June’s employment figures released on Friday and were dismal. While some pundits were surprised by the increase in the unemployment rate, those in the real business world were not. First, the raw figures:
- Only 18,000 jobs were created in June, the worst since September, 2010.
- Private employment rose by 57,000 while government payrolls decreased by 39,000.
- May’s jobs figure was revised downward by 29,000 jobs and April’s went down by 15,000.
- Total unemployed is now over 14 million, and that does not count the underemployed.
- The unemployment rate increased to 9.2%.
The numbers tell the story, period. President Obama’s uneconomic policies that revolved around bailouts, Stimulus spending, and other market interventions have failed. The failure is more grotesque when compared to the numbers included in the sales-pitch the Obama Administration made to the American people when promoting the Stimulus Package and other interventions. That $787 billion Package was sold under the pretense that without it, the U.S. unemployment rate would exceed 8%. All that money was spent and the rate spiked to over 10%. Two years later it is 9.2% and rising. Below is the infamous chart the Obama Administration used to sell the Stimulus Package. The addition of the actual unemployment numbers in the red dots was added by e21.
The employment projections made by the Administration’s economic advisors with impeccable credentials in government and academia were flat out wrong. These academics did not understand the real issue behind the 2008 economic meltdown, i.e. the excessive debt, or the effects of their junk science interventions. In the business world these folks would have been fired long ago. However, in the “Alice in Wonderland” world of government, they jumped ship when their policies failed, received a government pension and returned to academia to teach the next generation of economists. Yikes!
Unfortunately there are more headwinds that will negatively impact future economic reports. Three significant ones include:
End of QE2 – Quantitative Easing (QE) is in essence the Federal Reserve (Fed) buying U.S. Treasury bonds using money that they print. If that sounds like alchemy, it is. The Fed has supposedly stopped QE in June, which will have contractive effect on the economy going forward.
End of the Stimulus – While the Stimulus spending failed to positively impact the economy in the medium to long run, it had a short term simulative effect. That effect is now winding down and given the current deficits, it is unlikely Congress will approve similar deficit spending. This will be a contractive force on the economy.
State and Municipal Government Cutbacks – The prolonged economic downturn has significantly reduced tax revenues for states and municipalities. This is forcing them to reduce expenses leading to increased unemployment of governmental employees; again a contractive force.
The underlining cause of the lengthy economic downturn is excessive debt. In the private sector this debt became excessive by a combination of miscues that included:
- The U.S. government intervening in the housing market, promoting home ownership without regard for a buyer’s ability to afford a home. This creeping intervention started in 1977 with the Community Reinvestment Act. It continued with the government changing the charters of Fannie Mae and Freddie Mac from lending to social engineering. When housing prices declined, this made a huge number of home owners underwater causing many to walk away from their mortgages, further placing downward pressure on housing values, the largest asset in most households.
- The credit markets were distorted by the U.S. government’s promoting artificially low interest rates. This cheap money helped create bubbles that popped, with the largest one being the housing market. Each time a bubble popped or the economy headed for a downturn, the government and Fed went back to the same old elixir; lowering lending rates. These interventions and cheap money stopped the economy from rebalancing supply and demand for an extended period and ultimately led to even larger bubbles. Supply and demand remains out of balance in many sectors of the economy, a major reason for the length of this downturn.
- The low interest polices meant savers received very low returns for safe investments. That led to riskier investment behavior as investors searched for improvements on the meager returns. This also led to a great pool of finds eager to invest in the CDO’s (Collateralized Debt Obligations) offered by the large investment banks. These CDO’s fed the housing bubble. Eager lenders make bad decisions and lost billions when the housing market collapsed. Investment banks including Lehman failed and other banks required government bailouts to survive.
The excessive debt in the private sector was never allowed to unwind by the painful, but necessary, controls in free market; supply and demand. Instead, the government moved the private sector’s debt to the public’s (taxpayers) balance sheet through bailouts and other interventions. As a result, the markets have not rebalanced. In addition, the government intervened in the employment market, for example, by increasing unemployment benefits. This kept the cost of employment at a level not sustainable in the weaker economy. Finally, the government intervened once again in the housing market by offering tax credits to buyers last year and this year slowing down the foreclosures process.
While the government’s interventions can be sold to the public as seemingly being humanitarian on their face, they actually are not. These programs do not create real wealth or economic growth. The interventions will only prolong the downturn and make the Country as a whole poorer. Ultimately the markets will have their way as they always do. It is this reality that the Obama Administration’s economic team either does not understand or chooses to ignore. It is this reality that resulted in the dismal employment figures long after the recession supposedly ended.
This posting focuses on the failed economic policies of the Obama team and the Left since they control the White House, Senate, and controlled the Congress until earlier this year. However, the Bush Administration and Right are not blameless. It was George W. Bush and the Republican Congress that approved the initial and ill-advised bailouts of the large banks. They also ran deficits that while meager Obama standards, set a tone for spending the next generation’s money.
Currently, the Republicans have rightfully pushed back on government spending and the ongoing debate on increasing the debt ceiling. However, they have been silent on the effects on the economy should the belt-tightening polices be implemented. While the Country must cut its spending to remain solvent, in the short-term these policies are contractive and will lead to pain for the Country as a whole. In keeping with Washington’s lame view that the American people are too dumb to hear the truth, the Republicans tell just half the storey.
Economic problems caused by excessive debt cannot be resolved with still more debt no more than a drug addiction can be cured with more of the drugs. American society as a whole benefited from the orgy of deficit spending and related ill-advised economic policies of the past two decades. American society as a whole will need to be part of the solution and share in the pain required to rebalance supply and demand. In a democracy, this means solutions that are not totally palatable to any one group or party.
Any workable solution to America’s complex and huge debt problems will require solutions of simplicity to keep special interests from attempting to protect their own at the expense of others. An example of such simplicity is a balanced budget agreement to insure that the knuckleheads in Washington can never again create this type of fiscal mess. Another example is a simplified tax code that lowers aggregate tax rates, but eliminates all loopholes and deductions to insure that the knuckleheads in Washington cannot pick winners and losers through the tax code.
Finally, a combination of substantial spending cuts and some revenue increases will be required, with much greater emphasis placed on spending cuts. This, coupled with the simplified tax code and balanced budget, will insure that America’s fiscal house will be brought back into order.
It is no longer a question as to if austerity will be brought to America to fix its fiscal house. The only question is whether it will be implemented by a plan that the People create or one that is forced on the Country by the unforgiving hand of the bond markets.
The video below brings the to dismal science of economics into the modern tone of rap. Much more interesting than this Post’s modest attempts at putting the economic choices into perspective.