FedUpUSA

Archive for June 6th, 2011

The commonly-accepted unemployment figures for the Great Depression are overstated.

Specifically, government workers were counted as unemployed by Stanley Lebergott (the BLS economist who put together the most widely used numbers) … even though gainfully employed and receiving a pay check.

If we’re trying to compare current unemployment figures with the Great Depression, the calculations of economists such as Michael Darby are more accurate.

Here is a comparison of Lebergott and Darby’s unemployment figures:

(see Robert A. Margo’s Employment and Unemployment in the 1930s.)

We’ve Got Depression-Level Unemployment

Unemployment is currently underreported. Even government officials admit that their “adjustments” to unemployment figures are inaccurate during recessions.

In addition, the most widely-cited statistics use the Department of Labor’s Bureau of Labor Statistics’ “U-3″ methodology. But “U-6″ figures are more accurate, because they include people who would like full-time work, but can only find part-time work, or people who have given up looking for work altogether. U-6 is also is closer to the way unemployment was measured during the Great Depression than U-3

Current levels of unemployment are Depression-level numbers, especially when compared to Darby’s figures.

For example, economist John Williams puts current U-6 unemployment at 15.9%. That’s higher than 9 out of 12 years charted by Darby.

And there are certainly Depression-level statistics in some states. For example, official Bureau of Labor Statistics numbers put U-6 above 20% in several states:

• California: 22.0

• Nevada: 23.7

• Michigan 20.3

• (and Los Angeles County has 24.1% unemployment, higher than any of the Depression years as reported by Darby)

Williams puts SGS unemployment – which he claims is the most accurate measure – at 22.3%. That’s higher than 11 out of 12 years charted by Darby.

Youngstown State University’s Center for Working Class Studies puts the “De Facto Unemployment Rate” at 28.76%. I’m not sure if that compares to methods used during the Great Depression, but it surpasses all 12 out of 12 years charted by Darby.

More People Are Unemployed than During the Great Depression

As I noted in January 2009:

In 1930, there were 123 million Americans.

At the height of the Depression in 1933, 24.9% of the total work force or 11,385,000 people, were unemployed.

Will unemployment reach 25% during this current crisis?

I don’t know. But the number of people unemployed will be higher than during the Depression.

Specifically, there are currently some 300 million Americans, 154.4 million of whom are in the work force.

Unemployment is expected to exceed 10% by many economists, and Obama “has warned that the unemployment rate will explode to at least 10% in 2009″.

10 percent of 154 million is 15 million people out of work – more than during the Great Depression.

Given that the broader U-6 measure of unemployment is currently around 17% (ShadowStats.com puts the figure at 22%, and some put it even higher), the current numbers are that much worse.

Unemployment is Long-Term

USA Today reported in December:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.

Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.

***

The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations.

***

“The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.

***

Although “this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.

The Wall Street Journal noted in July 2009:

The average length of unemployment is higher than it’s been since government began tracking the data in 1948.

***

The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The Christian Science Monitor wrote an article in June entitled, “Length of unemployment reaches Great Depression levels“.

60 Minutes – in a must-watch segment – notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery this flat. 60 Minutes points out that unemployment has been at 9.5% or above for 14 months.

Pulitzer Prize-winning historian David M. Kennedy notes in Freedom From Fear: The American People in Depression and War, 1929-1945 (Oxford, 1999) that – during Herbert Hoover’s presidency, more than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years.

Blytic calculated last year that the current average duration of unemployment is some 32 weeks, the median duration is around 20 weeks, and there are approximately 6 million people unemployed for 27 weeks or longer.

As Calculated Risk noted last month:

According to the BLS, there are 5.839 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.122 million in March. This remains very high, and is one of the defining features of this employment recession.

Job Destruction is Permanent

Many leading economists say that America is suffering a permanent destruction of jobs.

For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:

[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

The chief economists for Wells Fargo Securities, John Silvia, says:

Companies “really have diminished their willingness to hire labor for any production level,” Silvia said. “It’s really a strategic change,” where companies will be keeping fewer employees for any particular level of sales, in good times and bad, he said.

And former Merrill Lynch chief economist David Rosenberg writes:

The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.

