S. Department of Agriculture (USDA) and released in mid-November. It showed the highest level of food insecurity since the government started the survey, in 1995, and provided a graphic illustration of the effect of sharply rising unemployment.

This year’s picture will be even bleaker - the unemployment rate more than doubled from the beginning of 2008 to now, at 10.2 percent the highest in a quarter century. It is still climbing, and for many the distance between losing a job and lack of food security is very short.

In keeping with the American predilection for euphemisms, the word “hunger” does not appear in the report which classes food security into several categories, from “marginal” and “low” to “very low.”

Marginal food security means, in the lexicon of the USDA, “anxiety over food shortages or shortage of food in the house.” The second category, low, means “reduced quality, variety or desirability of diet,” but not necessarily less food.

The most severe category, “very low,” used to be labeled “food insecurity with hunger” and is defined as “disrupted eating patterns and reduced food intake.” That applied to around 17 million people, up from 12 million in 2007. Black and Hispanic families and single-parent households are the most affected.

It is not the kind of hunger — think African famines, skeletal babies with distended bellies — that brought world leaders to a U.N. food summit in Rome this month to boost aid from rich countries for agricultural development in the Third World. The U.S. is a land of plenty, so much so that a study by the University of Arizona a few years ago found that the average household wastes about 14 percent of their food purchases.

Food is so abundant that overeating is more of a problem, numerically and in terms of public health, than under-nutrition. The Food Research and Action Center, a Washington-based advocacy group, makes the point that “poverty can make people more vulnerable to hunger as well as obesity,” one of the reasons being that food high in calories is cheaper than healthy food. For many  Americans, hunger and obesity are two sides of the same poverty coin.

(International health statistics put the United States at the top of the obesity league. Two-thirds of Americans are overweight and a third of these are obese.)

INEQUALITY OF THIRD WORLD PROPORTIONS

Vicki Escarra, head of Feeding America, a hunger relief charity that runs 200 food banks in the U.S., has likened the growing difficulties of those on the lower rungs of the socio-economic ladder to conditions in the Third World. She is right in more ways than one.

The USDA report reflects inequality of Third World proportions. While the Great Recession has culled the ranks of American millionaires — by 22 percent according to a September study by the Boston Consulting Group — the gap between rich and poor is not shrinking.

Last year, according to a report by the census bureau, the wealthiest 10 percent of Americans made 11.4 times more than those living on the poverty line. The year before, the ratio was 11.2. At the far end of the economic scale, America’s six largest bank holdings have set aside $112 billion in salaries and bonuses during the first nine months of the year. By year’s end, bonuses might exceed the almost $164 billion paid in 2007, before the credit bubble banks had helped to inflate burst and millions of Americans lost their jobs and savings.

Banks and other financial institutions were rescued by a $700 billion infusion of taxpayer money and news of the bonuses coincided with reports that U.S. wages were at a 19-year low. Which helps explain growing anger among a public long famous for lacking the resentment of the rich that is common in other parts of the world.

After all, a bedrock belief in America held that this is the land of unlimited opportunities where every citizen has an equal chance to succeed and become rich. That requires an assumption that the system is fair. How many Americans still believe that? Last summer, a pair of political scientists, Benjamin Page and Lawrence Jacobs, published a study whose findings included that just 28 percent thought the present distribution of wealth is fair.

More evidence that the gap between myth and reality is shrinking comes from the American Human Development project, a research group which found that “social mobility is now less fluid in the United States than in other affluent nations…a poor child born in Germany, France, Canada or one of the Nordic countries has a better chance to join the middle class in adulthood than an American child born into similar circumstances.”

A better chance to avoid food insecurity, too.

You can contact the author at Debusmann@Reuters.com

–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-

It’s July, teen unemployment has risen to 24 percent, and you—or your teenage children—still don’t have a summer job. This is a peculiarly American problem.

In Nepal, according to Hudson Institute research assistant and Nepalese citizen Astha Strestha, “teens just hang around all summer and spend their parents’ money.”

In France, summer vacations are shorter, only 6 weeks, and teens try to stay with relatives outside the city.

