Why Is Unemployment Rising?

Today's unemployment numbers are bad. See this and this.

Why is unemployment rising? Because the government is doing everything wrong.

One
definition of insanity is doing the same thing again and again and
expecting different results. Unless the government substantially
changes its approach, unemployment will keep rising.

Here
are two essays I wrote - the first last month, and the second last year
- explaining why unemployment is rising and what the government needs
to do differently to get the unemployment crisis under control.

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.

The Rising Tide of Unemployment in America: How Bad Will It Get, And What Can We Do?

Unemployment is disastrous on both the individual and societal level.

Individuals who look for work but can't find it are miserable.[1]

On
the national level, high unemployment is both cause and effect
concerning other problems with the economy. As we'll see below, high
unemployment results from a weak economy and - in turn - weakens the
economy.

Until the causes of, and solutions to, high levels of unemployment are understood, we will not be able to solve the problem.

How High is Unemployment?

Before
we can even start looking at causes or solutions, we have to
understand what the current level of unemployment really is, and what
the trends portend for the future.

Let's use America as an
example. With the largest economy in the world, it has often been said
that "when America sneezes, the rest of the world catches cold". And
much of the rest of the world has adopted the "Washington Consensus" -
America's neoliberal view of economics.[2]
Moreover, the rest of the world has been infected by many types of
"toxic assets" invented in America, such as credit default swap
derivatives[3],
as well as Wall Street style banking strategies. So I will use the
United States has a case example, but will also touch on global trends.

Official
figures put unemployment in the United States somewhere between 9 and
10 percent. But the official figures use a very different measure for
unemployment than was used during the Great Depression and for many
decades afterwards.

Specifically, the official unemployment
reports of the Department of Labor's Bureau of Labor Statistics (BLS)
provide conventional "U-3" figures and various alternative measures
including "U-6". [4]

For example, as of December 2008, U-3 unemployment was 7.2 percent, while U-6 was 13.5 percent. [5]

U-6
is actually more accurate, because it includes those who would like
full-time work, but can only find part-time work, or have given up
looking for work altogether.

As can be seen by the December 2008 figures, U-6 unemployment rate can almost double the more commonly-cited U-3 figures.

But those in the know argue that the real rate is actually even higher than the U-6 figures.

For example, Paul Craig Roberts [6]
- former Assistant Secretary of the Treasury and former editor of the
Wall Street Journal - and economist John Williams both said in
December 2008 that - if the unemployment rate was calculated as it was
during the Great Depression - the December 2008 unemployment figure
would actually have been 17.5%.

Williams says [7] that unemployment figures for July 2009 rose to 20.6% [8].

According to an article [9]
summarizing the projections of former International Monetary Fund
Chief Economist and Harvard University Economics Professor Kenneth
Rogoff and University of Maryland Economics Professor Carmen Reinhart,
U-6 unemployment could rise to 22% within the next 4 years or so.

As the New York Times pointed out in July[10] :

Include
[those who have given up looking for a job and those part-time workers
who want to be working full time] — as the Labor Department does when
calculating its broadest measure of the job market — and the rate
reached 23.5 percent in Oregon this spring, according to a New York
Times analysis of state-by-state data. It was 21.5 percent in both
Michigan and Rhode Island and 20.3 percent in California. In Tennessee,
Nevada and several other states that have relied heavily on
manufacturing or housing, the rate was just under 20 percent this spring
and may have since surpassed it.

Indeed, the chief of the Atlanta Federal Reserve Bank -Dennis Lockhart - said in August 2009:

If
one considers the people who would like a job but have stopped looking
-- so-called discouraged workers -- and those who are working fewer
hours than they want, the unemployment rate would move from the official
9.4 percent to 16 percent. [11]

Former Labor Secretary Robert Reich notes:

Over
the past three months annual wage growth has plummeted to just 0.7%.
At the same time, furloughs -- requiring workers to take unpaid
vacations -- are on the rise: recent surveys show 17% of companies
imposing them. [12]

Temporary employment is still falling as well. [13]

And economist David Rosenberg points out:

65% of companies are still in the process of cutting their staff loads...

The
Bureau of Labor Statistics also publishes a number from the Household
survey that is comparable to the nonfarm survey (dubbed the population
and payroll-adjusted Household number), and on this basis, employment
sank — brace yourself — by over 1 million, which is unprecedented...[14]

In
addition to the failure of official BLS unemployment figures to take
into account discouraged and underemployed workers, many analysts argue
that BLS' "Birth-Death Model" severely understates unemployment during
recessions. [15]

Many
people - including economists and financial reporters - say that
unemployment is much lower than it was during the Great Depression. What
they mean when they say that is that current U-3 figures in America
are under 10%, while unemployment hit 25% during the Great Depression.

But most people forget that the worst unemployment numbers during the Great Depression did not occur until years after
the initial 1929 crash . Specifically, unemployment did not hit 25%
until at least 3 years after the start of the Depression.[16]

As
of this writing (2009), we are only a year into the current economic
crisis. Therefore, we have at least 2 more years to go until we hit the
same period that unemployment peaked during the Great Depression.

Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.[17]

And
Chris Tilly - director of the Institute for Research on Labor and
Employment at UCLA - points out that some populations, such as
African-Americans and high school dropouts, have been hit much harder
than other populations, and that these groups are already experiencing
depression-level unemployment.[18]

Assuming
that Williams, Roberts or Lockhart's calculations of unemployment are
correct (using the same methods of measuring unemployment as were used
during the Great Depression), and depending on when we deem the current
crisis to have commenced, then - as shown by the following charts -
unemployment percentages may actually be worse than they were during a comparable period in the Great Depression:

[19 and 20]

[21]

We
also know that, in terms of total numbers of unemployment people (as
opposed to percentages), more people will be unemployed than during the
Great Depression. [22]

What Are the Unemployment Trends?

If
unemployment is anywhere near as bad as during a comparable period
during the Great Depression, the obvious question is where the trends
are heading.

It is well known among economists that unemployment is a "lagging" indicator. [23]
In other words, there is a lag time. When the economy hits a rough
patch, the economic weakness will not show up in the unemployment
numbers until several months or years later.

For example, as Europe’s largest bank - RBS - warns:

Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards ...[24]

Because
of the lag time between conditions in the economy and unemployment, we
have to ask the following two questions in order to forecast future
unemployment trends:

1) How bad were conditions in 2008 and early 2009?

and

2) What will economic conditions be like in the future?

How Bad Did It Get?

Unfortunately,
many experts - including the following people - have said that the
economic crisis which started in 2008 could be worse than the Great Depression:

• Federal Reserve chairman Ben Bernanke said on July 26, 2009:
  

  A
  lot of things happened, a lot came together, [and] created probably
  the worst financial crisis, certainly since the Great Depression and
  possibly even including the Great Depression. [25]

• Economics
  professors Barry Eichengreen and and Kevin H. O'Rourke said that
  world-wide conditions are worse than during a comparable period during
  the Great Depression [26] (updated in June 2009 [27])

• Investment
  advisor, risk expert and bestselling author Nassim Nicholas Taleb said
  that the current crisis could be "vastly worse" than the Great
  Depression [28]

• Former Fed Chairman Paul Volcker believes the current crisis may be even worse than the Depression [29]

• Nobel prize winning economist Joseph Stiglitz said "this is worse than the Great Depression" [30]

• Economics
  scholar and former Federal Reserve Governor Frederick Mishkin said
  that conditions were worse than during the Depression [31]

• Well-known PhD economist PhD Economist Marc Faber believes this could be far worse than the Great Depression[32]

• Former Goldman Sachs chairman John Whitehead thinks that the current slump is worse than the Depression [33]

• Morgan Stanley’s UK equity strategist Graham Secker predicts economic collapse worse than the Great Depression [34]

• Former
  chief credit officer at Fannie Mae Edward J. Pinto said in January
  2009 that the current housing crisis was worse than the Depression, and
  that current efforts to rescue the mortgage industry are less
  successful than those used during the 1930s. [35]

• Billionaire
  investor George Soros said in February 2009 that the current economic
  turbulence is actually more severe than during the Great Depression,
  comparing the current situation to the demise of the Soviet Union. [36]

What Will Economic Conditions Be Like In the Future?

As
of this writing, the fact that unemployment will substantially
increase is quite controversial. Most people still assume that the
benefits of the government's policies will soon kick in, the economy
will recover, and then jobs will recover soon afterwards.

In
order to accurately determine how bad general economic conditions - and
thus unemployment - might be in the future, it is necessary to look at
a variety of trends, including residential real estate, commercial
real estate, toxic assets held by banks, loan loss rates, consumer
spending, age demographics, the decline in manufacturing, and
destruction of credit.

Residential Real Estate

Citigroup is projecting that unemployment in Spain will rise from its current 17.9% to 22% next year. [37]

Spain's unemployment is largely driven by the bursting of its housing bubble. [38]

Housing bubbles are now bursting in China [39], France [40], Spain [41], Ireland [42], the United Kingdom [43], Eastern Europe [44], and many other regions. [45]

(And
unemployment in Japan is apparently at the highest level since the
government began collecting the data in 1953, a year after the U.S.
military occupation ended.)[46]

Unfortunately,
while the peak in subprime mortgages is behind us, many analysts say
that Alt-A mortgage defaults have not yet occurred (as of this writing),
but will not peak until 2010.[47]

Indeed,
the crash in real estate and rising unemployment together form a
negative feedback loop. As McClatchy notes, foreclosures rise as jobs
and income drop. [48]

Former chief IMF economist Simon Johnson notes that a vicious cycle also exists between unemployment and property foreclosures:

Unemployment
is always a lagging indicator, and given the record low number of
average hours worked, it will turn around especially slowly this time.
Until then, people will continue to lose their jobs and wages will
remain flat, and any small rebound in housing prices is unlikely to help
more than a few people refinance their way out of unaffordable
mortgages. So unless the other part of the equation – monthly payments –
changes, the number of foreclosures should just continue to rise.[49]

Indeed, the Washington Post notes:

The
country's growing unemployment is overtaking subprime mortgages as the
main driver of foreclosures, according to bankers and economists,
threatening to send even higher the number of borrowers who will lose
their homes and making the foreclosure crisis far more complicated to
unwind. [50]

