James Pethokoukis

Politics and policy from inside Washington

12 reasons unemployment is going to (at least) 12 percent

Nov 11, 2009 16:04 UTC

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.


According to the latest U6 measure of unemployment, the number already stands at 17.3% and passed the 12% a long time ago.

A different take on Buffett’s new bet

Nov 3, 2009 19:10 UTC

Michael Mandel of BW doesn’t think the Oracle’s purchase of Burlington Northern Santa Fe should be interpreted as a positive economic sign:

Let’s take a look at what Burlington Northern carries. Its major freight revenues (as of 2008) come from coal (23% of revenues); agricultural products (20%); international intermodal shipments of consumer products, which is probably mostly imports (16%); construction and building products (14%); and petroleum products (4%).

In essence, Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products. If he thought that innovation was going to be the driver of the next ten years—biotech, energy, and infotech—he wouldn’t be buying Burlington Northern.

I’m not saying that Buffett is wrong. His skepticism about the tech sector in the late 1990s, and innovation in general, turned out to be right on the mark. Berkshire Hathaway stock over the past decade has risen by 84%, whil the S&P 500 is down by 18%.

But his “all-in wager on the economic future of the United States” paints a remarkably gloomy picture of where we are heading.


I think Buffett and GS are co-conspirators to make money by deception. Why the anouncement today ? The market was going to tank. Also GS longed Burlington couple of days ago and Buffett is in it.
Remember when he lobbied Obama to approve TARP? It was a stunt to make his holding in GS pays off.
That old fart is becoming a GS hit man.

Posted by Dr Georgy | Report as abusive

A tale of two economic recoveries

Nov 3, 2009 18:38 UTC

Which one do you believe? John Hussman sketches them out:

1) One possibility, which is clearly the one that Wall Street has subscribed to, is that the recent downturn was a standard, if somewhat more severe than normal, post-war recession; that the market’s recent strength is an indication that it is looking forward to a full “V-shaped” recovery, and that the positive print for third-quarter GDP is a signal that the recession is officially over. Applying the post-war norms for stock market performance following the end of a recession, the implications are for further market strength and the elongation of the recent advance into a multi-year bull market.

2) The alternate possibility, which is the one that I personally subscribe to, is that the recent downturn was the initial phase of a more prolonged deleveraging cycle; that the advance we’ve observed in recent months most likely represents mean-reversion – qualitatively and quantitatively similar to the large and often abruptly terminated “clearing rallies” of past post-crash markets; that major credit losses are continuing quietly but are going unreported thanks to changes in accounting rules by the FASB this past spring, which allowed for “substantial discretion” in accounting for loan losses and deterioration in the value of securitized mortgages; that a huge second-wave of mortgage losses can be expected from a reset schedule on Alt-A and Option-ARMs that has just started (following a lull in the reset schedule since March) and will continue into 2010 and 2011; that intrinsiceconomic activity remains abysmal; that recent GDP growth is an artifact of massive fiscal stimulus that is unlikely to have sustained follow-through; and that recent market valuations are not representative of those observed at the end of most post-war recessions, but are instead similar to those observed at major market peaks prior to the mid-1990′s.


How about a middle ground? My take is the 3.5% GDP number took the v-shaped recovery off the table. As you pointed out in a previous blog entry, that number is quite low compared to the first quarter of recovery after previous downturns and therefore should have been interpreted as a disappointment.

Having said that, I’m not sure I can buy off on an overly gloomy picture going forward. I’ll take Hoffman at his word regarding the credit problems he listed, but does all of that translate into an economy that has only one place to go — down? I’d say it translates into an economy that still faces some headwinds. But headwinds or not, it’s usually been foolish to bet against the American economy. And oh yeah, don’t fight the Fed.

So my vote is for a modest recovery going forward, but recovery nonetheless.