In America, summer vacation lasts the better part of three months, and teens work either to earn spending money, contribute to college tuition payments, or simply because they think that they should have a job.

These days summer jobs are less plentiful due to the economy and to increases in the minimum wage.

It’s easier to be employable at a wage of $5.15, the 2006 minimum, than to find someone to hire you at $7.25, the new federal minimum effective on July 24. But just because no one has hired you, it doesn’t mean that you can’t earn money. You can start your own business. If it grows, you can employ friends and siblings, and perhaps keep it going for the rest of the year.

Computer assistance. You may not know it, but you have a comparative advantage in computers. This can be used by helping older adults, who grew up when computers were larger than cars and programming meant putting a pile of cards in a machine. You could help people set up email or social networking accounts, figure out their iPods, build a Web site, organize digital photos on a computer, or construct spreadsheets for bills and expenses.

Tutoring. You may not get straight As in school, but you probably know more about a subject than kids two or three years younger than you. And some of them might want to review material from last year, or get a head start on their classes for next year. Even more likely, parents might think their kids need help. Your slogan can be “Give Your Kids the Best—the Power of Summer Tutoring.”

Bicycle Repair. It’s remarkable how people throw out bicycles that–with a little cleaning, grease and tube repair—can be almost as good as new. Some people have old bikes in their basements that they would like collected, and some cities are even willing to have discarded bicycles removed from their dump. With the help of a bike repair manual you can mend them and sell them on Craigslist.

Yard Service and Car Maintenance. What people value most is their time, and some don’t want to spend their time mowing their lawn, weeding, or washing their cars. In suburbia there are endless opportunities which can carry over into the school year with leaf clearing and snow shoveling.

Summer Camp. One step up from babysitting is setting up informal week-long summer camps for small groups of neighborhood children. The themes could be sports, arts and crafts, reading and writing—wherever your skills may lie. In order to start a business, you need enthusiasm for a publicity drive through word of mouth; flyers through neighbors’ doors; notices with tear-off telephone numbers at grocery stores, houses of worship, community centers, and libraries; or internet sites, such as your Facebook page and Craigslist.

The object is to let everyone know that you’re available. Since businesses generally spread through word of mouth, you could ask the first few clients to act as references, perhaps even giving them a discount to do so. Valuable references and good will are some of the best assets your young company can have. That means always being courteous and cleanly-dressed.

Pricing can be a challenge. Until you find the right price, you might want to ask your clients to pick the price—“pay me whatever you like to mow this lawn”—so that people don’t think that you’re out to exploit them. In some cases, your clients might pay you more than you would have dared to charge on your own.

Just as large businesses collect information about potential customers, you want to keep a good database of your clients by recording names, addresses, telephone numbers, and email addresses.

Then, if business is a little slow, or if you go on vacation and return to town, you can call your clients and politely ask if they need your services. The advantages of starting your own business are numerous. You work for yourself, not a boss. You set your own hours. You don’t have to put up with cranky co-workers. If you’re not interacting with your clients, you can dress as you choose: no one cares if you build a website in your pajamas.

On the other hand, entrepreneurship is unpredictable and has its ups and downs. You might need several tries to get clients. One teen I know intended to spend his summer tutoring full-time and fixing bicycles on the side, yet ended up fixing bicycles full-time and tutoring on the side, since he had more bike customers than students.

Teens, there’s a job out there for you. You just have to go out and make it.

–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-

Next Thursday, just in time for the July 4 holiday weekend, America’s unemployment rate is forecast to rise from 9.4 percent to 9.6 percent, well above rates in other industrialized countries.

Yet today the House of Representatives is rushing to pass the American Clean Energy and Security Act of 2009, even though the bill was incomplete yesterday and congressmen have not yet had the opportunity to analyze it. The bill would send America’s unemployment rate even higher.

The 1,200-page bill, cosponsored by Henry Waxman, Chairman of the House Energy and Commerce Committee, and Edward Markey, Chairman of the House Energy and Environment Subcommittee, would increase the price of energy by setting allowances for greenhouse gas emissions and mandating new standards for energy production and use.  The bill would raise $846.6 billion over 10 years while adding $821.2 billion to federal spending.