And see this.

Despite What the Government Says, Reducing Unemployment Is a Very Low Priority

While government officials talk a good game, government policy has actually not been geared towards fighting inflation, not creating more jobs.

Wages for those Lucky Enough to Have a Job Are at Depression Levels

As I’ve previously noted, wages have plummeted for those who are employed. As Pulitzer Prize-winning tax reporter David Cay Johnston notes:

Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined ….

Indeed, wages have increased less over the past 10 years (when adjusted for inflation) than they did during a comparable 10-year period during the Great Depression.

Some Jobs Are Being Created … But Mainly In the Military

127,000 jobs need to be created each month just to make sure that things aren’t getting worse. (127,000 is the monthly population increase in the United States.)

But – according to the Bureau of Labor Statistics – only 54,000 total nonfarm payroll jobs were created last month.

There is fierce debate about how much the government has spent to create a few measly jobs. Some say that it is an insane amount, while others say the figure is lower. And see this.

But the truth is that there wasn’t very much government stimulus aimed towards creating jobs at all … other than in the military. As I pointed out in 2009, public sector spending – and mainly defense spending – has accounted for virtually all of the new job creation in the past 10 years:

The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 10 years:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

***

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

Let me finish with a final chart.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

Indeed, Robert Reich lamented last year:

America’s biggest — and only major — jobs program is the U.S. military.

Raw Story argues that the U.S. is building a largely military economy:

The use of the military-industrial complex as a quick, if dubious, way of jump-starting the economy is nothing new, but what is amazing is the divergence between the military economy and the civilian economy, as shown by this New York Times chart.

In the past nine years, non-industrial production in the US has declined by some 19 percent. It took about four years for manufacturing to return to levels seen before the 2001 recession — and all those gains were wiped out in the current recession.

By contrast, military manufacturing is now 123 percent greater than it was in 2000 — it has more than doubled while the rest of the manufacturing sector has been shrinking…

It’s important to note the trajectory — the military economy is nearly three times as large, proportionally to the rest of the economy, as it was at the beginning of the Bush administration. And it is the only manufacturing sector showing any growth. Extrapolate that trend, and what do you get?

The change in leadership in Washington does not appear to be abating that trend…

So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S. And this shows military versus non-military durable goods shipments:

[Click here to view full image.]

So we’re running up our debt (which will eventually decrease economic growth), but the only jobs we’re creating are military and other public sector jobs.

This might be okay from a strictly economic (as opposed to moral) perspective if defense jobs reduced unemployment. But, as many economists point out, the fact is that massive military spending actually increases unemployment in the long-run.

For example, PhD economist Dean Baker notes that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment:

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight [recognized as the most consistently accurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

  And the Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that  non-military spending creates more jobs than military spending.

Government policy has largely caused the current unemployment crisis. And until Washington and Wall Street are forced to change course, things will not meaningfully and significantly improve for a long time.

Washington’s Blog

The Status Quo heavily rewards financialized profiteering and resource extraction while penalizing productive capital investments in manufacturing.

There is so much ideological, quasi-religious fanaticism around “free trade” (there is no such thing as “free trade,” there are only various permutations of managed trade) and “industrial policy” (every nation has one, explicit or implicit) that it is difficult to make any sense of the many intertwined issues.

Ideological purity is not a substitute for knowledge, any more than a superficial admiration of machines equals actually knowing how to assemble, maintain and repair them.

As a background context, we might start by noting that Marx outlined how finance capital comes to dominate industrial capital, as industry comes to depend on the credit extended by the banks/finance capital.

The key takeaway: if you don’t control the banks, then they will end up dominating industrial capital. In the U.S., we have the worst of both worlds: a dominant financial Elite and various cartels (military-industrial, sickcare, agribusiness, etc.) that have captured what little of the Central State that isn’t already beholden to financial capital.

Moving production around the world to exploit cheap labor–also knowns as “wage arbitrage”– is not free trade: it is merely the consequence of free capital flows, and an extension of capital’s dominance of labor. If capital can reap higher returns by flowing elsewhere and abandoning domestic labor, then it will do so, and “lowering the cost to consumers” is the marketing propaganda issued to placate the captive home markets.

