Zachary Karabell Gets It – Jobs Aren’t Coming Back

An excellent piece by one of my favorites Zachary Karabell in The Daily Beast on the employment issue.  To even begin to fix a problem (that is in part ‘unfixable’) one must acknowledge it exists.  The United States (and many developed countries) remain in denial about what has been happening the past 10-12 years, hence are relying on ‘solutions’ that are not solutions.  Instead we remain in an environment dominated by easy to print out talking points that work great for cable TV, but are useless in the real world.

This chart is about 2 years old but it showcases the ‘job creation’ of the past 10-12 years has been almost solely government or pseudo government created – healthcare and education largely funded via taxes and deficit spending… and government obviously being government.  Of course as pointed out 3 years ago, any real large scale cost efficiencies to health care – will be reducing jobs from the one place the bevy of net job creation has come from the past decade+.  Hence, a conundrum – continue a ponzi that is the only huge source of job creation, or actually try to limit costs, but lose jobs.

Meanwhile the ‘rest of the economy’ aka private sector? Buffeted by a housing bubble (jobs ballooned, than eliminated) as real jobs moved offshored or eliminated via technology. A big problem – with no easy solutions.

This also has implications for the market – increasingly the U.S. economy can disassociate from the prospects of the S&P 500 companies as long as foreign growth – especially of the Asian kind – remains solid.  Handing these companies ever more tax cuts in a desperate ideology to ‘create jobs’ is useless other than on the margin.  One also must look at the chart above, and ask what the Bush tax cuts of 2001 and 2003 accomplished for employment.  Supposedly these reduction were to unleash a great wave of capitalism and job creation…  (not that I want higher taxes, but let’s be honest on whom these policies help)

Glad to see some few in the mainstream spreading the message to help fight the denial, as opposed to some of us two bit bloggers.  More from Zach

  • Americans remain in denial. Economists rely on models that correlate GDP growth and other indicators with past patterns of employment and assume that because GDP is expanding 2 to 3 percent this year, job creation will follow. The political class continues to treat employment as a product of the recession and sees government policy as either helpful to future job growth (Democrats) or harmful (Republicans).
  • We are stuck in a framework that treats unemployment today as a cyclical phenomenon, and assumes that employment will return as the overall economy recovers. The truth, it is becoming clear, is that unemployment is a structural issue, and that the tools being used are based on the wrong analysis and will therefore continue to fall short.
  • In fact, there has been almost no net job creation in the past year, according to the Bureau of Labor Statistics, with about 139 million people employed in June 2010 and about the same now. There are, by the way, many issues with how these numbers are compiled (based on telephone surveys and adjusted by statisticians with complicated formulas meant to compensate for seasonality and other factors). But they do provide an indication of overall patterns of employment, and those patterns are clear: job creation is not happening, and there is little indication that it will.
  • To be fair, this is a new problem for the United States in the modern era. Everyone now alive has only a memory of employment being a cyclical issue, and with every downturn since the middle of the 20th century, unemployment spiked with recession and then recovered as growth resumed. No longer
  • First of all, it’s clear that companies can make a lot of money with no need for extra bodies. Corporate profits continue to rise at a double-digit rate, and as the companies of the S&P 500 report their financial results in the coming weeks, that reality will stand in stark contrast to employment and wages that remain stagnant. Even when companies do open factories in the United States, they need hundreds of highly skilled workers to manage factory floors that are increasingly sophisticated and mechanized where they might have needed thousands upon thousands decades ago. Lowering tax rates, and thereby increasing the amount of cash in individual and institutional hands, won’t help. There is no dearth of cash on hand for many companies and many wealthy individuals; yet they aren’t using that cash to hire.
  • Second, we don’t live in a simple economic system. We live in a multifaceted one, where people with a bachelor’s degree or above are almost fully employed (with a 4.4 percent unemployment rate, according to the latest report) and people without a high-school degree or minimal college and people of color have unemployment rates in the high teens. Some regions are booming (oil states, agricultural states); some are still mired in structural challenges (manufacturing states like Ohio, real-estate bust states like Arizona). And some are both booming and busting, such as the wide gulf between Silicon Valley and the Central Valley in California. There is no one-size-fits-all employment policy that will magically create employment across the country.
  • Finally, our policies assume cyclical patterns. We have spent more than $300 billion on unemployment benefits since the recession began because we think that jobs will magically appear as activity picks up and all we have to do is get people through the rough patch. It only makes sense to spend that much on unemployment insurance if it is perceived as temporary or cyclical. If the issue is structural, that money only subsidizes unemployment and low-level consumption and does nothing to create jobs. It is right not to let those out of work suffer profoundly in a society as wealthy as ours, but we are fooling ourselves if we think that money will help change the employment picture.
  • Indeed, with that $300 billion, it would have been more cost-effective (and probably better for collective morale) to hire millions of people on government payrolls and have them do some sort of productive work à la New Deal–era programs. But government would only do that if we collectively reached a point where we admitted that we didn’t know what to do about long-term unemployment, which is essentially what happened in the mid-1930s. It wasn’t a solution to the problem, but it was at least recognition that it was a problem for which we didn’t have a solution.
  • Today, there is little willingness to confront a changed economy that is not following past patterns. ….. avoids consideration that the United States is embedded in a global economy fueled by information technology on one end of the spectrum and commodities on the other—both of which put pressure on the living standards of 20th century–style high-wage earners that typified the middle-class society of the United States.
  • This time, it’s different.
About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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