The bill requires that greenhouse gas emissions in 2012 do not exceed 97 percent of 2005 emissions, declining to 17 percent of 2005 emissions by 2050.  Meeting these standards now is technologically impossible without radically reducing our standards of living, but Congress is hoping that technology will magically appear as needed.

The mechanism for this is a “cap-and-trade” program under which allowances to emit greenhouse gases would be issued by the Environmental Protection Agency at a steadily declining rate through 2050.  When emissions exceed a firm’s allowance, or cap, it would have to purchase allowances from the government or other firms, a tax under another name, driving up costs that would be passed on to consumers.

Electric utilities have been given free allowances to encourage them to support the bill.  Oil and gas would be particularly hard hit, because they are responsible for 35 percent of emissions yet are allocated only three percent of the free allowances.

Just as the increases in oil prices in the 1970s brought about an increase in unemployment, the energy provisions in the Waxman-Markey bill could usher in years, perhaps decades, of lower economic growth and higher unemployment than would be the case otherwise.

The effects of the oil price increases between 1972 and 1988 have been extensively analyzed by economists Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland.  Although their research deals with the effects of oil price increases, it is also applicable to increases in the price of energy, which would be the effect of Waxman-Markey.

Davis and Haltiwanger find that oil price increases resulted in more jobs lost than jobs gained in almost every industry sector of the economy.  The largest oil shock, in 1973, caused an estimated eight percent decline in manufacturing employment over the following two years.

Oil price increases have larger effects on economic activity than oil price declines, Davis and Haltiwanger calculate, a finding shared by other economic studies.  In other words, when energy prices increase firms lay off workers, but when prices decline the workers are not hired back as fast.

Davis and Haltiwanger also find that higher energy prices are more likely to suppress employment than monetary shocks. Many politicians fret over the harmful effects of recent American monetary policy, but overlook the even greater danger to employment from the Waxman-Markey bill.

Supporters of the bill claim that the new regulations will create jobs, because people will have to be employed to produce the new technology.  But the funds for the new expenditures have to come from somewhere, and money spent on new products is money that cannot be spent on other activities, such buying clothes or food, or anything else that Americans would otherwise buy.  This would drive down employment in those industries.

In fact, not only does the bill penalize American firms through higher costs, it gives firms a financial incentive to move abroad through “offsets,” activities that supposedly lower carbon emissions elsewhere.  Since Congress knows that firms cannot meet the standards in the bill, legislators are allowing firms to meet 30 percent of their 2012 greenhouse gas reduction obligations, increasing to 60 percent by 2050, by buying offsets. Half of these offsets can take place abroad.

The offset provisions allow firms to shift economic activity abroad to countries with laxer emissions standards, further damaging U.S. job creation. A plant’s emissions might exceed its U.S. allowances, yet its technology might produce lower emissions than the norm in a developing country, allowing the relocation to count as an offset.

The American unemployment rate now exceeds those in France (8.9 percent) and Germany (7.7 percent). With unemployment climbing even without the Waxman-Markey bill, the question for Congress is the following:  how high do you want the rate to go?

– Christopher Swann is a Reuters columnist. The views expressed are his own –

This recession is introducing many Americans to a novel experience — the pay cut.

Fifteen percent of employers surveyed by the Society of Human Resource Management reduced pay in the past six months — a threefold increase from earlier this year. Companies like Hewlett-Packard, Caterpillar and the New York Times have taken the pruning shears to wages.

Real pay cuts — when wages fail to keep pace with inflation — are commonplace in recessions, but you would have to look back to the 1930s for the last example of widespread cuts in nominal wages in the United States.

Since Keynes, many economists have treated nominal wage cuts as a virtual impossibility. In 1999, Yale economist Truman Bewley wrote the optimistically titled “Why Wages Don’t Fall During a Recession.”

Wage cuts cause huge resentment, damage moral and raise the risk of losing star employees. Bewley found American firms prefer to lay people off to “get the misery out the door”.