Commercial Real Estate

Moreover, a crash in commercial real estate is now picking up speed. Unlike the
subprime mortgage meltdown - which affected mainly the biggest banks -
the commercial meltdown will apparently affect a huge number of small
to medium-sized banks. [51]

On
August 11, 2009, the Congressional Oversight Panel on the bailouts
issued a report saying that small and medium sized banks are especially
vulnerable, the report will say, in part they hold greater numbers of
commercial real estate loans, "which pose a potential threat of high
defaults." [52]

That
could spell real trouble for employment by small businesses since (1)
smaller institutions are disproportionately responsible for providing
credit to small businesses [53], (2) credit is essential for many small businesses, (3) commercial real estate is crashing even faster than residential [54], and (4) industry experts forecast that the commercial real estate market won't bottom out for three more years.[55]

Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in the coming months. [56]

Unfortunately, the crash in commercial real estate is occurring world-wide. [57]

Toxic Assets

The
Congressional Oversight Panel report also says that banks remain
threatened by billions of dollars of bad loans on their balance sheets,
more could fail if the economy worsens, and that - if unemployment
rises sharply or the commercial real estate market collapses – the
banking system could again crash:

The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix...

Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.[58]

As Reuters notes:

The
chairman of the congressional oversight panel, Elizabeth Warren, said
no one even knows the value of the toxic assets still on banks'
books...

"No
one has a good handle how much is out there," Warren said. "Here we
are 10 months into this crisis...and we can't tell you what the dollar
value is."[59]

Loan Loss Rates

Loan
loss rates in could also be worse than the Great Depression, at least
in the United States. Specifically, during the depths of the Great
Depression, the loss rate which banks suffered on their loans climbed as
high as 3.4% (it is normally well under 2.0%).[60]

Last
month, banking analyst Mike Mayo predicted that loan loss rates could
go as high as 5.5%, which is substantially higher than during the
1930s.[61]

But
the Federal Reserve's more adverse scenario for the stress tests -
which everyone knows is too rosy concerning most of its assumptions -
predicts a loan loss rate of 9.1%, nearly three times higher than during the 1930s.[62]

As US News and World Report wrote in May 2009:

For
most of the past 50 years, the loss rate on all bank loans has stayed
well under 2 percent. The Fed estimates that over the next two years
the loss rate could reach 9.1 percent. You know all those historical
comparisons that end with "the worst since the Great Depression"? Well,
9.1 percent would be EVEN WORSE than during the 1930s. Still looking
forward to a soft landing or a quick recovery?[63]

Consumer Spending

Consumer
spending accounts for the vast majority of the economy in the United
States. The figure commonly cited is that consumer spending accounts for
70% of U.S. Gross Domestic Product. [64]. (Consumer spending has been a lower percentage of GDP in most other countries. [65])

But the economic crisis is driving consumer spending downward. Economist David Rosenberg [66] says that consumers have undergone a generational shift in spending habits, and will be frugal for a long time to come.[67]

The head of Collective Brands, Matthew Rubel, states:

Consumer
spending as a percentage of GDP has moved down, will probably continue
to move down through the end of year, and then normalize as we get
into somewhere in early-to-mid next year, from our point of view.[68]

The chief economist of IHS Global Insight, Nariman Behravesh, says consumer spending will decline to 65 percent of GDP:

With
individuals more focused on saving than spending, Behravesh said
retail consumer spending as a percentage of GDP is likely to fall from
70 percent to 65 percent. “It will take a while, maybe 10 years,” he
said. “Correspondingly other countries are going to have to shift in
the opposite direction to rely more on their own consumers rather than
the U.S. consumers.”[69]

Jason DeSena Trennert, Chief Investment Strategist for Strategas Research Partners, says:

Consumer spending as a percentage of GDP is going to go in one direction for a long time -- lower.[70]

Time points out :

Economist
Stephen Roach, chairman of Morgan Stanley Asia, says that "there is
good reason to believe the capitulation of the American consumer has
only just begun." U.S. consumer spending as a percentage of GDP reached
72% in 2007, well above the pre-bubble norm of 67%. Using that as a
gauge, Roach says that only 20% of the potential retrenchment of
spending has taken place, even after the dramatic decline at the end of
2008. "The imbalance that contributed to the crisis — overconsumption
and excessive savings — cannot continue," says Ajay Chhibber, director
of the Asia bureau at the United Nations Development Program in New York
City. "The model where you stimulate and [then] go back to the old
days is gone."[71]

The Wall Street Journal notes:

"Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift....."[72]

Demographics

Financial
analysts who have studied U.S. demographics - like Harry Dent and
Claus Vogt - point out that the U.S. population is aging:

United States Population Pyramid for 2010

Predicted age and sex distribution for the year 2010:

United States Population Pyramid for 2020

Predicted age and sex distribution for the year 2020:

United States Population Pyramid for 2050

Predicted age and sex distribution for the year 2050:

[73]

Vogt argues that an aging population within a given nation is correlated with a decline in that country's economy. [74]. Certainly, a population with less working-age people and more dependent elderly people will experience a drag on its economy.

