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Job Creation: Why There's None; What Should Be Done


Despite record deficits, spending, various stimulus schemes, and money printing programs, jobs are not being created at a pace that results in a falling unemployment rate.

It is clear to everyone that the economic vitality of the US is based on jobs. Since its peak in late '07, the US has lost between 6.8 and 7.0 million jobs (depending on which employment survey you consult). Despite record deficits, spending, various stimulus schemes, and money printing programs, jobs are not being created at a pace that results in a falling unemployment rate. Also, there is a lot of evidence that the official unemployment rate (the U3 series) seriously understates the issue. In his latest press conference, as QE2 is about to end, Fed Chairman Bernanke appears to be befuddled as to why the US economy is softening. The Obama Administration's release of 30 million barrels of oil from the Strategic Petroleum Reserve (just over one day's usage) with prices already retreating certainly appears to have an element of desperation in it, perhaps aimed at the 2012 election. For sure, after trying everything in the Keynesian playbook, no one with any policymaking power seems to have a clue about how jobs get created.

The Problem: Deteriorating Balance Sheets
Demand, of course, is the key. If demand rises, employment will eventually follow. And it is not corporate America that is in need, as they stand around with record levels of cash looking for something to do with it. But it is middle America, the heart of the consumption machine, who is in trouble. We know that real wages have been stagnant since the late '90s and that the economic boom of the early part of the last decade was induced by debt and artificially low interest rates. But, besides stagnant wages, the biggest issue for Americans is their deteriorating balance sheets. Since the largest item in their asset base is their home, the relentless downward march of property values is simply debilitating to the net worth of a significant percentage of Americans, and this is likely the most significant factor in the stagnation of consumption despite the record level of stimulus. As an aside, the Fed's QE2 program did raise the level of equity prices, but only a small segment of America benefitted. So, we've recently seen a rise in luxury retail sales, but little else. If we leave things as they are (unlikely in an approaching election year), because of the binge of Alt-A mortgage lending in '06, 2011 is seeing the beginnings of another wave of defaults. Five years is the magic number written into those mortgage notes. At the end of five years, principle payments begin. For a property already underwater, a doubling of the monthly payment simply induces default. So, if nothing changes, the US has at least 18 more months of high foreclosure activity and declining property values.

Pent-Up Demand
Looking back at the employment data, in mid-'06, there were 7.7 million construction workers. Today, there are 5.5 million. Doing the math, of the 7 million lost jobs from the '07 peak, 2.2 million (31%) are in construction. The fact is, US periods of economic expansion have always been accompanied by high employment in the construction trades. In addition, there is a multiplier effect both when jobs are created or lost as jobs in other ancillary industries (like home furnishings) are positively or negatively impacted to say nothing of jobs created simply as support (services etc.). After four years of the lowest level of construction activity on record, a level we know is below replacement and certainly below the needs of a rising population, with families moving in together and college graduates remaining in their parents' homes, there has to be a huge pent-up demand for housing. But, no one will buy while prices are falling, and prices will continue to fall while foreclosures remain near record levels. One key to job creation, then, is stable or rising home values. That would result in rising sales and would stimulate construction employment with its attendant job multiplier.

Extend and Pretend
Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff have completed several studies examining the aftermath of balance sheet recessions. In a recent interview with Investors Business Daily ("Slow Growth Normal For Post Fin'l Crisis Recoveries", Norm Alster, 5/23/11), Vincent Reinhart said that in Japan, for example, "the banks were allowed to carry bad assets on their books at inflated values". As a result, "property prices have declined for 20 years". Reinhart concludes that "the government's willingness to let banks carry bad debt rather than force them to take losses tends to stretch out the process of deleveraging. When you let banks carry their assets at high values relative to their market values, it freezes that market". His prescription: "Recognize the losses … take the hit".
We have a 20+ year example with Japan, 3+ years in the US, and now, Europe is about to embark on a similar path with the "extend and pretend" game with Greek debt.
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