The notion that pay is rigid on the downside has been a cornerstone of much post-war economics. This assumption is now proving about as true for wages as it was for houses.

Pay cuts are threatening to make the leap from anecdote to generalization. The Employment Cost Index is already showing wages growing more sluggishly than at any time since 1983.

Downward pressure on salaries is intensifying. While job losses slowed in May, the unemployment rate jumped to 9.4 percent — the highest since July 1983.

Even this may not fully capture the current oversupply of labor. The U6 unemployment rate — which includes people working part time because they can’t find permanent positions — climbed to 16.4 percent.

With so many workers waiting in the wings, wages nationwide may start to fall over the next couple of years.

The United States would be following the path of Japan in the 1990s — the most recent example of absolute pay cuts in a modern economy. The impact on consumers could be worse than focused layoffs — spreading the pessimism over a broader base.

The Conference Board’s measure of consumers’ income expectations has dipped to the lowest level in its 21-year history.

Alpine levels of household debt — which has doubled to 134 percent of disposable income since 1985 — put consumers in a particularly vulnerable position. Lower wages make it harder to service loans and increase the incentive to defer spending.

As demand ebbs, companies cut headcounts and remuneration further. If companies use the money saved to grab market share by reducing prices the final piece of the deflationary jigsaw slots into place.

Pay cuts, far from averting layoffs, could increase them.

If the trend toward pay cuts increases, the economic consequences will be profound. The damage may be deeper than merely the erosion of spending power. Breaking the taboo on wage cuts greatly heightens the threat of a deflation mentality.

— Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former Chief Economist at the United States International Trade Commission. The views expressed are his own. –

On Friday, the Labor Department will report employment data for May. In April, the economy lost 539,000 jobs, and the consensus forecast is for another 550,000 jobs lost in May. My forecast is for a 561,000 loss.

In Friday’s jobs report the key variables to watch are:

Jobs Creation. May 8 the Labor Department reported the economy lost 539,000 payroll jobs in April, down from 699,000 in March. However, a significant part of this improvement was a surge in temporary Census Bureau positions. The private sector still lost more than 600,000 jobs. In recent weeks, new unemployment claims have remained stubbornly above 600 thousand, and my forecast is 561,000 jobs lost in April.

Even if the economic contraction slows in the second and third quarters, job losses above 400,000 appear likely for the next several months. Job losses will top 7 or 8 million before the hemorrhaging ends.

The economy continued to contract at a 5.7 percent annual pace in the first quarter. The numbers would have been much worse but for a January surge in consumer spending.

Weak data for consumer spending and retail sales in February, March and April, notwithstanding, some analysts expect consumer spending to rebound soon.

Through April, the retail sector continued to bleed jobs, but if consumer spending is indeed strengthening, May retail jobs figures should show some leveling and point to recovery.

Unemployment. In April, the unemployment rate, as computed by the Labor Department, was 8.9 percent, and is expected to rise to at least 9.2 percent for May. According to my forecast, unemployment will reach 9.9 percent by the end of 2009.

Since President Bush took office, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 11 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add in part-time workers who would prefer full-time employment, and the hidden unemployment rate is above 16 percent.

Business vs. Government Payrolls. In April, government employment rose 72,000, as overall payroll jobs contracted 539,000. This indicates the private business economy shed 611,000 jobs.

Construction. In April construction lost 110,000 jobs. Since construction employment peaked in September 2006, the sector has lost 1.4 million jobs.

Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for the level of GDP growth in the second half of 2009 and beyond.

Productive assets not put in place during the recession will not be available to produce goods and services after the slump ends. The U.S. economy will be on a permanently lower growth path thanks to mismanagement of the credit crisis, energy policy and trade with China and other Asian developing countries pursuing mercantilism strategies.

Retailing. Retail trade has shed 766,000 jobs since November 2007, and lost 64,000 jobs in March and 47,000 jobs in April. Again look for a jump in retail employment if the recession is ending.

Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. Since December 2007, finance and insurance has shed 277,000 jobs, and 25,000 in April alone.