Dent
argues that one of the main drivers of a country's economic growth is
the number of people in the country who are in their peak spending
years.

For example, Dent says that in the U.S., 45-54 year
olds are the biggest spenders, because that is when - on average - they
are paying for their kids' college, paying mortgage on the biggest
house they will own during their life, etc. Dent argues that the
American economy will tend to grow when the number of 45-54 year olds
grows, and to shrink when it shrinks.

As the charts above show, the number of 45-54 year olds in the U.S. will shrink considerably in the year ahead.

Decline in Manufacturing

As
everyone knows, the manufacturing has shrunk in the United States and
the service sector has grown. Even in a manufacturing center such as
Detroit, manufacturing jobs have been declining for decades:

[75]

Indeed,
according to professor of economics Dr. Mark J. Perry, manufacturing
jobs have dropped to their lowest level since 1941, and are now below 9%
of the workforce for the first time. [76]

Wayne State University's Center for Urban Studies argues:

For
each job lost in the manufacturing industry, more spinoff jobs are
lost than would be in other sectors. Each manufacturing job helps
support a larger number of other jobs than do most other sectors. [77]

That means that the ongoing reduction in manufacturing jobs will adversely affect unemployment for the foreseeable future.

Destruction of Credit

The amount of credit outstanding has been reduced by trillions of dollars in the past year.

For example, the amount of consumer credit outstanding has plummeted:

Banks
have become tight-fisted about lending, and this will probably not
change any time soon. As the New York Times wrote in an article from
October 2008 entitled "Banks Are Likely to Hold Tight to Bailout Money":

"Will
lenders deploy their new-found capital quickly, as the Treasury hopes,
and unlock the flow of credit through the economy? Or will they hoard
the money to protect themselves?

John A. Thain, the
chief executive of Merrill Lynch, said on Thursday that banks were
unlikely to act swiftly. Executives at other banks privately expressed a
similar view.

'We will have the opportunity to redeploy that,' Mr. Thain said of the new capital on a telephone call with analysts. 'But at least for the next quarter, it’s just going to be a cushion.'

***

Lenders
have been pulling back on credit lines for businesses, mortgages, home
equity loans and credit card offers, and analysts said that trend was
unlikely to be reversed by the government’s money.

Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month [said] 'My expectation is it’s quarters off, not months off, before you see that capital being put to work.' ”[78]

And another New York Times article included the following quote:

“It
doesn’t matter how much Hank Paulson gives us,” said an influential
senior official at a big bank that received money from the government,
“no one is going to lend a nickel until the economy turns.” The
official added: “Who are we going to lend money to?” before repeating an
old saw about banking: “Only people who don’t need it.”[79]

Reading between the lines, the bank officials are saying that they will not lend freely until the economic crisis is over.

As
WLMLab Bank Loan Performance points out, outstanding loans in the
United States have dropped $110 billion dollars quarter-over-quarter. [80]

McClatchy notes:

Over
the course of 2008, the nation's five largest banks reduced their
consumer loans by 79 percent, real estate loans by 66 percent and
commercial loans by 19 percent, according to FDIC data. A wide range of
credit measures, including recent FDIC data, show that lending remains
depressed.[81]

The Telegraph writes:

US credit shrinks at Great Depression rate prompting fears of double-dip recession...

Professor
Tim Congdon from International Monetary Research said US bank loans
have fallen at an annual pace of almost 14pc in the three months to
August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for
the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist
at Gluskin Sheff, who said that over the four weeks up to August 24,
bank credit shrank at an "epic" 9pc annual pace, the M2 money supply
shrank at 12.2pc and M1 shrank at 6.5pc...

US banks are cutting
lending by around 1pc a month. A similar process is occurring in the
eurozone, where private sector credit has been contracting and M3 has
been flat for almost a year.

[82]

Indeed, total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July 2009 alone.
credit-card debt fell $6.11 billion, or 8.5%, to $905.58 billion. This
is the record 11th straight monthly drop in credit card debt.
Non-revolving credit, such as auto loans, personal loans and student
loans fell a record $15.44 billion or 11.7% to $1.57 trillion [83]

In
addition, the securitization market has largely collapsed, which in
turn has destroyed a large proportion of the world's credit. As noted in
an article in the Washington Times:

“Before last fall’s financial crisis, banks provided only $8 trillion of the roughly $25 trillion in loans outstanding in the United States,
while traditional bond markets provided another $7 trillion, according
to the Federal Reserve. The largest share of the borrowed funds - $10
trillion - came from securitized loan markets that barely existed two
decades ago. . . .

Mr. Regalia [chief economist at the U.S. Chamber of Commerce] said ... 70 percent of the system isn’t there anymore,’ he said.”[84]

The
reason that seventy percent of the system "isn’t there anymore" is
because the traditional bond markets and securitized loan markets (part
of the "shadow banking system") have dried up. As the Washington Times
article notes:

“Congress’ demand that banks
fill in for collapsed securities markets poses a dilemma for the banks,
not only because most do not have the capacity to ramp up to such
large-scale lending quickly. The securitized loan markets provided an
essential part of the machinery that enabled banks to lend in the
first place. By selling most of their portfolios of mortgages, business
and consumer loans to investors, banks in the past freed up money to
make new loans. . . .

