James Pethokoukis

Politics and policy from inside Washington

Riding a downbound train

Oct 27, 2009 16:41 UTC

This has to be a classic piece of analysis by David Rosenberg:

Without either deep spending cuts or tax increases (a dirty three-letter word in the U.S.A. — remember Bush Sr.’s “read my lips” back in the early 90s that cost him the election?) the only way out of this fiscal mess caused perhaps by the prior Administration and now accentuated by the current Administration will be by monetizing the debt. …  In the final analysis, we all should know how this is going to play out. It is going to be somebody else that foots the bill for all this government incursion, and that is very likely the creditors who hold U.S. government paper. Not that the U.S. would ever default; that will never happen. However, there is very likely going to be a stage where this mountain of public sector debt gets monetized, and while gold is inherently difficult to value, what is going to drive the price higher, in the future, to new record highs will be the supply of bullion relative to the supply of dollars. ( …  Let’s face it, the degree of retrenchment that would be needed to bring the deficit-to-GDP ratio down to the 3-4% level that would allow the debt/GDP ratio to stabilize, would simply be too much for the U.S. electorate to put up with.

Nor does think much of the state of the stock market:

In other words, this is not the onset of a sustainable secular bull market as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:

• Dividend yields were 6%, not sub-2%.
• Price-to-earnings multiples were 8x, not 26x.
• The market traded at book value, not over two times book.
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher.
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear.
• Sentiment was universally bearish; hardly the case today.
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day.
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation

September jobs report: -263,000, unemployment at 9.8 percent

Oct 2, 2009 15:22 UTC

The silver linings here are tough to find, at least according to this summary from IHS Global:

The September employment report signaled a painfully slow path to stabilization in the private employment market, and sharper declines in government jobs. It also suggested that the unemployment rate is likely to hit 10% by the turn of the year.

The leading indicators in the report were not promising. The workweek fell, and is now back at its June low. And temporary help jobs – while declining only fractionally – still haven’t moved into positive territory.

There was nothing to support the view that the economy will be adding jobs before the end of the year. And nothing to support the view that the consumer can sustain the spending increases that we saw in August – employment and hours worked were down, and hourly earnings only inched higher, implying that wage and salary incomes fell.

State and local governments have now shed 160,000 jobs over the past four months as budget cuts bite. This month, 29,000 of those losses came in education as the school year began. The education sector as a whole lost 46,000 jobs this month.

The economy has now lost 7.2 million jobs since the recession began – but the story is even worse than that. The BLS now tells us that it expects to revise down March 2009 employment by 824,000, based on a full employment count from unemployment insurance statistics. That implies that the total loss is now 8.0 million.


I think the “early adoption” of 21st energy and health care reform is capable of putting the job market on a solid ground. As a major driver, IT industry stalled and stranded in a game industry for the lack of 21st energy policy over the stretch of two wars needs to evolve into the all but indefinite energy, medical, and academic industry where the investors are eagerly waiting for policy-makers to act now, which I guess is why the far-reaching and long overdue health care and 21st energy bill have come into focus.

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A case for long-term high unemployment in America

Sep 11, 2009 14:30 UTC

A fantastic article by Joshua Cooper Ramo looking at whether the US is doomed to years of high unemployment. Read the whole thing, but this a key bit:

Many of the ideas Summers developed were codified in a 1986 article titled “Hysteresis and the European Unemployment Problem.” Even today it’s a piece he’s proud of: “Ah, yeah, the hysteresis article,” he interjects when it’s mentioned. Hysteresis is a word that you (and the rest of us) should hope we don’t hear too much of in the coming months. It comes from the Greek husteros, which means late. It refers to what happens when something snaps in such a way that it can never be put back together. Bend a plastic ruler too far, drop that lightbulb — that cracking sound you hear is the marker of hysteresis. There’s no way to restore what has just been smashed.

The idea that hysteresis happens to economies is one that economists don’t like to think about. They prefer to consider economies as yo-yos tethered to the sturdy string of the business cycle, moving up and down from growth to slowdown and back. But from time to time, things do snap. And Summers’ argument in 1986 was that unemployment in Europe, the sort that might persist in the face of growth, was an expression of an economy that had snapped. Europe’s economy was hit not only by shocks like an oil-price spike, a productivity collapse and rocketing tax rates but also by stubborn unions that made hiring, firing and adjusting payrolls near impossible.

Hysteresis, Summers explained, could come from all sorts of shocks like this. And that may be what is playing out in the U.S. If you look at the three great job busts of the past 100 years — the 1930s, the early 1980s and today — you find an important difference. The Reagan recession ended with workers returning to jobs that were the same as or similar to the ones they had lost. But 1930s joblessness was structural. The jobs people lost — largely in agriculture — never came back. Workers had to move to the industrial sector, a transition helped by the demands of a war. It was massive national hysteresis. Sound familiar?