It is not just the gap, but the rapidity of the decline that it is so stunning.
Politics and policy from inside Washington
Yes, says U. of C. prof Casey Mulligan:
Labor market distortions have gotten progressively worse during this recession. The federal minimum wage, for example, was increased once shortly before the recession began, a second time in the summer of 2008, and yet again this summer. The housing collapse has also had multiple harmful effects, such as impeding families who might want to move out of some of the hardest-hit regions toward areas where the economy is doing better.
These types of factors can make a bad labor market much worse. Some of the labor market distortions will stop getting worse over the next couple of months, as housing prices stabilize and the federal minimum wage stays put, but that does not mean that labor market problems will reverse themselves.
According to my measures, labor market distortions have been getting worse at the same rate over the past couple of months as they have throughout the overall recession. Moreover, Congress appears poised to further erode incentives to earn income as an accidental byproduct of its plans reforming health care. Nor do consumers seem to be spending in anticipation of a grand employment recovery.
Thus, my humble prediction for the next several months is that real incomes and spending will continue to grow, although likely at an annual pace less than the 3.5 percent estimated a couple of weeks ago. In other words, as many have feared, this part of the recovery will be “jobless,” in the sense that employment and hours will not rise significantly, and may continue to fall.
Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, thinks the unemployment rate is going to at least 12 percent, maybe even 13 percent. Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn. And even before this downturn, the economy was not generating jobs in huge numbers. If he is right, all political bets are off. I think the Democrats could lose the House and effective control of the Senate. I think you would also be talking about the rise of third party and perhaps a challenger to Obama in 2012.
So here is what I gleaned from Rosenberg’s latest report (bold is mine):
1. For the first time in at least six decades, private sector employment is negative on a 10-year basis (first turned negative in August). Hence, the changes are not merely cyclical or short-term in nature. Many of the jobs created between the 2001 and 2008 recessions were related either directly or indirectly to the parabolic extension of credit.
2. During this two-year recession, employment has declined a record 8 million. Even in percent terms, this is a record in the post-WWII experience.
3. Looking at the split, there were 11 million full-time jobs lost (usually we see three million in a garden-variety recession), of which three million were shifted into part-time work.
4.There are now a record 9.3 million Americans working part-time because they have no choice. In past recessions, that number rarely got much above six million.
5. The workweek was sliced this cycle from 33.8 hours to a record low 33.0 hours — the labour input equivalent is another 2.4 million jobs lost. So when you count in hours, it’s as if we lost over 10 million jobs this cycle. Remarkable.
6. The number of permanent job losses this cycle (unemployed but not for temporary purposes) increased by a record 6.2 million. In fact, well over half of the total unemployment pool of 15.7 million was generated just in this past recession alone. A record 5.6 million people have been unemployed for at least six months (this number rarely gets above two million in a normal downturn) which is nearly a 36% share of the jobless ranks (again, this rarely gets above 20%). Both the median (18.7 weeks) and average (26.9 weeks) duration of unemployment have risen to all-time highs.
7. The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labour demand does begin to pick up.
8. Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.
9. The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.
10. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.
11. So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.
12. After all, the recession ended in November 2001 with an unemployment rate at 5.5% and yet the unemployment rate did not peak until June 2003, at 6.3%. The recession ended in March 1991 when the jobless rate was 6.8% and it did not peak until June 1992, at 7.8%. In both cases, the unemployment rate peaked well more than a year after the recession technically ended. The 2001 cycle was a tech capital stock deflation; the 1991 cycle was the Savings & Loan debacle; this past cycle was an asset deflation and credit collapse of epic proportions. And economists think that the unemployment rate is in the process of cresting now? Just remember it is the same consensus community that predicted at the beginning of 2008 that the jobless rate would peak out below 6% this cycle.
Joel Kotkin has a great piece on how Obama can still save his presidency. The bit on jobs is particularly good:
The key rule of Chicago politics is delivering the spoils to supporters, and Obama’s stimulus program essentially fills this prescription. The stimulus’s biggest winners are such core backers as public employees, universities and rent-seeking businesses who leverage their access to government largesse, mostly by investing in nominally “green” industries. Roughly half the jobs saved form the ranks of teachers, a highly organized core constituency for the president and a mainstay of the political machine that supports the Democratic Party.
The other winners: big investment banks and private investment funds. People forget that Obama, even running against a sitting New York senator, emerged as an early favorite among the hedge fund grandees. As The New York Times’ Andrew Sorkin put it back in April, “Mr. Obama might be struggling with the blue-collar vote in Pennsylvania, but he has nailed the hedge fund vote.”
The Chicago approach works better in a closed political system controlled by a few powerbrokers than in a massive continental economy like the U.S. Health care and education, which depend on government largesse, are surviving.
But the critical production side of the economy that generates good blue-collar jobs – like agriculture, manufacturing and construction – is getting the least from the stimulus.
These industries need more large-scale infrastructure spending, as well as more focused skills training and initiatives to free capital for politically unconnected entrepreneurial businesses. Instead, productive industries face the prospect of more regulation while capital for small businesses continues to dry up.
Those in post-industrial bastions tied to speculative capital – think Manhattan and the Hamptons – are the ones most benefiting from Obamanomics. College towns like Cambridge, Mass., Madison, Wis., Berkeley, Calif., and Palo Alto, Calif., will also prosper, becoming even richer and more self-important. It seems, then, that Obama has done best for elite graduates of Harvard and Stanford and other members of the “creative class.”