“The
market for pooled subprime loans, known as collateralized debt
obligations (CDOs), collapsed at the end of 2007 and, by most accounts,
will never come back. Because of the surging defaults on
subprime and other exotic mortgages, investors have shied away from
buying the loans, forcing banks and Wall Street firms to hold them on
their books and take the losses.”

Senior economic adviser for UBS Investment Bank, George Magnus, confirms:

The restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit,
and until banks have created the capacity to resume lending to
creditworthy borrowers. This is still about capital adequacy, where
better signs of organic capital creation are welcome. More importantly
now though, it is about poor asset quality, especially as defaults and
loan losses rise into 2010 from already elevated levels.[85]

And McClatchy writes:

The
foundation of U.S. credit expansion for the past 20 years is in ruin.
Since the 1980s, banks haven't kept loans on their balance sheets;
instead, they sold them into a secondary market, where they were pooled
for sale to investors as securities. The process, called
securitization, fueled a rapid expansion of credit to consumers and
businesses. By passing their loans on to investors, banks were freed to
lend more.

Today, securitization is all but dead. Investors have
little appetite for risky securities. Few buyers want a security based
on pools of mortgages, car loans, student loans and the like.

"The
basis of revival of the system along the line of what previously
existed doesn't exist. The foundation that was supposed to be there for
the revival (of the economy) . . . got washed away," [economist James
K.] Galbraith said.

Unless and until securitization rebounds, it
will be hard for banks to resume robust lending because they're stuck
with loans on their books.[86]

Not only has the supply of credit been destroyed, but the demand for many types of loans - such as commercial real estate loans - is also drying up.[87]

So there is simply much less credit flowing through the economic system than there was prior to 2007.

The New Normal - Lower Economic Activity

As chief economist for the International Monetary Fund, Olivier Blanchard, said:

This
recession has been so destructive that "we may not go back to the old
growth path ... potential output may be lower than it was before the
crisis." [88]

All
of the above trends force many economists to conclude that economic
activity as a whole will be lower for many, many years. In other words,
they say that "The New Normal" will be a much lower level for the
economy.

Pimco CEO Mohamed El-Erian says elevated unemployment
and record wealth destruction will keep growth at 2 percent or less
for years. [89]

As Bloomberg writes:

The
New Normal theory predicts that the recession will leave unemployment,
forecast to reach 10 percent for the first time since 1983 early next
year, higher for years. [90]

Indeed, the "overhang" of inventory [91]- that is, the inventory of unsold goods - in everything from housing [92 and 93] to cars [94] to consumer electronics [95] means that the newly reduced consumer demand is meeting up with very high levels of supply. [96 - Indeed, entire fleets of cargo ships are sitting empty because of slack demand] This is a recipe for unemployment.

Many economists also point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:

Another
disturbing development was that the number of people out of work for
27 weeks or longer reached a record 5 million, accounting for a third
of the unemployed. That suggests to some economists that those job
losses were caused by structural changes in the economy
and that many of those people won't be called back to work once the
economy picks up. The longer people are out of work, the harder it
becomes for them to find jobs and the more likely they are to exhaust
savings or lose their homes to foreclosure. [97]

The
following chart from the St. Louis Federal Reserve Bank shows that
people are staying unemployed much longer than they have in any previous
economic downturn since 1950:

[98]

As 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.
[99]

[100: for graphical updates on the state of the economy, see charts from the Cleveland Federal Reserve Bank posted at http://www.clevelandfed.org/research/data/updates/index.cfm?DCS.nav=Local]

Other Theories Regarding the Causes of Unemployment

The
main cause of unemployment today is the economic crisis. For example, a
report from the the National Industrial Conference Board pointed out
in 1922 stated the obvious: depressions increase unemployment. [101]

The
report also points out that seasonal variations, "immigration and
tariff policies and international relationship" can affect unemployment
figures. [102]

In fact, economists from different schools of thought ascribe different causes to unemployment. For example:

Keynesian
economics emphasizes unemployment resulting from insufficient
effective demand for goods and services in the economy (cyclical
unemployment). Others point to structural problems, inefficiencies,
inherent in labour markets (structural unemployment). Classical or
neoclassical economics tends to reject these explanations, and focuses
more on rigidities imposed on the labor market from the outside, such
as minimum wage laws, taxes, and other regulations that may discourage
the hiring of workers (classical unemployment). Yet others see
unemployment as largely due to voluntary choices by the unemployed
(frictional unemployment). Alternatively, some blame unemployment on
disruptive technologies or Globalisation.

[103 and 104]

For
example, many Americans believe that globalization has increased
unemployment because "American jobs" have moved abroad. Certainly, the
American government has encouraged multinational corporations based in
the U.S. to move jobs overseas. But quick fixes may lead to new
problems. For example, a new American protectionism could stifle trade,
further weakening the American economy.

