The latest US jobs data, showing 533,000 payroll jobs lost in November, after
320,000 jobs lost in October and 403,000 in September, illustrate a situation
that is much worse than was expected and represents wholesale capitulation. The
threat of a widespread depression is now real and present.
The full weight of the banking crisis, the trade deficit with China and burdens
imposed by high-priced imported oil are now bearing down on manufacturing,
construction and the broader economy with unrelenting pressure.
Unemployment increased to 6.7% in November; however, factoring in discouraged
workers, unemployment is closer to
8.7%. Add workers in part-time positions that cannot find full-time employment
and the hidden unemployment rate is nearly 13% .
The economy has been slowing since December 2007. The real question is whether
the economy is in a recession or depression?
Recessions are like stock market corrections - after a time, equity prices
rebound without government intervention. Federal Reserve interest rate cuts and
stimulus tax rebates and spending have shortened the lives and eased the impact
of post-World War II recessions, but those policies did not end them. The
economy self-corrected.
A depression is not self-correcting. Franklin D Roosevelt administration
stimulus packages in the early 1930s - huge deficit spending - eased the pain
but failed to end the Great Depression. Roosevelt's policies did not put the US
economy on a sustainable growth path, because New Deal policies worsened
structural problems that pulled the economy down in the first place. For
example, the New Deal proliferated monopoly pricing, extended the life of
undersized farms, raised structural savings rates, and created a system of home
lending too dependent on federally sponsored banks.
The challenges facing president-elect Barack Obama could not be clearer. The
current economic slowdown has two structural causes - bad management practices
at the large money center banks and the huge foreign trade deficit.
To accomplish lasting prosperity, Obama will have to fix the banks and the
trade deficit. He must ensure that the banks use the trillions of dollars in
federal bailout assistance to renegotiate mortgages and make new loans to
worthy homebuyers and businesses.
Obama must make certain that banks do not continue to squander federal largesse
by padding executive bonuses, acquiring other banks and pursuing new
high-return, high-risk lines of businesses in merger activity, carbon trading
and complex derivatives. Industry leaders like Citigroup have announced plans
to move in those directions. Many of these bankers enjoyed influence in and
contributed generously to the Obama campaign. Now it remains to be seen if he
can stand up to these same bankers and persuade or compel them to act
responsibly.
In addition, Obama must address the huge cost of imported oil and the trade
deficit with China, or any effort to resurrect the economy is doomed to create
massive foreign borrowing, another round of excessive consumer borrowing, and a
second banking crisis that the Treasury and Federal Reserve will not be able to
reverse.
Ultimately, reducing the oil import bill will require higher mileage standards
for automobiles and assistance to automakers to accelerate the build-out of
alternative, high-mileage vehicles. Fixing trade with China will require a tax
on dollar-yuan transactions if China continues to refuse to stop subsidizing
dollar purchases of yuan to prop up its exports and shift Chinese unemployment
to the US manufacturing sector.
Near term, a stimulus package focused on infrastructure is critical for
resuscitating growth. The recent round of tax rebate checks ended up in savings
accounts or were spent at the Wal-Mart on Chinese goods and did little to
create jobs or accelerate growth, whereas projects to repair roads,
rehabilitate schools and refurbish public buildings would create high-paying
jobs at home and provide a legacy in capital improvements that assist growth
now and in the future.
However, stimulus spending alone won't fix what's broke. It didn't end the
Great Depression. Japan has had a succession of stimulus spending plans over
the past two decades and they have failed to restore its economic dynamism.
Similarly, Obama's proposed massive stimulus package alone won't fix the US
economy. He must also reach into the management of the banks, and dramatically
reduce US dependence on imported oil and the trade deficit with China. The
alternative is economic stagnation or worse, a depression.
Wages and unemployment
In November, wages rose 7 cents per hour, or 0.4%. With labor markets
weakening, pay raises will be more modest in the months ahead.
The unemployment rate was 6.7% in November, up from 6.5% in October. However,
these numbers belie more fundamental weakness in the job market. Discouraged by
a sluggish job market, many more adults are sitting on the sidelines, neither
working nor looking for work, than when George W Bush took the helm. Factoring
in discouraged workers who have left the workforce and those forced into
part-time employment owing to the lack of full-time work, the unemployment rate
is about 12.8%.