Consumers, after all, are not free to travel the globe seeking “higher returns,” i.e. lower prices–that privilege is reserved for capital.

When China sold silk to the Roman Empire in 100 C.E., the cost of capital to produce the silk and the cost of labor was set in China. Traders took the risks of transport and reaped the gigantic profits. The same was true when China sold porcelain made for export to America in the 1800s.

That is “free trade.” Moving capital to China to exploit cheap labor there, then closing the factory and moving production to Vietnam, and so on, is simply free-flowing capital exploiting labor on a global scale.

As further context, we should note the dominance of short-term profiteering as the motivator of management in Corporate America. “Beating quarterly estimates” is basically the only metric of “success” in America, because a corporate management that fails to “beat estimates” won’t last long enough to pursue any long-term capital investments.

The financialization of compensation is also a critical factor: if compensation is mostly stock options, then that creates a huge incentive to boost the stock price and then exercise the options–”pump and dump” on a vast, systemic scale.

This obsessive addiction to boosting short-term profits also leads management to view labor as the “enemy” which is sucking off profits, rather than the partner in the company’s long-term success. Thus relentless cost-cutting and downsizing is heavily incentivized as the one sure way to boost short-term profits, even as the company is being hollowed out.

Management isn’t being rewarded to think about the long-term, any more than a member of the House of Representatives is rewarded for thinking ahead more than two years. Some problems cannot be solved, or even addressed, in short-term thinking. This is one reason why the nation is heading to heck in a handbasket–nothing can be discussed that can’t be “resolved” in 18 months (the election cycle starts six months before every congressional election). Management might only last 18 months, so there is every reason to stripmine the company of assets and know-how, boost the stock price, cash in the millions of dollars in options and hightail it on to the next “opportunity.”

An emphasis on housing as a bedrock of wealth and lending has completely distorted the U.S. economy. The incentives in real estate are massive, and massively perverse: the unlimited mortgage deduction for interest incentivizes borrowing vast sums and “moving up” to ever-larger, ever more wasteful homes, to name just two, and policies aimed at expanding suburbs effectively gutted central cities while heaping subsidies on sprawl and distant exurbs.

The U.S. has a distinct industrial policy: benign neglect, ignorance, favoritism towards real estate development and financialization, and a fanatic devotion to short-term profits and cost-cutting.

What makes any discussion of “free trade” so impossible is the vast ignorance of free trade proponents about our industrial competitors and the history of trade. If you know essentially nothing about industry and industrial policy in China, Japan and Germany, and nothing about the long history of trade in a capitalist framework, then exactly what are you bringing to the discussion other than religious fanaticism to a concept that begs for deep knowledge of other nations and nuanced understanding?

I have studied Japan and China for almost 40 years, both formally in university studies and via visits, research and discussions with my many Japanese and Chinese friends. I have toured many Chinese factories and discussed trade with entrepreneurs and marketing reps, and received inside information from local government sources.

Japan, Germany and China have trade policies which support and encourage specific industrial and export models. For context, please read these two related articles: Outsourcing manufacturing hurts U.S. and a factory that costs $11 million in California costs $5 million in Germany, after tax credits.

If you watched any Japanese television (NHK) after the tsunami and earthquake, and you are a careful observer, you had a rare chance to see industrial Japan from the inside. Japan, Inc, is not just a Toyota factory filled with industrial robots: it’s thousands of small factories producing parts for the global corporations.

For example, one factory affected by the tsunami manufactured special components for satellites. The workers were shown hand-polishing the complex castings by hand.

Let me repeat that, for those who mistakenly think everything can be made by robots or in some Chinese factory by low-skilled workers: by hand, by highly skilled workers.

Industrial robots are costly to buy and maintain; they make no sense on small production runs, or highly skilled, complex tasks. No robot could duplicate the delicate hand-eye coordination required to hand-polish these complex parts.

This is not some outlier, this is standard in Japan, Inc., and also in Germany, Inc. There is a critical need within any broad-based industrial supply chain for skilled labor.

As for automation: yes, it works in producing mass-produced goods, but skilled labor is required to reprogram the robots, maintain them, assemble them, etc. Though the factory floor may have few people present, there is a long supply chain behind the automation that supports multiple levels of value-added labor and manufacturing.