Similarly, some
economists believe that inflation decreases unemployment. However, that
is only true where the workers drastically underestimate the extent to
which higher prices are decreasing the real value of their wages.
Indeed, as the Cato Institute notes:

This reduction in
unemployment cannot occur unless workers systematically underestimate
the inflation rate. When workers are aware of the inflation rate and,
for example, have their pay adjusted according to the cost of living,
they will interpret wages properly and not be misled into thinking that a
normal wage offer is a relatively high wage offer.

Rather than
merely failing to decrease unemployment, inflation may actually
increase the unemployment rate. Frequent concomitants of inflation,
such as high interest rates and volatility and uncertainty in the
financial and product markets, increase the risks inherent in business
operations and thereby discourage the expansion of firms and the
creation of jobs. [105]

Therefore, many "quick fixes" for unemployment may actually do more harm than good.

Isn't the Government Helping to Reduce Unemployment?

The government has committed to give trillions
to the financial industry. President Obama's stimulus bill was $787
billion, which is less than a tenth of the money pledged to the banks
and the financial system. [106]

Of the $787 billion, little more than perhaps 10% has been spent as of this writing. [107]

The Government Accountability Office says that the $787 billion stimulus package is not being used for stimulus. [108]
Instead, the states are in such dire financial straights that the
stimulus money is instead being used to "cushion" state budgets, prevent
teacher layoffs, make more Medicaid payments and head off other fiscal
problems. So even the money which is actually earmarked to help the
states stimulate their economies is not being used for that purpose.

Indeed, much of the $787 billion was earmarked pork [109], not for anything which could actually stimulate the economy. [110]

Mark
Zandi - chief economist for Moody's - has calculated which stimulus
programs give the most bang for the buck in terms of the economy:

[111]

But very little of the stimulus funds are actually going to high-value stimulus projects.

Indeed, as the Los Angeles Times points out:

Critics
say the [stimulus money reaching California] is being used for
projects that would have been built anyway, instead of on ways to
change how Californians live. Case in point: Army latrines, not
high-speed rail.

***
Critics say those aren't the types of projects with lasting effects on the economy.

"Whether
it's talking about building a new [military] hospital or bachelor's
quarters, there isn't that return on investment that you'd find on
something that increases efficiency like a road or transit project,"
said Ellis of Taxpayers for Common Sense.

Job creation is another
question. A recent survey by the Associated General Contractors of
America found that slightly more than one-third of the companies awarded
stimulus projects planned to hire new employees. But about one-third
of the companies that weren't awarded stimulus projects also planned to
hire new employees.

"While the construction portion of the
stimulus is having an impact, it is far from delivering its full promise
and potential," said Stephen E. Sandherr, chief executive of the
contractors group.

It's unclear how many jobs will be created
through the Defense Department projects. Most of the construction jobs
are awarded through multiple award contracts, in which the department
guarantees a minimum amount of business to certain contractors, and lets
only those contractors bid on projects.

That means many of the
contractors working on stimulus projects already have been busy at work
on government projects.even the stimulus money which is being spent [112]

David Rosenberg writes:

Our
advice to the Obama team would be to create and nurture a fiscal
backdrop that tackles this jobs crisis with some permanent solutions
rather than recurring populist short-term fiscal goodies that are only
inducing households to add to their burdensome debt loads with no
long-term multiplier impacts. The problem is not that we have an
insufficient number of vehicles on the road or homes on the market; the
problem is that we have insufficient labour demand.[113]

Donald
W. Riegle Jr. - former chair of the Senate Banking Committee from 1989
to 1994 - wrote (along with the former CEO of AT&T Broadband and
the international president of the United Steelworkers union):

It's
almost as if the administration is opting for a rose-colored-glasses
PR strategy rather than taking a hard-nose look at actual consumer and
employment figures and their trends, and modifying its economic
policies accordingly.[114]

How Much Unemployment Do We Want?

On the one end of the spectrum, Article 23 of the United Nations' Universal Declaration of Human Rights declares:

Everyone
has the right to work, to free choice of employment, to just and
favourable conditions of work and to protection against unemployment.[115]

In other words, the U.N. says that there should be essentially no unemployment for those who wish to work.

On
the other end of the spectrum, some people - who make a lot of money
during periods where the condition lead to high levels of unemployment -
are comfortable with unemployment percentages reaching those in the
Great Depression.

Societies should decide for themselves what
level of unemployment they consider acceptable, and then demand policies
which will accomplish that goal to the greatest extent possible. As
discussed above, there are many factors which affect employment levels,
and so solutions are complicated.

However, without an open and
visible public policy debate about the issue, unemployment levels will
either remain second order affects of policy choices concerning other
elements of the economy, or will be decided behind closed doors by
decision-makers who may or may not have the best public interest in
mind.

Public Funding

As the above facts show,
unemployment is a very serious problem in the United states, and
world-wide. The policy responses of the U.S. and other Western
governments has not been working. As discussed above, there is no simple
solution.

Senator Riegle recommends a 4-part prescription, including:

Ensure
that loans and credit facilities are readily available to the nation's
small and medium size businesses and manufacturers.

Many of the top economists argue that we need to break up the giant banks which are insolvent in order to save the economy.[116] Fortune[117], BusinessWeek[118] and Federal Reserve governor Daniel K. Tarullo[119]
have pointed out that breaking up the largest, insolvent banks would
allow more competition from small to mid-size banks, and that such banks
may actually make more loans to small businesses. More loans to small
businesses would lead to more employment by those many small
businesses.

