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Now the Bad News: Those August Jobs Were Rented

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Despite what some on Wall Street say, the August jobs report shows little hope for recovery.

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Since this huge fiscal bailout was temporary and is largely slated to expire at the end of this year, it just kicked the can down the road. States and localities are still mired in the deep structural deficits incurred during the last decade's housing and home ATM-based consumption boom. The latter resulted in massively inflated revenues from property appreciation, sales taxes, and bonus-swollen taxable incomes -- every dime of which was absorbed by huge increases in permanent spending.

Now these bubble-era revenues are gone, leaving a yawning fiscal gap. To be sure, the resulting gross violation of state constitutional strictures against budgetary red ink has thus far been papered over by Washington's "stimulus" infusion -- along with emergency state/local budget cuts, deferrals, and gimmicks. But these temporizing arrangements will be overwhelmed during the next two years as state and local receipts drop by upwards of $150 billion when temporary stimulus programs roll off.

Some of this true state and local fiscal gap will be covered by additional tax increases -- measures that, in turn, will subtract from disposable household incomes. But much of the structural fiscal gap will have to be closed by means of further, sharp retrenchment of services and payrolls. This is especially the case because the easy non-payroll cost savings have already been harvested and because legally binding funding requirements for pension and other retirement programs are soaring.

At a fully loaded cost of $75,000 per employee, for example, it will take upwards of a 10% cut -- or about a 1 million reduction in state and local jobs -- to compensate for the expiration of federal stimulus transfers. Stated differently, we're about to see a real Warren Buffett scenario as it becomes evident that the state and local budget beach is populated almost entirely by naked swimmers!

The nation's fiscal predicament will bear just as heavily on the 30 million jobs reported for the HES Complex in the August release. In the first place, about 13.5 million (45%) of this total is accounted for by education -- which is almost entirely a ward of the state. In addition to the 10.4 million education employees on state and local payrolls, there are another 3.1 million jobs on purportedly "private" education payrolls. But the dominant share of these jobs is attributable to higher education institutions -- both conventional private schools and also for-profit colleges and technical training programs.

Both rely heavily on federal student aid, but the booming for-profit education sector is especially dependent. The latter institutions typically obtain 80%-90% of their revenues from federal student grants and loans -- and currently constitute one of the most egregious scams in the entire federal budget. Indeed, after skyrocketing from a few billion annually to more than $20 billion at present, flagrant abuses of federal aid at tuition-harvesting machines like Phoenix University and Strayer Education (STRA) has caught the attention of even the spendthrift Obama administration. Consequently, pending restrictive regulations are likely to cut off this most recent avenue of rapid education job growth, as well.

Another 2.7 million of the HES Complex jobs are in day care and other social services. These payrolls have always exhibited acute fiscal dependency, but even here the days of generous budget increases are clearly over.
No positions in stocks mentioned.

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