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Government Policy Caused America's Unemployment Crisis
The unemployment rate has risen again for the the first time in 4 months. I predicted a growing, long-term unemployment problem last year.
Indeed, even after the
government plays with the numbers to make them look better (using
inaccurate birth-death models and other tricks-of-the-trade), this is
how the current jobs downturn compares with other post-WWII recessions:
In fact, as demonstrated below, the government's actions have directly contributed to the rising tide of unemployment.
The Government Has Encouraged the Offshoring of American Jobs for More Than 50 Years
President Eisenhower re-wrote the tax laws so that they would favor investment abroad. President Kennedy railed against
tax provisions that "consistently favor United States private
investment abroad compared with investment in our own economy", but
nothing has changed under either Democratic or Republican
administrations.
For the last 50-plus years, the tax benefits to American companies making things abroad has encouraged jobs to move out of the U.S.
The Government Has Encouraged Mergers
The government has actively encouraged mergers, which destroy jobs.
For example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry.
This is nothing new.
Citigroup's
former chief executive says that when Citigroup was formed in 1998
out of the merger of banking and insurance giants, Alan Greenspan told him, “I have nothing against size. It doesn’t bother me at all”.
And the government has actively encouraged the big banks to grow into mega-banks.
The Government Has Let Unemployment Rise in an Attempt to Fight Inflation
As I noted last year:
The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The
Board of Governors of the Federal Reserve System and the Federal Open
Market Committee shall maintain long run growth of the monetary and
credit aggregates commensurate with the economy's long run potential to
increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.***
The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:
The
Fed is mandated by law to maximize employment, but focuses on
inflation -- and "expected inflation" -- at the expense of job
creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.
Board
members expressed concern "that banks might seek to reduce appreciably
their excess reserves as the economy improves by purchasing securities
or by easing credit standards and expanding their lending
substantially. Such a development, if not offset by Federal Reserve
actions, could give additional impetus to spending and, potentially, to
actual and expected inflation." That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting...
Suffering
high unemployment in order to keep inflation low cuts against the
Fed's legal mandate. Or, to put it more bluntly, it may be illegal.In fact, the unemployment situation is getting worse, and many leading economists say that - under Mr. Bernanke's leadership - America is suffering a permanent destruction of jobs.
For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:
[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.The chief economists for Wells Fargo Securities, John Silvia, says:
Companies
“really have diminished their willingness to hire labor for any
production level,” Silvia said. “It’s really a strategic change,” where
companies will be keeping fewer employees for any particular level of
sales, in good times and bad, he said.And former Merrill Lynch chief economist David Rosenberg writes:
The
number of people not on temporary layoff surged 220,000 in August and
the level continues to reach new highs, now at 8.1 million. This
accounts for 53.9% of the unemployed — again a record high — and this is
a proxy for permanent job loss, in other words, these jobs are not
coming back. Against that backdrop, the number of people who have been
looking for a job for at least six months with no success rose a further
half-percent in August, to stand at 5 million — the long-term
unemployed now represent a record 33% of the total pool of joblessness.
And see this.
In fact, the Fed intentionally curbed lending by banks in an attempt to stem inflation, without addressing whether public banks could provide credit.
The Government Has Allowed Wealth to be Concentrated in Fewer and Fewer Hands
As I pointed out a year ago:
A new report
by University of California, Berkeley economics professor Emmanuel
Saez concludes that income inequality in the United States is at an
all-time high, surpassing even levels seen during the Great Depression.The report shows that:
- Income inequality is worse than it has been since at least 1917
- "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
- "In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
As others have pointed out, the average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this. On the other hand, billionaires have never had it better.
As I wrote in September:
The
economy is like a poker game . . . it is human nature to want to get
all of the chips, but - if one person does get all of the chips - the
game ends.
In other words, the game of capitalism only
continues as long as everyone has some money to play with. If the
government and corporations take everyone's money, the game ends.
The fed and Treasury are not
giving more chips to those who need them: the American consumer.