In addition, the U.S. has largely been financing job
creation for ten years. Specifically, as the chief economist for
BusinessWeek, Michael Mandel, points out, public spending has accounted
for virtually all new job creation in the past 1o years:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between
May 1999 and May 2009, employment in the private sector sector only
rose by 1.1%, by far the lowest 10-year increase in the post-depression
period.

It’s impossible to overstate how bad this is. Basically
speaking, the private sector job machine has almost completely stalled
over the past ten years. Take a look at this chart:

Over
the past 10 years, the private sector has generated roughly 1.1
million additional jobs, or about 100K per year. The public sector
created about 2.4 million jobs.

But even that gives the private
sector too much credit. Remember that the private sector includes
health care, social assistance, and education, all areas which receive a
lot of government support.

***

Most
of the industries which had positive job growth over the past ten
years were in the HealthEdGov sector. In fact, financial job growth was
nearly nonexistent once we take out the health insurers.

Let me finish with a final chart.

Without
a decade of growing government support from rising health and
education spending and soaring budget deficits, the labor market would
have been flat on its back. [120]

Raw Story argues that the U.S. is building a largely military economy:

The
use of the military-industrial complex as a quick, if dubious, way of
jump-starting the economy is nothing new, but what is amazing is the
divergence between the military economy and the civilian economy, as
shown by this New York Times chart.

In
the past nine years, non-industrial production in the US has declined
by some 19 percent. It took about four years for manufacturing to
return to levels seen before the 2001 recession -- and all those gains
were wiped out in the current recession.

By contrast, military
manufacturing is now 123 percent greater than it was in 2000 -- it has
more than doubled while the rest of the manufacturing sector has been
shrinking...

It's important to note the trajectory -- the military
economy is nearly three times as large, proportionally to the rest of
the economy, as it was at the beginning of the Bush administration. And
it is the only manufacturing sector showing any growth. Extrapolate
that trend, and what do you get?

The change in leadership in Washington does not appear to be abating that trend...[121]

So
most of the job creation has been by the public sector. But because
the job creation has been financed with loans from China and private
banks, trillions in unnecessary interest charges have been incurred by
the U.S.

Former Washington Post editor and author of one of the
leading books on the Federal Reserve, William Greider, points out that
governments actually have the power to create money and credit
themselves, instead of borrowing it at interest from private banks:

If
Congress chooses to take charge of its constitutional duty, it could
similarly use greenback currency created by the Federal Reserve as a
legitimate channel for financing important public projects--like sorely
needed improvements to the nation's infrastructure. Obviously, this has
to be done carefully and responsibly, limited to normal expansion of
the money supply and used only for projects that truly benefit the
entire nation (lest it lead to inflation)...

This approach
speaks to the contradiction House Speaker Pelosi pointed out when she
asked why the Fed has limitless money to spend however it sees fit.
Instead of borrowing the money to pay for the new rail system, the
government financing would draw on the public's money-creation
process--just as Lincoln did and Bernanke is now doing.[122]

By
creating the credit itself - instead of borrowing from private banks
and foreign nations - the American government could finance the creation
of new jobs without incurring huge interest charges owed to the
private banks and foreign countries which lent America the money. In
other words, the U.S. government would itself create the new credit,
just as Lincoln did to finance the civil war.

By financing new
projects with credit created by the government itself, America might be
able to pick itself up by its bootstraps and put its people back to
work.

The same may be true for other countries as well.

Comments

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[Azannoth]

The Government is Actively and Passively getting in the way of private enterprise, shoveing 1000 new laws out every year, the entepreneurs are buried under a pile of paper they need to fill out before they can 'invent' things, people are just giving up trying to work in this system and who can blame them

Enterpreneur - Eureka, I invented a better mouse trap!

The Government - and does your mouse trape have child safety built in, does it conform to 1000 environmental regulations, does it have an instruction written in Brail language, is it tested to be safe for 1000 other species except mice becase if any 1 of those is 'No' youll have to do a full recall and pay damages and restitution to all users and a fine to the Government

Enterpreneur - well fine drown in mice! @ssholes !

[Goldenballs]

Unemployment is rising because the establishment don,t give a shit.The elites see themselves apart from any nation, sort of internationalist with the sole goal of getting wealthier.Until people boycott foreign goods or refuse to enter certain shops on certain days things will not change.The elites need to understand National responsibility along with National interest.Shut the offshore tax havens,introduce import quota,s on foreign goods and tax companies in the country they make their profits period asap.If they don,t like it refuse access to the markets and see how long it will be before they capitulate.

[minus dog]

Wealth is becoming more concentrated because of off-shoring, whack-a-mole minimum wage hikes, and continuing job destruction due to regulatory uncertainty, not the other way around.

Artificially forcing the cost of labor higher doesn't help those selling the labor or those relying on it to run their business (which is, directly or indirectly, EVERYONE) any more than artificially forcing the cost of gas, copper, paper, or drywall higher helps those selling it or those relying on it to run their business.

