November 12, 2009

Since my original Hub on October 8, 2009 dealing with the topic of a Jobless Recovery, the economy of the United States has continued to recover from the recession.

However, while the news has generally been promising, unemployment keeps rising. The only bright spot on the unemployment front is that layoffs are slowing down with fewer people being laid off in October 2009 than in previous months and fewer laid off in October than anticipated.

News reports keep saying that employment is a lagging meaning indicator that it is one of the last indicators to turn around following an economic downturn.

However, as Mark Gongloff in the November 6, 2009 Ahead of the Tape column on page C1 of the Wall Street Journal, employment has only been a significant lagging indicator in the last two recoveries.

A November 7, 2009 ABC News Money piece on the Web by Lucia Mutikani, stated that 190,000 additional workers were let go in October 2009 bringing unemployment in the U.S. to a twenty-six and a half year high of 10.2%. The only good news in the 190,000 new layoffs figure is that it was less than the 219,000 layoffs in September 2009.

This may mean that layoffs are declining and we are approaching the end of the layoff phase of the recession. If this is so, it would be good news only in the sense that we are reaching the end of layoffs but that still leaves more than 10% of the labor force out of work and no signs, as yet, on the horizon of a turn around.

As I mentioned in my October 8th Hub, it is entirely possible that the economy could stabilize and grow while leaving this 10% plus portion of the labor force out of work.

There are signs that this is happening.

Along with the stock market, Gross Domestic Product (GDP - which is the total value of the output of goods and services in the economy), is increasing indicating that the economy is starting to grow and expand again. This could be good news if it was growing as a result of businesses expanding and hiring more workers.

However, in my October 8th Hub, I stated that not only have companies laid off employees during this recession but a number of companies themselves have gone out of business thereby totally eliminating the jobs previously held by their employees. In some cases the business closings have been businesses in declining industries which means that not only won't the businesses be around after the recession to rehire their laid off employees but there will also be far fewer businesses and jobs in these industries after the recession.

Then there is the fact that many companies laid off part of their workforce during the slow down in economic activity when demand for their products were falling. However, in many cases, demand has picked up and sales are rising but the companies have not been calling the laid off workers back.

In some cases fear and uncertainty is the problem as the companies are not sure if this increase in demand is a temporary bubble or the start of a real recovery so they are holding off re-hiring. However, in other cases the remaining workers have become more productive - working smarter rather than harder - and have been able to keep up with the increasing demand without the company having to recall laid off workers.

If this were simply a matter of existing workers simply working longer and harder, we could expect recalls of laid off workers to begin soon.

But, if it is a case of real increased productivity per worker due to more efficient processes and/or increased use of new technology and equipment then the short term prospects for a recall of laid off workers does not look good.

Because many, if not most, of the jobs lost as a result of this recession have been terminations where the workers have been let go with no intention of or plans to hire them back, rather than a layoff in which a worker is indefinitely furloughed without pay but with the promise of returning the worker to the job once the economy turns around, the only way this problem will be solved with be with the creation of new jobs.

Job creation can take the form of existing companies expanding the number of workers as a result of increased demand for their product or hiring workers for new divisions that the firm is investing in as the result of new demand in a growing economy.

It can also take the form of new companies being formed thereby creating new additional jobs as they search for workers. Change and growth in the economy can also result in the creation of brand new industries full of businesses needing workers.

Cell phones and video games are examples of new industries that have hired hundreds of thousands of workers despite the fact that the products they are producing and selling didn't exist a generation or so ago.

The problem here is that for existing businesses to expand or for new businesses to be started, investment is needed. And investment involves risk. Not all investments succeed, many fail with the result that the investors lose money.

Not wanting to lose money, prudent investors seek to avoid unnecessary risk and/or seek higher payoffs for higher risks.

Here is where the government comes in. High taxes, excessive regulation and large public deficits all work to increase business costs and reduce funds available for investing.

High taxes not only reduce the amount of money people have to invest but also serve to reduce the after tax return on investments. No one wants to invest a large amount of money in a risky venture knowing that if the investment succeeds and pays a big return that much of the return will be taken from them in the form of taxes.

Government regulation is another financial burden that discourages investment. Again, people are going to be reluctant to risk money starting new businesses or expanding existing ones if much of the revenue they expect to generate has to be diverted to complying with onerous regulations.

Complying with regulations requires that businesses divert employees (who the firm is paying) and other resources away from production of products that can be sold and towards compliance work that yields zero revenue while adding to costs.

Large public deficits - the government spending more than it is collecting in taxes - force the government to enter the capital markets to borrow the money needed to fund the deficit.

In doing so, government not only reduces the amount of investment funds available to private investors seeking to borrow to produce worthwhile products, but the government's actions also add to the demand for capital which drives interest rates up which is an additional to cost to investors seeking to expand with borrowed capital.

To see how high taxes and over regulation can result in a jobless recovery we have no further to look than the Great Depression of the 1930s.

The stock market crashed in 1929 and the Dow Jones Industrial Average (which tracks and measures the value of a large group of stocks) did not return to its pre-crash level until 1954.

The period 1929 to 1954 is twenty-five years which is a quarter of a century or more time than lapses between the birth of a new generation and that generation maturing into productive adults.

For that period - a quarter of a century or a generation - the nation endured double digit unemployment (the war years, 1941 - 1945, did see full employment but about all they produced were war material which left people no better off economically than when they were unemployed).

The 1929 stock market crash occurred during the term of President Herbert Hoover, a big spending, big government Republican President whose economic policies were much like those of former President George Bush. Franklin Roosevelt, much like Barack Obama, campaigned on a platform that was moderate to conservative economically and won.

Relations were not good between the defeated Herbert Hoover and the victorious Franklin Roosevelt and this caused the economy to be ignored by the government during the months between FDR's electoral victory in November 1932 and his inauguration in March 1933.

Left to itself, the market began to recover. However, forgetting his criticisms of Hoover's big spending policies, Franklin Roosevelt immediately began increasing taxes, embarking on huge spending programs and burdening the economy with crushing regulation all of which caused the recovery to stall.

With the exception of the World War II years, the economy chugged along with double digit unemployment all the way through the Roosevelt presidency and into that of his successor Harry Truman. It wasn't until many of the more onerous New Deal restrictions were removed that the economy began to create new jobs as well as grow and expand.

Many people today are drawing parallels between today's economic problems and those of the 1930s and there are similarities. But the one thing we should strive to avoid is prolonging these problems by repeating the mistakes the government made in the 1930s in the name of helping the economy to recover.