Job Growth Is Key to a Turnaround

I listened to this clip on CNBC on August 7th. Former President Clinton's Labor secretary Robert Reich, now an Economics Professor at UC Berkley, seems to be making a point to anybody who listens that we are in a very ugly recession. The turnaround is nowhere in sight. His point is that businesses have laid off workers and without job growth, no economic turnaround is possible: Consumers are in a savings mood and are not spending and businesses cannot make more products unless there are consumers, and so on. He has a point.

Let's crunch some numbers. The unemployment rate is running around 10% nationally, with a total of approximately 15 million unemployed. Since this recession started sometime in 2008, 7 million jobs have been lost. According to the recent Sep. 5th report by chief economist of US Chamber of commerce, there are about about 1 million net new entrants in the job market every year. Therefore, 11 million new jobs are needed by 2012, just to keep unemployment rate even at the 2008 level.

What kind of shovel ready projects are going to create such jobs? What kind of innovations or break throughs are in the pipeline that are being counted upon for a V shaped or U shaped recovery? If we are counting upon emerging markets to create the US or global recovery, that will not happen either, because all these economies rely on the US consumer for exports to a very large extent.

Therefore, from a fundamental economic standpoint a quick recovery and back to boom times is far fetched and wishful thinking, really

Now let's compare the only point in modern US history that comes close to the financial times we are in, namely the 1930 depression period.

The top chart is a 5 year chart of the Dow Jones Industrial averages (DJI) during the depression era, and below that is a DJI chart from September 2007 until September 2009. The shapes look eerily similar! Perhaps it took only two years for this chart formation this time instead of five, due to rapid globalization, quicker information and money flows due to technologies such as internet, computers and cell phones, etc. I am sure that the "experts" have also been looking at this chart comparison. The experts have however have concluded that the DJI has seen its low point and the worst is over.

Sadly, this may not be the case. After the 1930s depression era, going into WWII, the US was leading the world in innovation. They created some of the amazing technologies and the high paying jobs: Cars, planes, telephone, radio, television, main frame computers, weapons, etc. Of course, there were shovel ready projects also such as new highways and bridges. So the experts will be correct in their assumption that the worse is over and the DJI will never see the March 2009 lows in the mid 6000s, but ONLY if the innovation and job growth that followed the depression era continues.

While information technology (computers, internet and software) and cell phones are examples of new technology in the recent past, the biggest reason for GDP growth was spending by the US consumer (based on borrowing) and not just by job growth (by new technologies such as IT). If the expectation of recovery is based on more borrowing and more spending by the US consumer, that is an unsustainable expectation. The reason is that the interest payment on the high level of debt by US consumers and government will crowd out any investment in new technologies.

And we therefore come to a full circle: Unless the 11 million new jobs by 2012 are innovation and technology related, productivity enhancement jobs, the recovery is not going to be long lasting.

Robert Reich is absolutely correct: the economy needs a structural change, an X shaped recovery. The shovel ready projects are not going to cut it.

By the way, what is the report card on the administration's shovel ready projects?

Comments

[NUCLEAR1929:]

agree, lets wait first for 30% unemployment

Sep 07 09:50 AM

[Davewmart:]

The way the present tracks the 30's comparing it to the first two years of the Great Depression is still more uncanny. The stock market had a similar bounce, just prior to falling off a cliff.
www.scribd.com/doc/175...

Sep 07 10:38 AM

[AndrewBaker:]

Everything's clear in hindsight, and more people are becoming aware that this recession is following the 30s depression very closely. Enjoy the bounce while you can, because there's a big fall coming, and it's gonna last a long time.

We all want it to be otherwise, but all the efforts of the world's governments to pump money and liquidity in to jump-start the economy are not working, and the excess money is not even looking like starting the inflation that would be expected if their policies were to work.

Stock up on gold and sell your bank and financial stocks whilst you can get a price that's way over their worth right now.

Most of all, look deeper at what is happening so that you don't get taken by surprise when the bottom falls out of everything, not just the markets.

Sep 07 11:03 AM

[Pat C:]

We need investment in alternative energy which will create investment and jobs. I see nothing else big enough to move the dial. Health care is just too fragmented and not big enough. There is alot of vested interest in the old energy and there is going to be some inefficiencies during the conversion.