During the presidential campaign, declining real wages and fewer adults working
gave Obama's proposals to redistribute income through the tax system a lot of
traction. However, those policies will do little to correct the fundamental
systemic problems that are destroying good jobs and squeezing middle-class
families, even if they would make them feel better for a little while.
Going forward, solutions that create better jobs will require cutting the trade
deficit by at least half to substantially boost domestic manufacturing, solving
the problems of the large money center banks to get mortgage money flowing and
housing construction going again, and energy policies that more aggressively
develop alternative fuel sources, conserve oil, and open up new domestic fields
for conventional oil and gas production. Reducing dependence on foreign oil
requires doing all things environmentalists want us to do and all things
environmentalists don't want us to do.
Politically correct promises to create millions of new jobs producing
alternative fuels make effective presidential campaign slogans, but realistic
policies for governing require aggressive development of more conventional oil
and gas, as well as non-conventional energy sources, and efforts to improve the
energy efficiency of personal transportation.
If the Democrats are not willing to drill for more oil offshore and take on the
automobile industry's resistance to significantly higher mileage vehicles, the
US economy will be even more indentured to Persian Gulf oil exporters at the
end of Obama's first term than it is today.
Finally, diplomacy has failed to redress the currency issue with China. If
Obama is not willing to take tough steps to redress the trade imbalance with
China and reduce oil imports, together the Persian Gulf oil exporters and
China's sovereign wealth funds may be able to buy the New York stock exchange
eight years from now. Americans, outside those working for the New York banks
that facilitate this sellout, will find their best futures waiting on tables
for Middle East and Chinese tourists.
Manufacturing, construction and job quality
Going forward, the economy will add some jobs for college graduates with
technical specialties in finance, healthcare, education and engineering.
However, for high school graduates without specialized technical skills or
training and for college graduates with only liberal arts diplomas, jobs
offering good pay and benefits remain tough to find. For those workers, who
compose about half the working population, the quality of jobs continues to
spiral downward.
Historically, manufacturing and construction offered workers with only a high
school education the best pay, benefits and opportunities for skill attainment
and advancement. Troubles in these industries push ordinary workers into
retailing, hospitality and other industries where pay often lags.
Construction employment fell by 82,000 in November. This is a terrible
indicator for future gross domestic product growth. Retailing shed 91,000
thousand jobs, and financial services lost 20,000 jobs.
Manufacturing has lost 85,000 jobs, and over the past 104 months manufacturing
has shed more than 4 million jobs. The trade deficit with China and other Asia
exporters are the major culprits.
The dollar is too strong against the Chinese yuan, Japanese yen and other Asian
currencies. The Chinese government intervenes in foreign exchange markets to
suppress the value of the yuan to gain competitive advantages for Chinese
exports, and the yuan sets the pattern for other Asian currencies. Similarly,
Beijing subsidizes fuel prices and increasingly requires US manufacturers to
make products in China to sell there.
Ending Chinese currency-market manipulation and other mercantilist practices
are critical to reducing the non-oil US trade deficit and instigating a
recovery in US employment in manufacturing and technology-intensive services
that compete in trade. Neither President George W Bush nor congressional
leaders like Charles Rangel and Chuck Schumer have been willing to seriously
challenge China on this issue, and Senators John McCain and Obama appeared
comfortable with continuing their approaches during the campaign.
Now Obama must alter his position and get behind a policy to reverse the trade
imbalance with China - or preside over the wholesale destruction of many more
US manufacturing jobs. These losses have little to do with free trade based on
comparative advantage. Instead, they deprive Americans of jobs in industries
where they are truly internationally competitive.
In the end, without assertive steps to fix trade with China, as well as fix the
banks and curtail oil imports, the Bush years will seem like a walk through the
park compared to the real income losses Americans will suffer during the Obama
years.
Instead, were the trade deficit cut in half and the banks fixed, manufacturing
would recoup at least 2 million jobs, and US growth would exceed 3.5% a year.
Real wages and domestic savings would climb, and the federal government would
receive more revenues to balance its budget or address other pressing domestic
needs.
The choices for the new president are simple. It's either renaissance or
decline. Fix the banks, trade with China and adopt a realistic energy policy or
become America's Nero.
Peter Morici is a professor at the University of Maryland School of
Business and former chief economist at the US International Trade Commission.
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