Manufacturing. Over the last 109 months manufacturing has lost 5.2 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.

To keep the value of the yuan low against the dollar policy, the Chinese government intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market determined price. The yuan is at least 40 percent undervalued, and provides a like amount subsidy on Chinese exports into the United States and on Chinese products competing with U.S. exports in China and other markets around the world.

Many U.S. manufacturers find it easier to locate production in China and elsewhere in Asia than to add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.

Were the trade deficit cut in half, manufacturing would recoup at least 2 million of the 5.0 million jobs lost since 2000. U.S. GDP growth would be in the range of 3.5 to 4.0 percent a year instead of 2.5 to 3 percent expected as the economy resumes growth in 2010. Real wages would rise briskly.

At his confirmation hearing Treasury Secretary Geithner acknowledged China is manipulating its currency and promised to work toward a realignment of currency values; however, the administration has backed off this position.

President Obama must 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 derive primarily from currency practices that make Chinese products artificially cheap in U.S. and other markets and Chinese restrictions on imports. These Chinese policies 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 job and real income losses Americans will suffer during the Obama years.

James H. Carr is chief operating officer for the National Community Reinvestment Coalition, a Washington-based association that promote access to basic banking services for America’s working families. He is a member of the Insight Center for Community Economic Development’s “Experts of Color Clearinghouse”. The views expressed are his own.

The U.S. economy is unraveling at a pace not seen in decades. The more than 650,000 jobs lost last month has contributed to a growing concern that the unemployment rate could rise to 10 percent or higher before the economy rebounds. At the center of the economy’s instability is a foreclosure crisis that has claimed 3.5 million homes in the last year alone, and threatens the loss of an additional 8 to 10 million homes to foreclosure over the next five years.

The loss of wealth associated with the collapse of the housing market is staggering. More than $5 trillion in housing equity has virtually evaporated since the foreclosure crisis began. Major stock indexes have also been cut in half, further contributing to decreased consumer confidence, substantially reduced spending, lower productivity, rising unemployment and additional foreclosures.

The magnitude of the economic decline has led many observers to conclude that the current crisis is an “equal opportunity financial nightmare.” But, reality paints a different picture.

While few have been able to escape the financial pain completely, African Americans, Latinos, Native Americans and many Asian sub‐populations are bearing the brunt of this national epidemic. Today, as the national unemployment rate rests at 8.1 percent, African Americans and Latinos are mired in double-digit job losses — the unemployment rate exceeds 13 percent for African Americans, is just under 11 percent for Latinos, and is a little over 7 percent for non-Hispanic whites. For young black males, the rate is 25 percent and climbing.

Before the current crisis, African Americans and Latinos held on average a mere $10 and $12 of net worth respectively for every $100 held by the typical non‐Hispanic white household. The disproportionate impact of the foreclosure crisis on African Americans and Latinos expands further the racial and ethnic wealth gap.

African Americans and Latinos were the disproportionate targets for the unfair, deceptive and reckless lending practices that triggered the foreclosure collapse and imploded the credit markets. The situation is so dire within the African‐American community that United for a Fair Economy, a Boston‐based policy group, estimates that African Americans could experience the greatest loss of wealth since Reconstruction.

To date, federal intervention has focused almost exclusively on propping up the credit markets. While ensuring the health of the credit system is essential, ignoring the plight of struggling homeowners has proven to be a costly and ineffective remedy. In total, the federal government has provided $9.7 trillion in investments and loans to ailing financial institutions. This amount is equivalent to almost 90 percent of all mortgage debt outstanding. Yet only 11 percent of outstanding home loans are delinquent or in foreclosure.

Meanwhile, the financial system remains in critical condition and may require several hundred billion dollars of additional life support. The Obama administration recently launched the most comprehensive program to date to stem foreclosures, but more borrower‐focused assistance is needed. The administration has also enacted a major economic recovery program to preserve or create 3 to 4 million jobs. Although impressive in scale and scope, that nearly $800 billion package of stimulus spending will not fully repair the severely damaged economy that has been inherited by the new administration.