Instead, they are giving chips to the 800-pound gorillas at the poker
table, such as Wall Street investment banks. Indeed, a good chunk of the
money used by surviving mammoth players to buy the failing behemoths
actually comes from the Fed...This is not a
question of big government versus small government, or republican
versus democrat. It is not even a question of Keynes versus Friedman
(two influential, competing economic thinkers).It is a question of focusing any government funding which is made
to the majority of poker players - instead of the titans of finance -
so that the game can continue. If the hundreds of billions or trillions
spent on bailouts had instead been given to ease the burden of
consumers, we would have already recovered from the financial crisis.
I noted in April:
FDR’s Fed chairman Marriner S. Eccles explained:
As
in a poker game where the chips were concentrated in fewer and fewer
hands, the other fellows could stay in the game only by borrowing. When
their credit ran out, the game stopped.***
When most people lose their poker chips - and the game is set up so that only those with the most chips get more - free market capitalism is destroyed, as the "too big to fails" crowd out everyone else.
And the economy as
a whole is destroyed. Remember, consumer spending accounts for the
lion's share of economic activity. If most consumers are out of chips,
the economy slumps.
And unemployment soars.
As former Secretary of Labor Robert Reich wrote yesterday:
Where have all the economic gains gone? Mostly to the top.
***
It’s no coincidence that the last time income was this concentrated was
in 1928. I do not mean to suggest that such astonishing
consolidations of income at the top directly cause sharp economic
declines. The connection is more subtle.
The rich spend a
much smaller proportion of their incomes than the rest of us. So when
they get a disproportionate share of total income, the economy is
robbed of the demand it needs to keep growing and creating jobs.
What’s more, the rich don’t necessarily invest their earnings and
savings in the American economy; they send them anywhere around the
globe where they’ll summon the highest returns — sometimes that’s here,
but often it’s the Cayman Islands, China or elsewhere. The rich also
put their money into assets most likely to attract other big investors
(commodities, stocks, dot-coms or real estate), which can become wildly
inflated as a result.
***
THE Great Depression and
its aftermath demonstrate that there is only one way back to full
recovery: through more widely shared prosperity.
***
And
as America’s middle class shared more of the economy’s gains, it was
able to buy more of the goods and services the economy could provide.
The result: rapid growth and more jobs. By contrast, little has been
done since 2008 to widen the circle of prosperity.
So through it's policies encouraging the offshoring of jobs, mergers,
decreasing of economic activity to fight inflation, allowing wealth to
be concentrated in fewer and fewer hands, and other policy mistakes (like pretending that there is a "jobless recovery"), the government has channeled water away from U.S. jobs, creating a worsening unemployment drought.
Note
for Keynesians: As I have repeatedly explained, the government hasn't
spent money on the right kind of things to stimulate employment. See this and this.
Note for followers of Austrian economic theory: I have repeatedly
railed against the government artificially propping up asset prices and
leverage, so that malinvestments can't be cleared, and we we have a
stagnant, zombie economy which prevents job creation.
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You keep confusing debt and inflation...
Inflation is the result of the growth of the supply of money relative to that of goods and services.
Debt can grow even when the supply of money stays equal. For instance if I lend you $100, the money supply between us two remains unaffected, but the debt between us two has grown by 100$. If you look at average inflation over the last 20 years, it's been around 3 and 4%, when average debt has grown by about 10% per year. In the last 30 years, M2 has grown from $1.5 to 8.5 trillion, while the total credit market has grown from $4.5 to $52 trillion.
Just look at a graph of inflation over the last centuries and debt growth, there's absolutely no link. None.
That's the big headache for Bernanke, with the most easing monetary policy of all times, the lowest rate, the most rapid expansion of the Fed's balance sheet, he can't get households and businesses to pile on more debt.
Monetary policy is just a tiny part of debt stimulation, especially when you have a shadow banking and derivative system that affects far more the level of debt that the Fed and the commercial banks.
