Now What?

How can we as laymen get our arms around the US economic situation, the basics, then acquire some reasonable odds for projecting reality ahead? Most of us are not economists (although the evidence suggests those guys don’t have a leg up in forecasting anyway). But any of us can glance at the data, then take a look at similar patterns/dynamics in recent history and come up with something, perhaps not the Holy Grail, but at least our own reasonable forecast, a handle over the intermediate term.

From the Bureau of Labor Statistics (http://www.bls.gov/) we can see that since the beginning of this recession (12/07) six million jobs have been destroyed. The unemployment rate is high, not quite as high as the peak during the 1982 recession (10.8%), but high enough. It is true that the pace of job loss has slowed recently; in fact the worst of the labor market deterioration is likely over; still, job depletion remains the trend. We can also see that the workweek (33 hours) is now at a record low. Not surprisingly, growth in hourly and weekly earnings has cratered. We don’t need to be a Fed governor to understand that when earnings slow, spending follows suit. Weakened aggregate spending hits all of us.

Finally, consumer and business sentiment, although improved somewhat from the collapse in Feb/09 (lowest in the 41 years data has been collected), remains at recessionary levels, in the tank. There are good reasons for low consumer sentiment: ongoing job losses, further house price declines, climbing foreclosures, tight credit standards and financial market volatility. There are also good reasons for low business sentiment. Renewed job creation requires business confidence about the structure of the economy, free of uncertainty about the future course of governments and politics. There is no reason to be confident, so most aren’t hiring. Of the sectors measured by the BLS, only two did any hiring in June (education & health, & miscl services). Manufacturing, professional and business services, temp services, construction, gov’t, trade, transportation, utilities, financial activities, information, leisure & hospitality - all shed jobs.

When left to its own devices the US economy has always self-corrected, even more briskly when aided by tax cuts. We can witness the Kennedy cuts in the early 60's, the Reagan cuts in the early 80's. Both times it was over quickly; in 1982, in 6 months. Markets then quickly adjusted to changing economic circumstances. Investors began investing, capital spending rose, workers and employees moved on to new jobs, consumers began spending again. The key to these quick employment recoveries was that the markets for investment, employment and consumption were free of political intrusion, subject only to the "unseen hand".

This time around this key is lacking; that is our problem folks and exactly why none of us can look for any significant improvement in this economy, the stock market, our own personal affairs as they may be linked to macro economic developments, for a considerable while. And why? An old maxim - It is not always better to do something rather than nothing. Obama’s administration doesn’t understand that, or doesn’t care, just as long as the masses don’t catch on. Most interventions do more harm than good, including FDR’s stab at it during the Depression. Substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.

In past sketches we have critiqued recent forays of just such intervention, a primary culprit among these the so-called stimulus bill. At best, this unsavory piece of legislation will be a wash, at the worst, a retardant. Obama and Pelosi exploited mass hysteria to fulfill a wish list. Robert Lucas, the 1995 Nobel laureate in economics who specializes in macroeconomics and government policy, recently remarked that the promise of large multipliers presented by private macroeconomic consulting firms in support of the stimulus bill was "schlock economics." And as we noted earlier, Bob Barro, candidate for the 03 Nobel, called the legislation, "probably the worst bill that has been put forward since the 1930's." "I think is garbage," he said. So do we.

It is what is coupled with this bill that most worries business and consumer - outrageous debt loads ahead. We taxpayers issue the IOU but get absolutely nothing in return. So now the national debt is growing faster than the GDP. According to the Congressional Budget Office, within 10 years publicly held debt will double to 82 percent of GDP. The CBO predicts that by 2038, our debt will be 200 percent of GDP. Debt siphons off growth for goodness sake. Dollars go to paying it off rather than investing in something productive.

Well, that’s the stimulus package. There is more: 1) Health insurance reform, which scares the pants right off businesses; the cost estimates, from $1 trillion to $3.6 trillion, will be footed much by them. 2) Cap and Trade - massive new taxes, yet this work of genius will not remove an ounce of carbon from the atmosphere for a decade. Even if you think climate change is a huge threat, the bill's own supporters admit its impact on global warming will be trivial. As the IBD put it, "It's nothing but a huge scam that will bankrupt any business that relies heavily on energy, boosting fuel prices by 22 cents a gallon and socking the average family with an $1,800 a year tax hike." Gee. 3) The threat of a stimulus II (are you kidding, BO?!).

So no way the private sector — the real engine of economic growth — is going on a hiring binge anytime soon. Why would it? It's concerned by what it sees coming out of Washington - higher taxes, uncontrolled spending and layer upon layer of new regulation.

Look for a long, hard pull. And the pity is, it didn’t have to be.

Robert Craven