It’s not just moving the assembly offshore, it’s moving the entire value-added chain that feeds it.

As my friend G.F.B. recently noted, the initial invention that is the obsession of America and supposedly its great advantage in the global marketplace leaves off the real value-added proposition, which is the development of the later models and iterations.

Place the production elsewhere and keep the design staff in the home nation is an excellent way to lose the design of the actual parts and workflow–the real value added. Apple has been able to keep ahead of competitors by integrating software that is difficult to copy into hardware, but it not the typical case, it is the outlier, hence its outsized value.

As I repeatedly point out, Apple, Google, Facebook and Twitter together have relatively few domestic employees. As production is overseas, then that’s where the design jobs go, too, eventually.

You have to understand the entire value chain, not just the assembly costs.

The U.S. culture denigrates skilled labor and glorifies the C.E.O. and innovator as god-like heroes. Other nations, notably Germany, maintain a value and education system which recognizes and nurtures technical skills. In the U.S., we fawn over social media companies that generate billions in new wealth for Wall Street and a handful of founders and venture capitalists, and drill into every student’s head the value not of tradecraft skills but of a four-year business degree.

For those not suited for an MBA–sorry, there are few other choices of learning.

In America, we are addicted to the drama of startling, big “innovations,” and we are enamoured with the romance of “instant wealth” from the “hot investment” of the moment.

Extraction is not the same as value-added production. There is temporary value in the equipment set up, but once the resource has been depleted, the wealth is gone and the “gold rush town” dries up and blows away.

The problem with financialization is that it is the gold rush dynamic on steroids. To reap the big gains from financializing, you need ever-greater amounts of credit, leverage, risk and churn–all the elements we saw in the housing bubble and in every stock bubble.

Once the financialization bubble bursts, there is nothing left to extract or leverage. Since productive investments were disincentivized at every turn, then the implosion of the unproductive investments leaves a hollowed-out shell of an economy with a very wealthy layer of managers and financial “winners” and the 90% below them with few prospects in what amounts to a corporate-colonial economy ruled by financial oligarchies and their minions in the Central State.

Of Two Minds

Amazing coming from this nozzle….

WASHINGTON (MarketWatch) — Treasury Secretary Timothy Geithner on Monday urged global regulators to cooperate and develop common standards to ensure banks trading in the derivatives market have sufficient collateral, or margin, to weather future economic crises.

That’s simple:

• All derivatives must be exchange-traded.  NOT “clearinghoused”, exchange-traded, so that they are double-blinded and the buyers and sellers have no idea who the other party is.

• All derivatives must be margined nightly against cash just like every other exchange-traded product.

End of problem.  Trade ‘em all you want, but:

• You can’t screw people.

• You can’t claim to have a risk covered when the counterparty cannot pay.

That’s all that needs to be done, it’s what I’ve advocated for years and it is the only solution that will actually work and cannot be gamed.

The Market-Ticker

Uh…file this under the WTF category.  There is something truly wrong with Bank of America.

From WWLP Channel 22, Mass.:

NORTHAMPTON, Mass. (WWLP) – The housing crisis ended with many homes in foreclosure, which is why it was no joke when a man from Northampton got a letter stating his home would be seized if he didn’t pay up zero dollars and zero cents!

Not wanting to lose his house, he called the 22News I-team and finally got some answers.

Following the mortgage meltdown, struggling homeowners dread getting that nasty letter in the mail announcing your home is listed under foreclosure.

That happened to Mark, only his letter caught him off guard.

“It says, you owe us zero dollars, zero cents. I going to write a check to them for zero dollars and have it clear? I couldn’t help but laugh,” he said.

Only, this was no laughing matter.

The letter clearly stated if they didn’t get his money, or lack thereof, by February 4th, his lender could seize his home.

To make matters worse, his credit score was downgraded and getting in touch with someone at the bank to help him was no easy task.

That’s when he called the 22News I-team.

We started making our own calls and e-mailing Bank of America to try to find out why this was happening to Mark and how others can prevent it.

I-Team:Man gets a $0 foreclosure notice: wwlp.com