There is growing consensus that a second round of stimulus will be needed. The administration and Congress should consider targeting spending in a manner that prioritizes communities that have the highest levels of unemployment, the greatest concentrations of foreclosures and historically under‐funded, inferior or poorly maintained infrastructure.

Channeling dollars to individuals and communities that need them most will immediately stimulate the economy and save and create jobs because families living on the margins of survival will pour those recovery dollars immediately back into the economy through spending on food, medicine, clothing, child care, energy, transportation and other necessities. Prioritizing areas hardest hit by the foreclosure crisis would more directly help stabilize the housing markets and steady falling home prices that continue to infect financial institutions.

Finally, investing in areas most in need of infrastructure improvements would provide fertile ground for shovel‐ready projects in communities long‐neglected. This prioritization of economic recovery spending would not only jump start the economy, it would aid the most financially vulnerable populations, stabilize communities, and reward all Americans by providing a more direct route to economic recovery.

Of course, there are those who will feel now is not the time to focus on wealth and income disparities and that further one‐time tax rebates to struggling middle-income families generally would be more equitable in the current crisis. But broad‐based stimulus checks will not have the same economic leverage effect as channeling those same dollars to the families and communities that need them the most.

– John Kemp is a Reuters columnist. The views expressed are his own –

Rising unemployment is the now the largest single threat to attempts to stabilize the banking system through recapitalization and assets swaps designed to remove toxic assets from bank balance sheets.

It is also the main impediment to restarting bank lending, renewing output growth and preventing debt-deflation becoming entrenched.

So far, the rising wave of defaults has been concentrated in the riskier portions of banks’ loan books: subprime mortgages, buy-to-let loans, and lending to private equity ventures and management to finance asset acquisitions and highly leveraged buyouts.

Defaults on prime mortgages, credit cards, auto loans and other forms of bank lending have all risen, but generally not very much, and from a very low cyclical starting point.

Senior bankers are correct when they insist conventional parts of the lending business have performed well until now. Problems have arisen mostly on the funding side of banks’ balance sheets and certain specialized parts of the lending side.

Elsewhere risk-management systems on the lending side have performed reasonably well. Losses have risen where credit control and risk management systems were deliberately overridden by senior executives anxious to grab market share or generate mortgages for packaging as part of the originate-and-distribute model. Leadership failure rather than technical errors in credit control lies at the heart of the debt crisis.

But the accelerating wave of job losses, especially in the United States and the United Kingdom, threatens to create a new and even more deadly threat to the banking system.

RISING JOBLESSNESS

Between November 2007 and January 2009, the number of people in full-time employment in the United States fell by 6.1 million (5.0 percent) from 121.9 million to 115.8 million, according to the Bureau of Labor Statistics’ “Current Population Survey” (see https://customers.reuters.com/d/graphics/EMP1.pdf).

The pace of job losses is accelerating. Almost as many full-time positions were lost in just the three months from November 2008 to January 2009 (2.6 million) as had been lost in the whole of the previous year (3.5 million).

It would be nice to assume most of those who have lost full-time jobs were well-paid professionals living off past bonuses and “resting” until banking picks up. But the statistics suggest otherwise.
The number of people unemployed but actively looking for work has jumped 4.4 million since November 2007 (and by 1.1 million in the last three months alone).

Others appear to have settled for part-time work instead. The number of part-time workers has risen by 1.5 million (and more than 600,000 in the last quarter).

Some have simply given up. The number of working age people not actively seeking work and longer considered part of the labor force has risen almost 2 million in the last 15 months.

FALLING CASH INCOME

Falling full-time employment rates are now translating into declines in household income. Total personal income (adjusted for population growth but not prices) stood just 0.5 percent higher in December 2008 than it had been twelve months earlier. Personal income is rising at the slowest rate since the start of 2002 and before that the 1960s.

As layoff programs are implemented, income growth looks set to turn negative for the first time in more than 40 years during the first half of 2009 (https://customers.reuters.com/d/graphics/INC1.pdf).