+100,000 chrisina!!!
But, you see, monetarists never concern themselves with debt, they don't believe it ever exists as part of the equation.
Out of sight, out of the mindless.
Well I guess they ignore the existence of the shadow banking system, the whole panoply of levered derivative instruments. What these numbnuts who keep talking about "the suplly of money" (whether M1, M2 or M3 or whatever other Austrian Money supply or another worthless piece of data) don't understand is all of those instruments don't affect the money supply yet it affects total CREDIT outstanding and that's what pulls forward expenditures that would otherwise have been made later.
They just don't get it. Leverage pulls forward demand, deleveraging pushes backwards.
As long as they ignore the impact of change in debt on aggregate demand and keep focusing on this useless piece of data which is money supply we're going to have completely blindfolded morons in charge of piloting the economy.
Why is it so difficult for people to understand that "financial innovation" has rendered the primary agents responsible for the creation of money (the central bank and its distribution arms the commercial banks) completely powerless on what really affects the economy, ie the creation of debt.
The number of times I read people talking of abolishing the Fed, changing the monetary system as if this is going to have any impact whatsoever on the creation of debt, it's just unbelievable. They just don't understand how the system works.
That includes monetarists, keynesians, austrians and their different worthless schools who still don't seem to have grasped that we are now in an economy that is dominated by debt and levered financial instruments of which they have no clue how they work nor how they are created nor how they affect the economy.
What a bunch of morons. All of them.
Unfortunately there can be no savings when so few are gainfully employed and those that are receive subsistence wages.
Being broke is like that. Companies are broke, individuals are broke and the government is also broke - because of the first two.
The problem is inherent to industrial manufacturing which can always outproduce demand ... which is where we are right now.
What is needed, a new approach to production that uses more labor - at lower but gainful wages - and less energy. Unfortunately, this will take some time ... 100 years or so.
What is needed, a new approach to production that uses more labor - at lower but gainful wages - and less energy. Unfortunately, this will take some time ... 100 years or so.
There an approach for that - go live in third world countries where American military industries freely dispensed Depleted Uranium.
http://en.wikipedia.org/wiki/Depleted_uranium
Calling all Luddites from a century or more ago...
Well, it was the "superior" "first world" countries who made up the term "thrid world countries."
What you'll find in those "crappy" countries is a population that is able to more readily deal with lower levels of depleting energy reserves. What is transpiring in the "superior" countries is that they are starting to become overburdened by complex and energy intensive infrastructures. People haven't quite been able to own up to this, opting, instead, to reach out and blame govt (or some other entity, like brown people or "welfare" people), when what's happening is that the very infrastructure that they thought was so great is now taking them down.
Sooner or later the US will feel what it's like to live amongst its effluent (like the depleted uranium). And, its people won't have a clue about how to subsist on vastly reduced amounts of energy.
Note to techno-heads: technology is a process, it's not an input (such as energy or raw materials, both of which are responsible for real stuff).
dude, manufacturing can never outproduce demand - ever.
Savings could come easily if prices were allowed to fall and interest rates were allowed to rise.
The malinvestment needs to be purged through bankruptcy.
Printing more money will not solve anything, it never has and it never will.
"The malinvestment needs to be purged through bankruptcy."
Probably. But with total credit outstanding at $52 trillion you don't know what will be left still solvent when that purge will end.
check mfg as a percentage of GDP - Ned
Sorry for the formatting problems. Not sure how to fix ...
GW, you'n me. Overstrike doesn't take, list goes on.
But, since we don't have to do real English, well, formatting goes to third place.
btw, thanks for all of your work on the GoM--we'll see how it all comes out. My bet is on better than the disaster predictions, fraud all around with phantom, consequential, and other "damages."
Please keep up your good work.
- Ned
You have to have a sound currency as well...Hey don't we have a business plan for creating a free economy...why yes, it's called the CONSTITUTION!!!