Posted by Bill, Fairfax, VA | Report as abusive

Larry Summers: Tax increases won’t hurt economy

Nov 2, 2009 14:51 UTC

Here is Obama economic guru Larry Summers at the Economic Club of New York: “I don’t find there to be much evidence that suggests that raising top marginal tax rates from 35 to 39 percent that will be implicit in the repeal of the Bush tax rates will do substantial damage to incentives in the economy.”

1) Remember that the 1993 Clinton tax increases — the Bush tax cut  expiration would restore some of those rates – -happened when the economy had been growing briskly since the 2Q 1991. A very different situation today.

2)  Here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

3) This tax increase would be in addition to possible healthcare and energy taxes.


Consider the source, period! Why should We be required to pay higher taxes to make up for the incompetence, greed and arrogance of both sides of the political aisle?

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Economic fears drive Pelosi’s healthcare push

Oct 30, 2009 14:17 UTC

First you have to realize that Mark Zandi has become the de facto chief economist for congressional Democrats. Here is a bit from his testimony yesterday to the Joint Economic Committee:

The Great Recession is over, but the recovery will be a difficult slog through much of next year. The risks are also uncomfortably high that the economy will backtrack into recession. This would be an especially dark scenario, as the economy would almost certainly be engulfed in a deflationary cycle of falling wages and prices. The Federal Reserve and fiscal policymakers would also have fewer options and resources with which to respond.
A range of problems suggest that such a scenario cannot be easily dismissed. Most obvious are the very high and rising unemployment and increasingly weak wage growth, the mounting foreclosure crisis, rising commercial mortgage loan defaults and resulting small bank failures, budget problems at state and local governments, and dysfunctional structured-finance markets that are restricting credit to consumers and businesses.

Me: So if you are Speaker Pelosi and Harry Reid, here is how you interpret this: The economy will still stink on Election Day 2012. Voter disapproval of Dems will continue rise.  Better pass healthcare as soon as possible or you won’t be able to pass it all.


Good point. Another problem is that the benefits to any bill that passes won’t start until 2013, but the taxes will start earlier, which won’t go over well, especially in a bad economy. Obama told people their premiums would fall if he passed his bill, but this seems unlikely to happen. That is when we’ll hear that you just can’t trust the insurance industry and it’s time for single-payer.

And after the GDP report ….

Oct 29, 2009 17:37 UTC

Some cold water via economist Dean Baker of the liberal Center for Economic and Policy Research:

While the growth shown in this report allows us to pronounce the recession ended, it does not provide much basis for optimism about the future. Consumption spending is virtually certain to shrink in future quarters. The same is true of structure investment and state and local government spending. We are unlikely to get much boost from the trade sector or much further boost from defense spending. The only sector that is likely to be a source of substantial growth in the next year is inventories, as the rundown eventually reaches an endpoint. However, with so much weakness elsewhere in the economy, inventories fluctuations will not turn the economy around.

America’s Potemkin Economy

Oct 29, 2009 14:34 UTC

That the US economy has stopped shrinking is certainly good news. But what kind of recovery is this? Strip out Cash for Clunkers and 3Q GDP growth came in at 1.6 percent. Also strip out slowing inventory cuts and GDP would have been just 0.6 percent. Then you have a report that the WH has overestimated the number of jobs created by the stimulus.

More from economist Robert Brusca:

1) But the fact is that inventories are still being cut, not being built up. Although less inventory cutting is a technical boost to GDP the fact of cutting tells us that the economy has not yet turned any corner very sharply.

2) Consumer spending spurted at a 3.4% pace this quarter, spurred important by cash for clunkers. But that program has come and gone and spending levels have SUNK BACK. So consumption is not yet on a strong sustainable expansion path.  … Cash for clunkers carried the quarter. It’s gone in Q4 and spending levels will recede, with GDP growth taking a hit. Will other spending pick up and compensate?

3) Business investment spending was a net negative this quarter and commercial real estate is under pressure – it will be no source of growth. Still business spending on equipment and software turned positive for the first time in six quarters.