The situation is even worse than the headline figures suggest. Personal income from wages and salaries in private-sector employment posted declines in both November and December compared with the same period a year earlier, the first sustained fall since 2002-03 (https://customers.reuters.com/d/graphics/INC2.pdf).

Only continued growth in public sector wages, social security payments and other transfers, some of them triggered by the rise in unemployment, is keeping the overall growth in household incomes positive (https://customers.reuters.com/d/graphics/INC3.pdf).

DEFAULT RATES SURGING

Even with the safety net, the rising tide of unemployment is pushing more and more households into default.

The proportion of single-family residential mortgages in which some or all payments are 30 days past due or more has climbed from 1.73 percent in Q3 2006 to 2.72 percent in Q3 2007 and a staggering 5.08 percent in Q3 2008 (https://customers.reuters.com/d/graphics/DEL1.pdf).

By the middle of last year, the number of non-business bankruptcies was already running at an annualized rate of more than 1 million per year, up from 600,000 two years earlier.

Bankruptcies are increasingly wiping out households. The number of bankruptcies under Chapter 7 (which involves liquidation of assets) had doubled to 720,000 per year, while debt reorganizations under Chapter 13 were up 45 percent to 345,000 (https://customers.reuters.com/d/graphics/BUST1.pdf).

Default rates and insolvencies are both expected to have risen substantially when data for Q4 is published in the next few weeks, and will keep on rising in Q1 and possibly Q2 as job losses work their way through.

The problem is that income losses associated with rising unemployment are highly concentrated. The risk of default on mortgage and other loans jumps sharply when a household’s primary income earner becomes unemployed, or it loses a major secondary source of earnings.

Loan losses on otherwise sound conventional loans risk draining banks’ capital, along with bonus payments and dividends paid to shareholders, even as governments on both sides of the Atlantic try to pump money into them through recapitalization programs and swap out more obviously impaired assets from their balance sheets.

Moreover, the fear of unemployment restrains spending even among households that remain in work, and the risk it will rise further increases the danger to banks making new loans.

EMPLOYMENT, NOT OUTPUT

Output in the United States, the United Kingdom and most of the other major economies contracted sharply in the final three months of last year. But this is only the first round. Rising unemployment will force a second round of spending cutbacks in the coming months, deepening the recession.

Unless government policy can stem the rising tide of redundancies, attempts to stabilize the banks and restart growth will come to nothing.

I have written elsewhere about the need to sustain nominal income growth (including generating a positive rate of inflation) to preserve capacity to repay debts fixed in nominal terms. But the distribution of nominal income is as important as the total in terms of default rates.

Government policy needs to sustain high levels of employment as well as ward off a collapse in asset values or a downward spiral in wages and prices. The central aim of the stimulus packages being considered around the world needs to be maximizing employment, rather than output.

This suggests the focus needs to be on spending money on labor-intensive low-skilled services, construction and low-technology manufacturing areas rather than transformative new technologies intended for a long-term legacy.

Expanding employment within the public sector itself, or commissioning simple construction work and an expansion of existing services and procurement projects is likely to be more effective.

In many of these areas, output can only be delivered locally rather than traded across borders, minimizing the risk fiscal stimulus will leak abroad to foreign firms, without resorting to the more obvious trade barriers, such as the incendiary “Buy American” provisions in the U.S. stimulus bill.

The risk with the current debate on stimulus spending is that it is confusing the important short-term goal of job creation with longer-term investment and social transformation needs such as new energy technology. Park keepers, social care workers, new school buildings and social housing are what the economy needs now.

Much of this spending is on the type of low-technology, semi-skilled, labor-intensive and low-productivity work that in other times would be decried as a waste of money. But right now creating jobs - not building a shining legacy for the future - is more important. There will be plenty of time to worry about technological transformations later.

For previous columns by John Kemp, click here.

November's job losses were the steepest since December 1974, when 602,000 jobs were shed. Analysts polled by Reuters had predicted a reduction of 340,000 jobs.

"This is a clear employment blowout. Firms are reacting as dramatically as they can to make sure they have cost structures they can survive the recession we are in," said Joel Naroff, president of Naroff Economic Advisors.

