Unemployment “Trap”

I wasn’t going to post today because there is very little new to report other than the fact that consumer confidence edged up slightly, but well below the kind of increase the markets were looking for. Something tells me that there is an emerging disconnect between what the markets perceive is going on, and what the average American family is experiencing.

I think it comes down to unemployment and its ramifications.

To that end I want to pass along to you some disturbing thoughts and figures gleaned from this week’s Economist magazine:

1. There were only about 400,000 more jobs in 2009 than there were in 1999, despite the population having grown about 30 million. That is appalling. It is a true ‘jobless decade’.
2. The economy shed about 800,000 more jobs in the second half of 2009, even though it grew quite well through those six months. This is also terrible.
3. It took a full four years for the economy to grow jobs after the last recession, which is an unusually long time and is the result of the changing nature of our labor market.
4. This total stagnation in the labor market put enormous pressure on wages – labor had no bargaining power and so wages languished. This caused families to have to borrow in order to stave off the effects of inflation.
5. This increase in borrowing contributed to the banking implosion and the depth of the crisis we are now digging out from.
6. A continued poor employment market implies that households will have to continue to reduce debt in order to make ends meet.
7. This ‘de-leveraging’ will reduce the amount households spend …
8. Which will reinforce the need for businesses to avoid hiring.

In short all the pieces are in place for another decade of joblessness.

While I take issue with the Economist’s point that household debt was a key cause of the collapse – I think rotten underwriting had more to do with it – the overall conclusion still holds. The American economy as it now constructed is simply not good at generating new jobs. This is an astonishing turn of events given that the experience of the 1990’s was the exact opposite: America was a veritable job creating machine from 1990 through 1999. The contrast could not be more stark.

Economic policy seems to have had little impact. Taxes were raised in the 1990’s and lowered in the 2000’s. The impact was counter-intuitive, with higher taxes being associated with faster growth and a better employment outlook.

Globalization is clearly involved in the extraordinary shift we have seen, with a great deal of the job growth our consumption should have generated having been ‘exported’ either through outsourcing or through our purchase of imports. Our economy has also shifted even further into being dominated by services like health care which have a different cyclical pattern and less volatility. They also require more education which is now apparently holding back our workforce.

The disturbing numbers go on: 40% of all unemployed Americans have been out of a job for at least 27 weeks. That’s an incredibly large number of long term unemployed people – in fact it is an all time record, at least since that statistic was first collected in 1948. We have also lost about 1.5 million people from the workforce. These are people who have given up looking for work and have simply dropped out. Combining these two deep rooted problems areas and the economy has a very large pool of labor to be tapped and absorbed over the next few years.

And there is no sign of it being able to do so.

So we appear headed for the worst possible recovery. One that fails to generate enough wage growth to spur consumption – households are in a determined debt reduction mode; and one in which job growth is extremely weak. These two factors play off against each other and create a kind of no-man’s land for policy makers. This is especially true given that with interest rates likely to have to remain low the banking system is almost certain to head into another asset price bubble fairly soon – if it isn’t already.

Frankly this is a recipe for disaster.

The Economist calls it an unemployment trap.

I call it the living epitome of what Keynes described as the paradox of thrift.

The only way out of the trap is more stimulus. The chances of that happening are near zero unless we can re-brand it as a ‘jobs program’. From what I have been hearing about the size and scope of such programs being proposed in Congress, there doesn’t appear to be the political willpower to break out of the trap. Ideological battle lines being what they are it looks like we will have to suffer longer.

That’s a shame given that we know how to break free.