4) Government spending rose by 2.3% the fifth highest rise in the last seven quarters. This is not a very good return on our stimulus monies spent. About three-quarters of a trillion dollars has been spent and with no discernable impact on GDP or on jobs.


We won’t enter a real recovery until we move from consumption mode to production mode. We produce little if anything of any real value. We make nice nick knacks but that’s about it. We can’t cure Cancer, AIDS, dementia, or anything else with a “financial product”. But we can sure watch others out perform the US in these areas with stunning clarity on a nice plasma screen tv made over seas.

We are magnificent killers. Our military is probably the best in the world. But that’s pretty much the only thing we’re any good at. Or at least, that’s the only thing we show the world we’re good at.

VAT Attack! Another reason it is a bad idea

Oct 28, 2009 18:36 UTC

One reason many free-marketeers want to take a pass on a value-added tax is that it would only fuel bigger government via higher tax revenues. Indeed, the good folks at TaxVox find new research that helps make that case (bold is mine)”

In the most recent edition of the American Economic Review, Raj Chetty, Adam Looney, and Kory Kroft, examine the effect of tax transparency – what economists call salience – on economic efficiency.

Traditionally, economists view the structure and application of a tax as unimportant. All that matters is the change in relative prices. But Chetty, Looney, and Kroft find that structure and application do matter. For example, they find that consumers are less likely to buy an item if a sales tax is explicitly listed on the product than if the same tax is instead added at check-out.

Chetty, Looney, and Kroft’s theoretical model indeed shows that efficiency increases as a tax becomes less salient. However, their model also shows that reducing the salience of a tax will necessarily harm consumers (albeit not by as much as it helps the government). In other words, tricking consumers into thinking a tax does not exist has two effects: 1) it leads them to poor consumption choices; and 2) it increases tax revenue because more transactions are taxed. In dollar terms, the harm to consumers is less than the increase in revenues. But whether or not you view an opaque tax as a useful policy instrument depends on whether you think the gains to government coffers are worth the reductions in consumer welfare.

As Milton Friedman feared, government can go a step further. If complicated and opaque taxes can dull consumer response, they can also dull the political penalty associated with higher tax rates. An optimizing government could then increase tax rates by more than fully-informed voters would like.  Amy Finkelstein, in the most recent edition of the Quarterly Journal of Economics, finds that drivers are less aware of tolls paid electronically and that switching from toll booths to electronic tolls led to a 20 to 40 percent rate increase. In other words, as salience goes down, tax rates go up.

Me: But for Team Obama, the hidden nature of a VAT would be a feature not a bug. The same approach is being tried with a) healthcare taxes via an excise tax on health insurance companies that will be passed onto consumers, and b) cap-and-trade which is a hidden energy tax that will also be passed along. There is nothing wrong with the idea of a consumption tax as long as it a) replaces other taxes and b) is transparent, such as would be the case with the Hall-Rabusha flat consumption tax.


Not hard to understand, but not obvious, either.

Very enlightening.

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

Oil prices, inflation and a double-dip recession

Oct 26, 2009 14:24 UTC

Andy Xie paints a dire scenario:

Central banks around the world have released massive amounts of money in response to the current financial crisis … But the proposition that a weak economy means low inflation is false. The stagflation of the 1970s proves it.

This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash.The excess money supply has created a new liquidity bubble.

The resulting asset inflation (stocks and bonds in developed markets and everything in emerging markets) has stabilised the global economy. The current equilibrium is one on a pinhead. The hope for strong economic recovery led by emerging economies raises investor optimism – and asset prices. This eases pressure on corporate balance sheets, spurs property production and boosts consumption through the wealth effect, making the hope self-fulfilling in the short term.

A rising oil price threatens to derail this recovery. It can trigger a surge in inflation expectation and a major crash of bond markets. The resulting high bond yields may force the central banks to raise interest rates to cool inflation fears. Another major downturn in asset prices would reignite fears about the balance sheets of global financial institutions, leading to new chaos.