Nah....we're too busy building free economies in Iraq and Afghanistan............<sarc off>
If Obunghole gave a shit about jobs he'd summon the ghost of Henry Ford who would tell him trading paper does not build an economy.
Design it, mine it, build it here creates an economy.
Keep listening to the kosher nostra Barry, it's really working out swell for us.
Right, it's Obama's fault for the last 50 years of offshoring....
No, not exactly, but it is damn well Obama's fault for hiring those who have had the most to do with offshoring and have earned their millions from it, such as Diana Farrell, the queen of offshore.
Obama can't be blamed for the dismantling of America over the past 35 years, be he damn well should be blamed for reappointing those demon spawn who have born some of the responsibility in the matter: Larry Summers, Timothy Geithner, Diana Farrell, Laura Tyson, Neal Wolin, Gene Sperling, Robert Hormats, Richard Holbrooke, Herb Allison, Orszag, et al.
So what real economist has Obama appointed?
None, damn it!
Obama, a product of the University of Chicago system, which has demagoged and destroyed America, to enrich the uppermost elites.
Screw to hell all those Wall Street lobbyists, private equity banksters, Goldman Sachs alumni, pharmaceutical lobbyists and Monsanto lobbyists Obama has appointed.
Agreed.
But really, do you think Obama has a clue about the macroeconomic impact of debt and debt creating instruments such as derivatives? Zilch, he doesn't even know how fundamental it has become.
So he asks, who has a clue about finance and economics. He asks of course the wrong people so he's given names of people like Summers and al. who have themselves absolutely NO CLUE about the macroeconomic impact of debt and credit derivatives. So he choses them.
THE MESS WE ARE IN HAS ONE AND ONLY SIMPLE CAUSE : CLUELESSNESS ABOUT THE ECONOMIC IMPACT OF CREDIT AND CREDIT DERIVATIVES.
And cluelessness attracts... more cluelessness
Where I differ with your assessment:
OK, but Obama should have some inkling that Summers, et al., were involved with creating this catastrophe as the rest of us are aware of this.
And, this still doesn't excuse Obama from appointing the MOST anti-worker, anti-small business and anti-union types possible.
Those of us paying attention, noting who his campaign advisors were (sons of Brzezinski, Rubin, and those other clowns) never expected him to say:
"Let the word go forth from this day on, a new generation has been born."
But we never expected Obama to say:
"I have appointed Diana Farrell, evil queen of jobs offshoring, to be my economics advisor."
Big, big difference here.
(My final pronouncement: The crucial point is that private equity leveraged buyouts, hedge funds, public-private partnerships, and the entire privatization process [actually, mini-leveraged buyouts in structure] all have the same underlying financial structure. And that is most definitely securitized debt fraud.)
Ciao, my good and intelligent fellow.
+1
to the POTUSes and the Greenspan/Bernanke list I'd add :
the vast majority of the members of the institutional machine that has led us into this mess :
.most politicians elected to office in the executive and legislative branches of both parties
.most executives and lobbyists of the big banking corporations, and many other international corporations
.economists and lawyers who advised them
Removing only the head of the institutional machine is of little help. It's like with a terrorist group, the machine grows back the wrong head immediately.
He's so smart, and such a great communicator Our Dear President.
but:
well, he won't rest until every American is back at work.
Except he's been on R'nR for what 2 months? (that we know publically).
- Ned
+1 for the premise (Government sponsorship of TBTF resulted in all the poker chips in a few hands, thus causing the game to stop -- manifesting in unemployment and economic decline), and -1 for quoting Reich (a redistributionist moron as silly as Krugman in his ability to analyze and reason, who believes that merely taking from one group and giving to another will create "prosperity").
reditributionist moron?
Don't you see that all the policies of the last 30 years have had for effect of redistributing the wealth of the middle class to the rich, and even more to the very rich.
Now it's only time the middle class take back what belonged to them. And if the government doesn't radically alter its policies in favor of hard working middle class Americans and continues redistributing their wealth to the very rich who don't even work for a living, you'll see that they'll eventually take it back by force.