One reader commenting on the site feels the job losses have not hit bottom. "I predict 30% unemployment by March of 2009. The retailers are gonna tank right after Christmas. Look for some really good deals!" wrote Smacktle.

Not all responses were as dire.

"Well these are pretty bad numbers. This will be a real test to see how much bad news is priced into the markets. Futures are down quite a bit, but I actually expected them to be down a lot more given these terrible recessionary numbers," says Jeff Kleintop, chief market strategist for LPL Financial in Boston.

"It might be hard in future months to get numbers that are any worse. It might be good that we raced to some of the worst numbers we've had because perhaps it can't get incrementally worse."

Some of our readers found the data less shocking.

"This is not a big surprise, really. One has only to observe how many fewer cars are on the road shortly after rush hour, how many empty seats are on the planes into or out of major hubs, how many fewer people are in front of you in any line for services from movie theaters to tire stores, how much more quickly you are seated in a restaurant," writes Jaime Simmons.

What you think about today's unemployment numbers?

(Pictured above: A member of the Laborers Union Local 89 waits outside his local union hall after placing his name on the job list in San Marcos, California November 7, 2008. REUTERS/Mike Blake)

– Diana Furchtgott-Roth, a former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

By Diana Furchtgott-Roth

Pity President-elect Barack Obama. Today, only three days after his historic victory as the first African-American elected president, the Labor Department announced that the economy lost 240,000 jobs from payrolls in October and that the unemployment rate rose to 6.5%. This underscores the difficulties he faces in raising taxes on “the rich” to fund new spending.

Obama must recognize that his campaign promises are impossible to implement without making the economy sicker. The economy is weak and getting weaker, probably contracting now at an annual rate of 3-4 percent.

Obama’s promises include a combination of tax cuts and welfare for 95 percent of working Americans, an end to America’s foreign oil dependence, a costly healthcare plan, more education spending, and so-called pay equity for women. Much of this is supposed to be funded by levies on businesses as well as tax increases on those making over $250,000.

But, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, Obama’s tax package would cost $2.9 trillion over the decade from 2009 to 2018. That includes increasing the tax rate on capital gains from 15 percent to 20 percent, and raising the top two tax rates, 33-36 percent and 35-39.6 percent, on singles with taxable income exceeding $165,000 and married couples earning over $201,000.

The Tax Policy Center’s estimates do not include the effects of financial market chaos and the stock market decline, which has reduced taxable income. And with the economy worsening, tax increases on upper income earners would net less than the Center projected, increasing the 10-year deficit to over $3 trillion.

Here’s one small example. In 2005, the latest data available, the Internal Revenue Service recorded 3.5 million returns with $200,000 or more. About half those returns had capital gains income, which averaged $304,000, netting approximately $80 billion in taxes annually.

These revenues will be reduced by weak stock markets—as well as by disincentives to invest stemming from higher taxes. In addition, many Americans are losing jobs, meaning not only less wage and salary income to be taxed but increased government payouts for unemployment benefits.

As president, Obama will have difficulty paying for new projects such as an incremental $65 billion health care plan, a $30 billion addition to the Medicare prescription drug plan, and $37 billion in increased education and research spending—all estimates for one year.

The bill for some other proposals would go to employers, who are already struggling to survive the recession. Investments in alternative energy and electric vehicles, for instance, would be funded by requiring purchases of permits to emit carbon, estimated to raise $56 billion annually.

Obama would also require most employers to offer paid sick and maternity leave, vacation, and parental leave for school visits. Employers would be penalized for paying women less than men for “equivalent” jobs, however they are defined.

Of course, in a recession, federal deficits are desirable. The question is how to structure them to help the economy recover. By increasing taxes on upper-income earners, small businesses, and capital gains, President Obama would reduce incentives to work and invest. Additional requirements on employers would encourage them to open plants overseas, rather than in America, slowing job creation.

After the euphoria in the streets and the chants of “yes we can” have faded, the question will remain: do Obama’s promises make fiscal sense?

Diana Furchtgott-Roth can be reached at dfr@hudson.org.