What Recovery? __ Part II, Systemic High Unemployment?

In Part I of this series, we examined money velocity (the number of times the money supply circulates in the economy over a year), which is directly related to economic growth, GDP, and found that it has been declining since 1999. The velocity of money is currently slower than it was in the Great Depression. We noted that the stock market has recovered nicely and corporate and banking profits are up and Wall Street investors are doing well. This suggest that the money supply is circulating at a higher rate for big corporations, big banks, and big Wall Street investors and less so for the folks on Main Street.

While writing Part I, I came across an article by Charles Hugh Smith, Why Employment Is Dead in the Water, where he said:

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keeps rising.

The question was raised in Part I about what happened to all that Quantitive Easing (QE) stimulus the Federal Reserve has been doing for the last four years. