In August the government said unemployment in the United States increased to 9.6% of the total United States labor force. For the headline reading public, percentages, as bad as they might be; are more soothing in their impersonal nature than actual numbers. The U.S. labor force is estimated to approximate 154 million people. An unemployment rate of 9.6% equals 14,784,000 people. There are also the underemployed, part time workers who lost their former full time jobs. The underemployed equal about 7.1% of the labor force according to the government. Consequently, as of August, 2010 about 16.7% of the total U.S. working population is unemployed or underemployed. In human costs 16.7% equals 25,718,000 people in this country who are out of work or unable to find full time work. This very large number does not include those individuals who have dropped out of the labor force according to government statisticians.
There is an opaqueness or lack of clarity in government monthly unemployment numbers. Econometric models, based on assumptions, are used in compiling the monthly unemployment data. Although we believe there is an honest effort for accuracy, some of the assumptions used to generate the final headline numbers are questionably biased. For example, each month the Department of Labor estimates (guesses) how many unemployed people decided to start their own private businesses to generate income. It also guesses each month at the number of people who discontinued their personal business venture. During difficult economic times the government seems to assume that many more new businesses are started than are terminated each month. A very questionable and unquantifiable assumption. For example in August the Bureau of Labor statistics decided that a net balance of 115,000 jobs were created by individuals who could not find either work with existing entities or did not want to. This is a hypothetical number which can only be more accurately ascertained many months later. It is quite possible in August that more small private businesses closed their doors than started new ventures. In economically hard times this is not an unreasonable assumption. Credit and liquidity become scarce and undercapitalized small personal ventures fail. The government said in August there was a net loss of jobs in the country of 54,000. Wall Street and economists were happy the job loss was not bigger. If we remove this questionable creation of 115,000 jobs last month, then the job loss would be 169,000, a negative number which would have shocked Wall Street and further heighted fears on Main Street. Also, in the August report almost all of the gains in employment came from an increase in part time employment, an increase of 331,000 part time jobs. Full time employment declined last month on a net basis.
Last month the government reported that the nation’s unemployment rate increased from July’s 9.5% to August’s 9.6%. The explanation the government said is that more people, who were previously out of the labor force, sought work. The government’s unemployment report does not count those people who have been unable to find work, have exhausted their unemployment benefits and have statistically dropped out of the labor force. It is highly likely that the estimated 25,718,000 people who are unemployed and underemployed understate the total unemployment in the eligible labor force in this country. If we made an assumption that at least two other people are dependent on the income produced by these 25,718,000 people, then at least 77,000,000 in this country are struggling to provide for themselves the basic necessities of life.
The consensus among economists is that it will take many years to recover the jobs lost between the summer of 2007 and now. It took almost 4 years to recover the jobs lost in the mid 2001 recession. Now it is estimated that it will take 7 to 10 years to recover the job losses that began with the advent of the 2007 recession. Since 1970 it has taken longer to recover the job losses experienced by each succeeding recession. There could be many reasons for the increasingly slow recovery of job losses from each successive recession, but in our opinion the continuing hollowing out of our domestic manufacturing capability since the 1950s, the growth of our service sector and the long term mismanagement of government and personal finances has created an environment in which a strong, quick recovery in employment is not possible. In fact these factors have caused a steady, lengthening of each employment recovery cycle. Consequently, we foresee an economy in the U.S. which will struggle for the next 10 years between slow growth and no growth because of our inability to provide employment growth.
According to the Wall Street Journal, the city of Toledo, Ohio recently completed a modern glass paneled building honoring the city’s long heritage as the country’s center for glass manufacturing. However, all of the glass windows in the building were made in China because no company in the United States had the high technology manufacturing expertise and capability to make these glass panels. High technology industries in the U.S. use to be the engine driving employment growth in the country. Now many high technology companies have “farmed out” these jobs to foreign countries as their technological expertise has grown to match ours. During the recession of the last couple of years high technology companies like IBM laid off workers in the U.S. while expanding their work forces abroad. This phenomenon in the high technology industry indicates that the technology industry may not be the savior of the American job market as in the past. In the 1950s manufacturing equaled about 50% of our economy. Today it accounts for about 17%. If the defense and aerospace industries are excluded from the current 17%, the number falls closer to 12%. The U.S. manufacturing sector of the economy has been so weakened over the years that it is no longer able to generate jobs to manufacture goods that are in demand in growing foreign markets, like Germany has done. The economic principal of comparative advantage has greatly weakened our national ability to compete and thereby create jobs. Profit growth is essential for job creation, but Wall Street and the corporate mantra for high profit margins have crippled entire industries in this country.
The manufacturing sector lost 27,000 jobs in August. The government sector of the economy continues to shed jobs each month except for the hiring of temporary census workers, late last year and earlier this year. Because of the dire financial condition of many state and local governments, it is difficult to foresee any meaningful employment creation in this area. The service sector of the economy provided the entire increase in private payrolls in August with health care becoming the only sector of the economy which has been consistently adding jobs in the past year. It is difficult to envision the service sector providing consistent growth in employment of at least 150,000 jobs a month which is needed to start a protracted, slow descent in the unemployment rate. The retail industry is a major component of the service sector. With the over leveraged balance sheets of most American households, it is unlikely that retail sales will accelerate much above current levels in the near future especially since wage growth in the past five years has been mediocre. The construction industry will continue to be a poor performer in our economy for at least the next five years. All sectors of the construction industry are overbuilt. Only Wall Street has prospered handsomely in this decade. Employment in the Wall Street financial community accounts for less than 1% of the U.S. labor force but its compensation, including bonuses in 2009, equaled about 1.5% of the country’s entire gross domestic product for last year, exceeding $170 billion. There has arisen in the United States an enormous inequality of wealth distribution which is threatening the survival of the middle class. This severely skewed wealth distribution in the United States has an adverse impact on the rate of job creation in the country.
The Obama administration has lately begun to concentrate its efforts on the economy and more specifically on job creation. Its federal stimulus programs in 2009 and 2010 have created jobs and probably have kept the unemployment rate from getting worse than it is. However, these stimulus programs at this juncture in the country’s financial history carry a very steep cost. Our unemployment benefits, future increases in business tax credits, new stimulus programs are all being financed by foreign governments, not the U.S. government through its collection of domestic tax revenues. Domestic tax revenues in fiscal 2009 equaled about $2 trillion and they will be about the same in 2010. Our government expenditures are about $3.5 trillion for both 2009 and 2010. Consequently our government shortfall or deficit is about $1.5 trillion for each of these years. Our government is able to spend about $1.5 trillion more than it makes by borrowing this money from domestic and foreign sources. Most of this money comes from foreign lenders, especially Japan and China. So, when Obama requests another $26 billion to extend unemployment benefits or $50 billion in new stimulus programs or $200 billion in business tax credits, the money to pay for these programs is primarily not coming from the American people but instead from foreign governments. The proposed programs are laudatory, but without going further into debt there is no way to pay for them. The financial condition of the U.S. government has been deteriorating during the past decade at an alarming rate. More government debt in the short term to hopefully generate more domestic economic expansion and concomitantly more jobs and, therefore, more wages followed by more tax revenues is a decent objective, but there exists a strong possibility that the level of debt by itself will defeat economic growth and thwart efforts to increase employment. High unemployment will impede economic growth. Slow or no economic growth will impair a reduction in the huge and constantly growing national debt. The level of the government’s indebtedness is reaching (and maybe has reached) a precarious point where the U.S. government is no longer able to finance its domestic and foreign debt without fostering inflation or a significant devaluation of our currency. Both events will eventually trigger severe economic repercussions for the U.S. economy and will have a profound negative effect on the rate of unemployment. The country’s sky-high deficits and sovereign debt makes the U.S. one of the most fiscally irresponsible countries in the world according to some prominent economists. The current profligate government spending to force-feed the U.S. economy to try to reduce unemployment will, if continued, only create soon more economic crises and a longer period of retrenchment.
The government stimulus programs have definitely helped to increase employment in the last two years. The stimulus helped keep the Great Recession from becoming the second Great Depression. However, according to the Commerce Department government presence in the economy is at a record high. $0.30 of every dollar earned by U.S. workers comes directly from the government. This figure includes all transfer payments plus compensation to public employees. Additional short term stimulus will further increase the government’s share of personal income. In previous economic recoveries federal stimulus policies were gradually replaced by a healing private sector. From the ashes of the Great Recession the private sector has not yet stepped-in to reduce and replace the government’s record high role in the economy. Many economists argue that more federal stimulus is needed to allow the private sector to regain its traditional role as the engine which drives our economy. But the corollary then comes into play: will the U.S. economy be able to show sufficiently high growth to sustain increasing employment numbers in the face of a significantly contracting government influence. The longer government remains the driving force behind economic growth, the longer it will take the private sector to regain its former footing. In our opinion, over the next 10 years the withdrawal of the government from its record high level of support to the economy will be another factor precipitating erratic and slow growth, and instead of systematically reducing high unemployment, it will be a factor in sustaining high unemployment.
In summary, the U.S. government’s very high and increasing level of debt will reach an inflection point which will severely limit further government support of the economy. We have perhaps reached that point. Rising interest rates would be a critical blow to the government’s financial structure and its ability to support the public labor force and transfer payments. Major industries such as construction, retail and real estate will not be making major net additions to their employment rolls in the next two years. Even the country’s high technology industry will be showing less rigor in its hiring of workers in the near future. State and local governments will continue to reduce their number of employees throughout 2010 and 2011. The absence of a strong national manufacturing base also hinders the country’s attempt to quickly reduce unemployment. The health care industry in the service sector of the economy is the one bright spot for full time employment growth. The very large number of people unemployed and underemployed, the absence of an effective national job training program, the mismatch of labor skills to job openings, the lack of wage growth in the private sector of the economy and the growth role of government in the national labor scene, which is susceptible to unpredictable national and international political forces, all portend an economy marked by stubborn high unemployment or underemployment and slow and erratic growth for at least the next five years. Before the 21st century the U.S. government had the financial resources to abbreviate economic downturns. These resources have been largely wasted and expended. Inflation, deflation and the devaluation of the U.S. currency are the monsters lurking in the background if Obama, Bernanke, Summers and company make future miscalculations about the U.S. economy. The margin for policy error is small and shrinking and none of the options will diminish unemployment or accelerate economic growth any time soon. The opposite is also true: frequently reoccurring recessions and persistent high unemployment might be with us for years to come.
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