Unemployment Will Remain High Because Obama Will Do All The Wrong Things

This article was originally published on Labor Day by the Daily Capitalist.

It is fitting to publish an article on Labor Day about unemployment. No doubt you already know that the market reacted badly (-2.5%) to last Friday's unemployment numbers from the BLS. Here is what they reported:

The number of unemployed persons, at 14.0 million, was essentially unchanged in August, and the unemployment rate held at 9.1 percent. [U-6, the broadest measure of unemployment, was at 16.2% (see below table). At that rate, there are 24,900,000 unemployed persons in America.] The rate has shown little change since April.

The number of long-term unemployed (those jobless for 27 weeks and over) was about unchanged at 6.0 million in August and accounted for 42.9 percent of the unemployed.

The labor force rose to 153.6 million in August. Both the civilian labor force participation rate, at 64.0 percent, and the employment-population ratio, at 58.2 percent [62.7% in December 2007], were little changed. 

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.4 million to 8.8 million in August. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. 

About 2.6 million persons were marginally attached to the labor force in August, up from 2.4 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. 

The highlights for specific industries:

Health care employment rose by 30,000, mining continued to trend up in August (+6,000), computer systems design and related services added 8,000, information industry declined by 48,000 in August, manufacturing employment was essentially unchanged in August (-3,000), and government employment continued to trend down over the month (-17,000).

The workweek went down 0.1 hour to 34.2 hours. Average hourly earnings for private employees went down 2¢ (0.1%) to $19.47.

Here is what it looks like:

Unemployment remains stubbornly high and it is becoming a political liability for the Obama Administration. We appear to be going backwards.

I suspect that President Obama in his speech this week will come up with the same remedies that his Administration has been proposing before, but repackaged to make it sound like bold new remedies. More tax breaks for employers, more "focused" spending on infrastructure, job training programs, and green jobs. And he will be roundly criticized by his leftist base. Watch for Paul Krugman and Robert Reich to call for more Keynesian fiscal stimulus. Reich believes that if you don't believe in this spending remedy, then you are either a knave or a fool. They ignore the fact that it has never worked since governments have been trying it, and, as we all know, under this theory apparently you can never spend enough.

There are several reasons why it won't work and why they are sentencing Americans to a stagnant future of high unemployment.

One is the regime uncertainty that many conservative and Austrian theory economists point out. That is, because businesses and entrepreneurs don't know what the government is going to do next, they are reluctant to commit capital to expand business. Obama has increased regulation, threatens to raise taxes, and there is the overhang of the unknown impact of Obamacare. It is difficult to refute this argument because it is true. I'm not saying it doesn't have a negative impact, but it isn't the main cause of our malaise.

Also I don't think reducing taxes on employment or employers will do much to drive a recovery either, apologies to Arthur Laffer. I think lower taxes are always a good thing for society and the economy, and I think taxes sh0uld be substantially lower, but it will have the effect of pushing on a string right now.

The reason the economy is stagnant isn't that consumers, the purpose of all production, aren't spending. It is because they aren't saving enough.

Let me back up for a moment before you dismiss my argument out of hand. I have written many times about the boom-bust cycle and how the fallout from the boom is what is holding back the economy. We understand the huge malinvestment from the production of real estate (that, as we discovered, no one wants). We understand the debt that drove it and how that impacts families and our financial institutions. I lay the blame at the feet of the Fed who were responsible for the explosion of money and credit that fueled the mistakes of the boom. Contrary to Keynes, these booms don't spring up as if by magic ("animal spirits").

What these Fed-induced booms do is destroy capital. They cause businesses to misread the signals they get from interest rates and markets and as a result capital is directed to unprofitable ventures. Those ventures get wiped out when the Fed shuts down the money machine, and the capital that went into them is wiped out as well. In this cycle it occurred on a massive scale, almost worldwide. Perhaps $30 to $50 trillion was wiped out worldwide (admittedly a difficult number to pin down; in the U.S. it is estimated at about $15 to $20 trillion). 

The reason the economy is stagnating is that we haven't generated enough "real" capital, i.e., savings from actual production, to fund new growth. The reason we know this is because manufacturing and industrial production is falling. You can't just print this kind of capital since it is based on productive activity.

We haven't been able to create new "real " capital because we haven't wiped out enough malinvested projects to clear the decks (and balance sheets). Excess (malinvested) residential and commercial real estate and their debt still clog up the balance sheets of our banks, small businesses, and consumers. There isn't sufficient production from which profits or wages can be saved.

When we've abandoned extend and pretend, mark-to-make-believe, and the programs that prop up underwater housing, we can  move forward. It isn't as if this isn't happening. It is; it's just too slow because of the government's efforts to forestall it. Despite their efforts, CRE and housing continue to decline. 

If you spend massively to build infrastructure to revive the economy, you will find out, as have the Japanese, that the economy still stagnates. Assuming as a result of such spending consumers have more money to spend, why didn't Japanese companies expand production to meet the supposed demand? Answer: you have to make goods first before people buy them.

When manufacturers wish to expand production, they have to buy raw materials, machinery and equipment, and hire labor. That takes capital. Capital comes from savings, not spending. Printing new money has never worked. If the money comes from the printing press or credit expansion, then it will again be malinvested into things that producers will eventually find that consumers don't want. If it comes from deficit borrowing, it just robs Peter to pay Paul — no net gain. You can't trick the market this way.

It is a sad commentary on conventional economics that these well-intentioned policies achieve the exact opposite of full employment. Obama's remedies will do nothing but perpetuate long-term high unemployment. And that is a hell of a gift to workers on Labor Day.

Comments

[Shocker]

There Has been no real plans put into action to help deal with unemployment. The stimulus did little to nothing.

Without jobs, there will be no recovery

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[New_Meat]

Law-Please explain what "dissent" u b seein' ?

"... the military in the U.S. is by far a volunteer force."

Well, actually, 100%.

So, your gradnfather's military, (even if you are like 12) had drafteez.  They mostly played, and all honor to 'em.  Honorable discharge is .. well .. 'Honorable'.

Difference is, these guyz 'n galz are playaz.  The National Guard folk who are in training or in harm's way are way different from your grandfather's military   Tremendous improvements in training, therefore, performance, therefore effectiveness.

Don't cha' know.

- Ned

[max2205]

Tricked traders for two years and made Them a lot of mulaa