How many of you guys have actually worked for an hourly wage any time in the last decade or two?  GW is right, minimum wage is crap right now - but few really understand the factors that lead to that.  You can't increase the minimum wage fast enough to make up for increased prices everywhere else.

[billw]

This guy expounds constantly on socialist dogma that has not worked anywhere else, If you want to read what real economists know works try cafehayek.com, Walter Williams or Thomas Sowell. Everywhere socialism has been tried it has screwed up that country's economy just like it is doing to ours. Jobs get shipped overseas primarily because the USA has the highest business tax rate and the most regulations ( federal, state and local) of any country in the world.

[NorthenSoul]

Everywhere socialism has been tried it has screwed up that country's economy

Do you consider Norway, Denmark, Sweden and Canada socialist countries? It's be nice if you could provide examples instead of dissing the post with generalizations.

[bobzibub]

I suspect that the current gini coeffient is to blame, when so much of the US economy is based upon consumers.  If the top 10% has 85% or so of the wealth, then they'll get a house in Calais, a yacht in Moncaco, a few cars from Bravaria, bank in Bermuda and invest the rest in China.  They're hardly nationals of any state, but they'll be able to influence US laws and elections via generous donation laws.  And hence pay continued low taxes.

A regular shmo that earned a little more at least might buy a car from Detroit, maybe a house in the US, and possibly start a local business.  The regular folks are getting the squeeze more and more just as each recessions gets worse employment numbers. 

I do not have no numbers to back that up, but that is my suspicion.

[Eternal Student]

An excellent overview. Well done.

[RockyRacoon]

Yes!  Quite good.  Thanks to GW for his monumental effort.

[midtowng]

+1

[Kayman]

Contrary to Vapid Witless Bugs excretions, it is the loss of American manufacturing through the tax code and general government policy that has mortally wounded this country.

Manufacturing provides the tax base and the Service Industry base.  

Technology is lost when jobs are "outsourced" offshore.

Granted, some companies are very profitable through outsourcing, but this is a small gain against the monstrous losses the country must carry from unemployment and debt creation.

George- you are right.  If Benny and the Inkjets proceed with further monetization of debt, unemployment in America will increase dramatically.

The Parasite is bigger than the host, but the Parasite doesn't recognize itself as a parasite.

[VWbug]

i didn't say i word about tax policy or anything else you mentioned, so dunno what you're on about, ranting about nothing again i guess.

What i did do was question why anyone would bother reading a word of this guy's blatherings when he has been so wildly wrong so often.

As for outsourcing, clearly companies do it because they get better results that way, mainly because perfectly qualified people outside the USA are doing the same or better work for less.

Sorry you feel you can't compete. Probably it's the government's fault.

Some people sit around and whine about it, and some people move out of the country or create their own job like I did.

Ready for your list of excuses why you can't possibly do that...

[bugs_]

Using the Zandi numbers its quite obvious
that we need to issue everyone food stamps,
and write unemployment checks to the world.

This is the Zandi Solution.

[Sarah Conner]

Given that Zandi's #1 is "food stamps", my #1 is "accelerated depreciation", whatever the f@#! that is...

[alexwest]

about shipping jobs offshore.. my pal george.. you forgot to mention most important thing..

MY STUPID AMERICANS FELLOWS who ARE so

#ucking ingrossed w/ LOHAN/Britney/ipads/batmans so didnt pay attenion so they elected Slicky BILL, imbecile Bush( both), and last one PRIMA BAMA man who never even worked for private sector..

well they got what they deserved.. dont they ???

alx

ps

IDIOCY seems wont end... now BECK/PALIN is under way...

[alexwest]

what was it ??? verbal Diarrhea :((((((((

[RockyRacoon]

what was it ??? verbal Diarrhea :((((((((

A lot of work went into the preparation of this article.  Probably hours assembling all the parts and presenting it for your edification.   The best you can do is post a churlish remark that supposedly showcases your cleverness?  I believe it displays other, less admirable traits.  The most respectful thing you could have done is to pass on to another ZH article.  There are many available and you might actually find something like williambanzai7 more to your liking -- it's mostly pictures.

[VWbug]

i dunno, i didn't read it either, especially since the last thing iof his I read he was predicting disaster for BP and boy was he ever wrong about that!  BP: $41.67 today, up from $27 when GW was being an alarmist fool.

35% gain...hope no one who bothers to read your stuff shorted BP GW.

[andybev01]

I'm waiting for the paperback edition.

[G. Marx]

LOL!

[VWbug]

One definition of insanity is doing the same thing again and again and expecting different results

would posting over and over again about impending disasters that never happen come under that definition?

[Sarah Conner]

If you mean man-made global warming and all that Mayan 2012 crap, then yes! If you mean a collapse of our global economic system, then no...

[VWbug]

yeah exactly.

And giant methane bubble explosions, tsunamis, hurricane borne toxic rain, death of the GOM, etc etc.

hard to take anyone seriously on the true disasters when they spew so much nonsense about ridiculous non-events and looney conspiracy theories.

[vote_libertaria...]

Ohhhhh...that's why we spiked up on equities.  Todays data confirms the complete economic disaster we are facing....errrr....what?