The economy needs jobs which pay taxes and fuel more jobs; not absurd consumption but further innovation and investment. The government has to lead the way, the private sector and capitalism in general has lost its way.

We can continue to stick our heads in the sand by hoping the financial system will efficiently allocate the resources. Come on, what are we smoking; the financial system promotes the financial system and will not change until forced to change. We can also just continue deficit spending on unemployment, food stamps and medicaid. What a waste!

Labor has been commoditized and we are stuck in this downward spriral. We have to break it and we have to do it by putting this country back to work, plain and simple.

Sep 07 11:49 AM

[Econ Base:]

Dear Readers, I noticed that this article does not display the second graph and some lines of texty in Internet Explorer 6.0 for some reason. The article pulls up correctly in Fire Fox. Until the error is corrected kindly read the instablog version at: seekingalpha.com/insta...

Sep 07 12:50 PM

[LKofEnglish:]

unemployment is the EASIEST thing the government can solve. I could do it TOMORROW and SO COULD YOU. WE HAVE A WAR GOING ON!!!! Sorry bud, that's not the so called "economic problem" we're facing.

Sep 07 01:16 PM

[enigmaman:]

One cannot look at a chart and compare to another chart that are almost identical and extrapolate the same result, the DNA of Human compared to Chimp are almost identical and would look the same if charted but in fact they are very different and with a different result. IMO- its not how things compare and or look in hindsight but how they compare going forward, we know how past recessions ended and how they progressed, are there any similarities with what we know and what is expected from this Great Recession, I dont believe so, if there we would have access to charts drawn showing 2010,11,12 using what we know happened in the past and what we expect to happen going forward. It can be done why it isnt is beyond me, maybe its because its safer to draw conclusions from comparing charts from the past rather then put ones butt on the line but trying to predict the future using charts, instead of technicians we need Astrologers

Sep 07 02:51 PM

[aja8888:]

Charts? hey unemployment is at 10% (officially) now, but is really more like 17% (ask my wife and two of the kids who no longer get unemployment benefits and can't find a job). Wait until the baby boomers hit the streets without jobs and they are NOT spending much going forward. They have saved for their retirement (hopefully) and the ones I know are just not spending much these days.

And if you think the jobs the baby boomers had will be filled, not likely.....

Sep 07 06:52 PM

[Moon Kil Woong:]

The fact people are depending on the government to create jobs is a good sign that the US economy remains in trouble. Government doesn't create lasting jobs except under the most unusual circumstances (the railroad, telephone lines, Hoover Dam, etc.). So far I don't see any grand infrastructure plans by the government that will spark a flow of new resources, energy, or discovery. Do you?

Government wasteful spending, prolonging a market collapse, and distorting the market is exactly the type of concoction that creates depressions.

Sep 07 10:59 PM

[g452ooo:]

I love it. Bring it on. Depression II

BTW, it's going to be the way that we rid America of the Democratic rule in Congress starting next year and in 2012, the Great Change artist Obama as well.

Sep 08 03:07 AM

[Mad Hedge F...:]

ygio. So who was the dummy that waiteduntil August to lay off their workers? Fire the bastard! Apparently,there are a large number of managers out there who don’t readnewspapers, watch TV, or talk to anyone, and waited until the GreatDepression was nearly two years old to cut costs. That is one of manyconclusions I am forced to draw on the news that the August non-farmpayroll showed a further hemorrhage of 216,000 jobs, better than the230,000 consensus, and a big improvement over the 273,000 July figure.But it included downward revisions of 50,000 in June and July, notgood. The unemployment rate came in at 9.7%, continuing its relentlessmarch towards double digits. The net net is that the economy has jumpedoff the top of the Empire State Building, but is now plummeting towards5th Avenue and the meat wagon at a slower rate. The usual culprits werethere; 65,000 jobs lost in construction, 63,000 in manufacturing, and27,000 in finance. What was truly amazing to me was to see losses ineducation at the start of the school season. And what is going tohappen to the 1.5 million who will exhaust their unemployment benefitsby year end? The figures are all proof that there will be no economicrecovery without bank lending. Running a business without credit islike trying to complete a marathon while holding your breath. Bring onthe “L.” My many US Navy readers should seriously consider re-upping,as the economy will not see net hiring for a very long time. Just hopewe don’t invade anyone new.

Sep 08 10:35 AM