The rest of America, however, is still waiting for a real sustained recovery. Industrial and office properties remain widely abandoned not only in Detroit but Silicon Valley. The future sustainability of our economy depends mostly on what happens to those who previously staffed these facilities – those who produced actual goods and services – not just on a relative handful of people working at Google or the national laboratories. In other words, we need jobs for machinists, welders and marketers as well as scientists with Ph.D’s.
I think Henry Kaufman (in the WSJ) accurately outlines the public policy choice when it comes to financial reform: heavily regulated monster banks vs. a more decentralized, somewhat less regulated financial system TBTF creates a need for heavy regulation and less economic efficiency.
From what I could gather from a speech given by Fed Chairman Ben Bernanke at a conference sponsored by the Federal Reserve Bank of Boston a few weeks ago, the Fed favors constraining giant institutions to the point where they would become, in effect, financial public utilities. They might be required to increase equity capital and to limit their activities in proprietary trading and other risky activities.
But under this arrangement, these large institutions nevertheless would still command a vast amount of private-sector credit. And when markets became unstable in the future, other financial institutions would merge in order to come under the government’s protective too-big-to-fail umbrella.
If an overwhelming proportion of our financial institutions are deemed too big to fail, monetary restraint would fall heavily on institutions that are not. Pressure would sharply intensify on smaller institutions that mainly service local communities. Further consolidation would result, which in turn would reduce credit-market competition. At the same time, with increasing financial concentration, market volatility would increase.
All of this would narrow the gap between the Federal Reserve and the political arena. Taken to its logical conclusion, our market-based system of credit allocation would be replaced by a socialized financial system, and the Federal Reserve would become part of it.
A much better approach would be to prohibit any financial institution from remaining or becoming too big to fail. This would require that regulators downsize large financial conglomerates. In this process, the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.
Our financial system is at a crossroads. We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank.
The instant analysis on Senator Christopher Dodd’s aggressive financial reform plan is that it’s more about getting him re-elected than getting a bill through the Senate.
And there’s some truth there. Dodd is in the fight of his political life to keep his U.S. Senate seat. A tough bill plays on populist outrage against Wall Street and mitigates the damaging public perception that he was AIG’s man in Washington.
The bill is also more ambitious than its counterpart in the House, at least in how it deals with systemic risk. (The Dodd version of a Consumer Financial Protection Agency may be slightly less powerful.)
Unlike the White House-blessed plan of House Financial Services Chairman Barney Frank, Dodd’s plan would create an Agency for Financial Stability to deal with too-big-too-fail firms. This new entity could write new regulations or subject such firms to enhanced supervision. Dodd would also combine existing financial regulators into a Financial Institutions Regulatory Administration.
Accomplishing this vast reorganization means clashing with myriad committee chairs and industry lobbyists. And the Richard Shelby-led Republicans on the Banking committee, while favoring limiting the Fed, have no use for the consumer piece or new limits on Sheila Bair’s FDIC.
So the politics are dicey. But an even tougher package might actually be more of a potential political winner by gaining grassroots support across America. Consider that the public seems to believe two big things about financial reform: The Fed should not be given more power, and too-big-to-fail is terrible policy.
The Dodd plan makes progress on the first but could go much stronger on the second. It could have, for instance, embraced Paul Volcker’s argument that banks should be prohibited from owning and trading risky securities (though not necessarily from underwriting stock and bond offerings).
Or Dodd could have incorporated the 225-word amendment of Senator Bernie Sanders, a self-described ‘democratic socialist’, which would require the actual break-up of too-big-to-fail institutions.
Spend a few minutes at a ‘tea party’ or listening to conservative talk radio and you’ll find plenty of appetite for Sanders’ so-called left-wing reforms. Today’s right has about as much use for Big Money as it does for Big Government.
As it is, financial reform is a 2010 issue. Plenty of time to makes its teeth even sharper.
First, Geithner on the dollar and deficits:
“I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Geithner said in a meeting with Japanese reporters at the U.S. embassy. “We bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence … in investors around the world that as growth recovers and growth strengthens that we’re going to bring our fiscal position back to a sustainable balance,” he said.
Now, Harry Reid on job creation:
Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday. … House Democrats have signaled openness to a tax credit for each new hire companies make, but lawmakers have yet to introduce a bill proposing it.
Me: Look, it is going to be jobs first, deficit second with the ObamaCrats. I would not be surprised if Obama’s State of the Union address paired a near-term jobs bill with some commission to deal with the longer-term deficit so as to not freak out the bond vigilantes. A jobs bill would also leapfrog past cap-and-trade, which is starting to look like a 2011 issue.
From the NYTimes:
“I want us to do everything we can to create the conditions for new, stronger growth,” Mrs. Merkel said Tuesday, laying out her agenda in a speech before the Bundestag in Berlin. “Without growth, there will be no investment. Without growth, no jobs. Without growth, no money for education. Without growth, no help for the weak.”
Indeed, a few prominent German politicians have started echoing the supply-side arguments propounded by former President Ronald Reagan and his economists in Washington in the 1980s and carried forward by the Republican Party ever since.
“Particularly because the coffers are empty we need fair taxes to jump-start the economic engine so that more money flows into state coffers,” the head of the Free Democratic Party, Guido Westerwelle, said in an interview with the German newspaper Bild.