The Economy Is Even Worse Than You Think
The average length of unemployment is higher than it’s been since government began tracking the data in 1948
The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.
Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:
- More companies are asking employees to take unpaid leave. These people don’t count on the unemployment roll.
- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn’t searched for work in the four weeks preceding the survey.
- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.
- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That’s 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).
- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
- The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.
- The goods producing sector is losing the most jobs — 223,000 in the last report alone.
- The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.
Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.
Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook.
How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.
About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. As paychecks shrink and disappear, consumers are more hesitant to spend and won’t lead the economy out of the doldrums quickly enough.
It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn’t. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency.
Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.
Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.
Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy’s main driver, we are going to have a weak consumer sector and many businesses simply won’t have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won’t be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending.
This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity.
No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It’s a shame Washington didn’t get it right the first time.
Mortimer Zuckerman is chairman and editor in chief of U.S. News & World Report.
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Here is an idea for parcial economic stimulus. It is not a complete solution but it is a start and cost effective
February 23, 2009
Let us begin
The situation we have is an economy that produces approximately 11 Trillion dollars annually of GDP and has approximately 70 Trillion dollars in debt and growing (about 10 trillion already spent (accumulated budget deficits) and about 60 trillion promised in the form of Baby Boomer Social Security, Medicare and Medicaid obligations. There is no way the economy itself can support 70 Trillion dollars of Debt. In addition, the economy presently is in a severe contraction due to both governmental and banking mismanagement and corruption. This current set of circumstances has resulted in HUGE government bailouts (700 Billion Tarp, Paulson/Bush banking system bailout and 797 Billion Obama economic stimulus package and 500 billion for current budgetary considerations).Thus adding 2 Trillion to the 70 trillion aforementioned with more to come.
A COMMENT
Considering the circumstances there will be some appetite for future Treasury issuances in the short run and mid term (the additional two Trillion referred to above). But the longer range appetites ( reserves for Baby Boomer obligations of Social Security, Medicaid and Medicare) for U. S. Treasuries are more questionable and undoubtedly will be more, much more, expensive with yields paid by American taxpayers much higher and revenues received by American tax payers much lower. At some point perhaps there will be a currency devaluation. I never thought I would say that. Unless we devise a plan that will satisfy world markets that Americans can successfully address this Financial Crisis and the massive inflation that could follow in a sustainable way, very unpleasant consequences will occur. We need a plan that is based in reality not the program we are engaged in now, IT WON’T WORK.
Suggested Partial Solution
Fed/Treasury Partnership &
Direct Fed/Treasury Economic Stimulation:
A successful solution will require an understanding that a significant Federal Reserve and Treasury Department partnership is mandatory (a Keysian/Friedman partnership).
This Partnership is critical because the economy is fragile and continues to weaken and cannot grow us out of this set of circumstances. Further, confidence has been essentially lost in all governmental institutions and elected representatives with the possible exception of the Fed and Treasury.
The Treasury Department ( with Tim Giethner’s leadership along with Larry Summers and Paul Volker’s experience and intellectual horsepower) teamed with the Federal Reserve (with Ben Bernenke at the helm) have the human resources and balance sheets to lead us back to the path of prosperity. The Feds balance sheet should be used in a manner that maximizes monetary policy while utilizing the Treasury department as a partner temporarily until this Crisis has been resolved and a sustainable Economic policy is in place.
An example of this would be for the Federal Reserve Bank and the Treasury Department to partner. This partnership would be represented by a model that consists of equal contributions of 30 year U.S. Treasury Bonds Principle and Interest. These contributions would be the engine of the partnership supporting troubled commercial banks loan activity. The partnership would serve as a guarantor of the new loan activity for qualified banks and would be called the Fed/Treasury Partnership. The Fed/Treasury Partnership would have two functions the first would consist of contributed Treasury bond principle for use in stabilizing troubled banks and the second would be contributed Treasury Bond interest used for other Fed/Treasury purposes (discussed later). For the first part of the Fed/Treasury Partnership to be successful the bank in question must be free of toxic assets. To accomplish this, the troubled bank would quarantine all of its toxic paper. Proceeds from toxic paper would be used as a further cash infusion and/or a set aside for additional capital requirements into the bank. The troubled mortgage/other assets themselves would be would be left unadjusted, no Mark to Market valuations. Toxic asset valuations would remain at their cost basis on the banks books and would be represented on the balance sheet as troubled assets to be worked out. Asset valuation would take place at a more tranquil time and environment and be market driven. With this treatment of toxic assets completed a clean bank emerges to work with.