Well said, chrisina, well said.
But not simply "the policies" as it were, but the entire overall design is to transfer wealth to the highest level, crash the system, then further the redistribution of wealth but the super-rich buying up everything at bargain basement rates.
This took place during the Great Depression, and the same is occurring today.
And today it is the debt-financed billionaires, when in the aftermath of the Great Crash, it was the debt-financed millionaires.
And why is employment a non-issue in America?
Because it isn't profitable to hire Americans, when Citigroup can lay off bunches, then hire thousands overseas.
When the Dept. of Commerce can sign all those waivers circumventing the incredibly watered-down "buy American" provision in the faulty stimulus.
Fantastic post by GW, I concur!
We agree. (Not "all" the policies, but yes, policies relating to the central bank, monetary system, capricious manipulation of interest rates and capital, and fiddling with the tax code were to serve the sole purpose of fleecing the middle class for the benefit of the other classes.)
That cannot and will not happen within the current system.
The government will not alter its policies, for a lot of reasons (mostly because they don't know how, the system will not allow it, and because it is mathematically too late).
Your reference to "by force" is removal of the current government. That is inevitable at this point, although it is conceivable it occurs without physical violence.
It wasn't only central bank policies, but also those of the executive and legislative branches of both parties, the repeal of glass-steagal, the stimulation of home ownership, of home to ATM conversion, of delocalisation and outsourcing, etc...
And compliments to Washington for a great article.
+1
(I was tongue-in-cheek for subtracting "-1" for quoting Reich.)
If the group you're taking it from has all the money and can't spend it, while the group you're giving it to has very little and will spend it, then yes, by increasing aggregate demand, you can create prosperity. If you don't get that, then it's you, not Reich or Krugman, that's the "moron".
No. You are describing the (very) temporary increase in the velocity of money (e.g., you're forcing transactions to occur now that may not otherwise occur.) And, you assume that this is used for productive efforts (i.e., society production), not society consumption -- almost never a good assumption for what happens with redistribution.
This is a big topic. Regrettably, it won't fit on a bumper sticker, if that's our expected level of discourse. However, let me try:
If you punish the producers enough, they won't produce. Take all my income, and I won't bother working. In fact, if you take even 60%, I'll merely say "screw it", sit on the couch, and expect you to give me my monthly check that you're going to confiscate from some other sucker. Society sucks when everybody figures this out (since that's a positive feedback loop).
If you're confiscating wealth, you'll wake up and realize there isn't any. Other than real estate (which isn't worth anything in your redistributionist world anyway), people will flee the nut-job confiscatory governments in California, New York, etc. (Not idle speculation, numerous case studies demonstrate clearly, including indisputable new ones going on right now.)
You assert that if you give money to the poor, they will spend it. Yes. Then, the money is gone. What will you do for an encore? Now, there is no more money.
If you're pretending the "broken window" fallacy's temporary increase in money velocity will bring about "prosperity", you're nuts. (Society had a productive asset, then destroyed it, and then went through the motions [and cost] to get back to where it was before you destroyed that asset.)
I agree with your assertion that $700B distributed to (Main Street) individuals would have been *vastly* superior to giving that to (Wall Street) TBTF, which was worse-than-a-waste (we merely levered up, solved nothing, and made the problem worse). However, I dispute the idea that the $700B should have been redistributed at all: Even if given to the "poor", there is no way to do that in an equitable manner, and no way to do that in a manner where society benefited anywhere close to 1x the cost.
Ok, so what do we do? Sue the FED for breach of contract?
How about dissolve the Fed.
it would be a start
and its 1913 sister spawn of the devil, the IRS.
Then replace the Plutocracy with the Meritocracy
and the manipulated Social Democracy with the educated Republic...
The people are too dumb or too dumbed down, forget it it's time to hit the s ea and look for new horizons
That's by design. The bosses don't want the peasants to get too clever - they might start questioning their place in the social order.
cha