Jobs, Trade, and Debt: What’s New?

There was a modest flurry of reporting this morning that enables us to take the temperature of the economy. Unfortunately, once again, we are left with a ho-hum feel. This really is a long slow slog.

Jobs:

The weekly release of new claims for unemployment assistance showed a very modest – 6,000 – improvement and came in at 462,000. This was very slightly above expectations and so is something of a disappointment. Worse: the four week moving average rose 5,000 to 475,500 which tells us that any positive momentum in the job market we saw late last year has dissipated. This conclusion is backed up by the fact that claims are now running about 7% higher than they were in November. While some of this loss in momentum can be attributed to the oddities of the weather and spotty data collection, every week that goes buy without improvement undermines those factors as sufficient explanation for what’s going on.

A better explanation is simply that the economy is close to a stall, and needs another kick start. Frankly the jobs bill that just passed through Congress is an affront: it is way too small to have enough immediate impact, and relies far too much on tax incentives rather than direct job creation.

Lurking in the underbrush of the data is an ugly fact: long term unemployment is growing steadily and has now reached 4.56 million receiving regular assistance and a grand total of 11.36 million people receiving some form of unemployment aid. With Federal programs already stretched to 99 weeks it is hard to see what more can be done in terms of assistance. I think the obvious next step would be work programs in the manner seen during the Depression. So far, though, such ideas have not received much attention in Washington.

When we discuss unemployment aid it is very important to recall its stimulative value for the economy. Since unemployed workers are generally very hard up, they tend to spend any aid they receive. So channelling stimulus cash through the unemployment assistance route is an extremely effective way of getting aggregate demand to rise. It is demand we are attempting to reflate with the stimulus and we get a great ‘bang for the buck’ with unemployment aid.

I won’t comment again on the inhuman folly of the Republican position that aid acts to undermine a worker’s determination to seek work. I am sure there are examples of such idleness. I am equally sure that those instances are not representative of the general unemployment market. If they were we would not be witnessing the long lines ate job fairs, job workshops, and employment bureaus that we are. The Republican view is reminiscent of Victorian England before the emergence of the labor movement. The paternalistic moralizing that underlies such an attitude towards those unfortunate enough to have lost their job is staggeringly demeaning and massively insulting. Yet it still crops up. Personally I find it disgusting. From the point of view of economic policy it makes no sense either. Unfortunately, as I have said here many times, orthodox economic theory lends its support to the ‘unemployed as indolent’ perspective: according to the Chicago school of economics – Milton Friedman’s legacy – anyone who is unemployed has specifically chosen to be such. That theory assumes an unemployed worker values leisure so highly that they prefer to remain unemployed rather than find work at a lower wage. Hence there can be no ‘involuntary’ unemployment. The persistence of this specious thinking is one reason it is hard to purge right wing politics of its frequent bouts of paternalism, which is unfortunate when, as now, we need a united front with which to confront the terrible social effects of a crisis.

Trade:

File this in the category of ‘not good news’. Our trade balance shrank 6.6% in January to $37.29 billion. This is not good news for the simple reason that it probably indicates that worldwide economic activity slowed somewhat. The last thing we need is a global retrenchment. It is also unfortunate since the previous two months had seen large increases in the deficit which had all the feel of a strong economy: not only were we exporting more, but we were importing more as well which is usually a sign of increasing demand and industrial activity. A sudden stall such as that in January is something we need to watch carefully. A repeat in February would be unwelcome.

While I am on the subject of trade I should mention the administration’s export initiative. Politicians always love export stimulating programs because they draw a straight line between a surge in exports and a healthy outlook for jobs. Allow me to pour cold water on that notion.

It takes a little thought to see why a surge in exports and thus a surge in jobs is not a healthy thing. There are two essential reasons.

First: any increase in our exports implies an increase in someone else’s imports. All we do in this case is to create jobs here at the cost of jobs there. The lost income abroad will eventually feed its way through as lost demand and eventually a loss in demand for our goods. To maintain our trade advantage in the face of this lost demand we would have to cut prices and engage in a trade war. The end result would be an erosion of activity and the potential loss of those jobs we created at the start.

Second: a surge in export related jobs would put pressure on our labor market. Right now that seems like a good idea – we have tons of slack to be taken up. But as that slack is removed and as the domestic economy improves the added export related jobs will exert inflationary pressure on wages and will cause the Fed to have to raise interest rates. This would cut off domestic growth at a lower point than normal, meaning that fewer domestic jobs were created during the business cycle. In other words the extra jobs in export industries come at the expense of fewer jobs in domestic industries. Over the course of the entire business cycle the number of jobs created will be the same, they will simply be allocated somewhat differently.

This is basic economics.

The only way to create extra employment over a business cycle is to increase total – ‘aggregate’ – demand. That way more stuff will be bought from all industries whether they are export, import or domestic only.

So stimulating exports, while it appeals to voters, politicians, and to business leaders in exporting companies, has no long term value. There are no extra jobs created and the effort simply masks losses elsewhere.

This is why stimulus should focus on reflating demand rather than on targeting specific industries.

Beyond stimulus, an industrial policy that helps expand the economy in a general sense has value, but that is not what the administration’s export initiative appears to be about. Obama should get back to finding ways to develop new industries and leave exports alone.

Debt:

One of the great features of this crisis, especially in the recovery stage is the massive de-leveraging going on. Households and businesses are shedding debt at unprecedented rates. Debt still continued to climb in the fourth quarter – at a 1.6% annual rate – but that represents a significant withdrawal from credit. Don’t forget the economy grew at over 5.5% during the same period.

According to the government businesses cut debt at rates never before seen, and the fourth quarter increase was the smallest on record – going back to 1952. The outstanding debts of non-financial companies fell at an annual rate of 3.2% in the fourth quarter, bringing the drop for the year as a whole to 1.8%.

Meanwhile households cut their debt levels by an annualized 1.2% in the fourth quarter, bringing the annual decline in that sector to 1.7%, the first annual drop ever.

At first sight these figures seem welcome: one of the chief concerns of the past few years has been the indebtedness within the economy. So de-leveraging appears to be a sign of a more healthy balance being established within the economy.

Not so fast. Think about this a little: every dollar spent on debt elimination is one less dollar spent on investment or consumption. All this debt reduction is putting a massive constraint on demand. No wonder the economic recovery is so slow. As in all things there needs to be a better balance between debt reduction and spending. Right now the economy has veered far to heavily towards thrift and too far away from expenditure.

But there is an offset. One that has been much debated recently: government debt.

One reason why the surge in the Federal deficit has been of little concern is that it is filling the debt void opened up by the huge private sector retrenchment. That’s why total debt is still rising even in the face of the private sector cutback. Without that surge in public debt aggregate demand would have imploded completely and we would most likely be in a deep depression.

Conversely, those who argue that the surge in public debt is somehow ‘crowding out’ private debt – making it difficult for businesses to raise debt and thus invest for the future – is clearly wrong. There is no private demand for debt to be crowded out. All the data suggests otherwise: the private sector has gone into a deep freeze and is trying to shrink itself at an unprecedented rate. The crowding out argument might have some validity during a normal business cycle, but this is far from such a cycle. We are witnessing an historically large retrenchment, which requires an equally historically large response.

One reason why the economic recovery is so meager is that policy makers completely misread the unique character and size of the crisis. Especially the impact that the banking implosion would have on the real economy.

It is vital that we all grasp the true nature of our current problems and understand that we are dealing with crisis whose size and scope is beyond any other than the Great Depression itself.

So, yes, debt retrenchment is great in the medium and long run. But short term it is acting as a massive brake on GDP growth. Only continued government debt creation can fill the gap and keep us afloat. Hopefully there will come a time soon that we can switch back to private sector borrowing and reduce the Federal debt. Right now any discussion on the subject is being rendered moot by the private sector’s actions.

So what do we make of today’s data on jobs, trade, and debt?

The economy is still a mess. The issues are still complicated and not easily tractable to simple policy shifts like the export initiative. Nor is debt reduction necessarily a good thing

This year continues to look very difficult. Even though we have made progress, it is both tenuous and far to reliant on government support. We are still waiting for private business and households to stop reducing. Only then will we see an easier path emerge. And until then risks abound.