With the bank now clean of toxic asset effects the Fed and Treasury representatives can determine and guarantee (thru the Principle portion of the Fed/Treasury Partnership contribution) a sufficient amount of new loan activity to obtain stability and/or profitability. This will be expensive as the Partnership is guaranteeing virtually all new loans and will do so for a sufficient amount of time for bank recovery. Management of the partnership model “Principle Portion” should be managed by Federal Reserve Bank representatives. By the end of the Fed/Treasury Partnership intervention the bank will be profitable and in a better position to dispose of toxic assets in a reasonable market driven fashion. The problem banks will survive. The toxic assets will be sold in the free market. The bank will finally be removed from the Fed/Treasury Partnership umbrella to lend again and prosper. This process can and should be used in a Federal Reserve Bank Partnership with foreign Central Banks and /or appropriate foreign government agencies. This model can be very useful as global portal linkage in addressing the global aspects of the financial crisis.
The Interest Portion of the Fed/Treasury partnership model will be used to support strong banks (banks not suffering from toxic assets) to generate a more balanced and healthier overall banking system. Management of the interest portion of the partnership model should also be managed by Federal Reserve Bank representatives. The result of the interest portion of the Fed /Treasury partnership model would be to effectively expand strong banks product lines and profitability. This is accomplished by the Fed/Treasury partnership utilizing the model’s on-going revenue stream (interest portion of the model) to underwrite new business Loan programs or Credit Card programs, asset purchase programs and other product line expansion that emerge as part of recovery. Other Product line expansion possibilities from the Fed/Treasury partnership on-going revenue stream (interest portion of the Fed/Treasury model) could be to allow mortgage warehouse lines for Jumbo’s mortgages, non-conforming mortgage loans or to purchase asset backed securities. Further product line expansions would include supporting Municipal Bond issuances nation wide and finally support our shadow lending industry (very important as this industry provides approximately 45% of all loan activity in the country). These and many other potential partnership activities would have the beneficial effects of generating confidence and attracting private capital back to the Capital Markets at an efficient cost basis.
These suggestions would begin the credit thawing process and would have a calming effect on financial markets. In addition to previously mentioned benefits of using the Fed/Treasury Partnership another important use is the Fed/Treasury Partnership is supporting Bank to Bank Lending. This could be a very, very important contribution of the Fed/Treasury partnership.
In addition to freeing up Credit Markets, instilling Investor confidence and reinvigorating asset securitization and eliminating the need for immediate Mark to Market accounting for toxic assets and reinstituting a secondary market for non-conforming mortgage loans (Jumbo’s and other collateralizations) and supporting Bank to bank lending while supporting the Municipal bond markets, Corporate Debt Market fluidity and reinvigorating the Shadow Lending Industry the model can be modified to stimulate the lower economy directly.
Direct Fed/Treasury Economic Stimulation:
Direct Fed/Treasury Economic Stimulation Program will be similar to the Fed/Treasury Partnership (described above). Both the Fed and Treasury will contribute 50% of partnership requirements into a model. These contributions will consist of both the Treasury and Fed contributing 30 Yr. U.S. Treasury Bonds, Principle and Interest into the model. However, one difference is that this stimulus would go directly to the lower economy and augment the work of the Fed/Treasury partnership in stabilizing and balancing the banking system.
Another difference is only in Interest Portion proceeds of the model are used as the program guarantee. The Principle Portion of the model is NEVER used. A further difference is this program is a for profit program for the Federal reserve bank. A fee structure, payment schedule and program time line will be established as part of program architecture with the Treasury managing the program.
One example of program use would be for the Direct Fed/Treasury Economic Stimulation Program to directly guarantee toxic loans sitting on troubled commercial banks books that have been quarantined. This would be a great help to the loan workout process as well as the banks mark to market problems. In addition, loans made by thrift banks that participate in the national Jumbo and/or non-conforming mortgage program financed by the Fed/Treasury Partnership (referenced above). This guarantee would encourage thrift institutions (thru stimulus program guarantees) to provide refinance and purchase credit to individual borrowers while the Fed/Treasury partnership encourages commercial banks to provide additional warehouse lines to thrift institutions. This approach would have the effect of creating seamless financing available for housing purchases and mortgage refinance activity, creating greater confidence and jobs in the mortgage, Construction, Real Estate and related service industries. Finally, this stimulus would minimize troubled bank losses of quarantined assets and help to stabilize the countries Real Estate price structure.
Another example would be for the Direct Fed/Treasury Economic Stimulation Program to directly subsidize small and medium size commercial (FDIC) banks not involved in toxic asset activity through direct loan guarantee programs designed for specific industries as determined by the treasury and Fed. This would make credit more available to a variety of small, medium and large businesses while creating confidence and jobs. Further, this program could be expanded to direct commerce lending with the amount, nature and duration of support determined by an industries or local economies as needed. In total the Direct Fed/Fed Treasury Stimulus would maximize the work of the Fed/Treasury partnership while supporting the growth of small business. The combination of these two initiatives is intended to augment current fiscal and monetary policy while lending flexibility to the crisis management plan now in place.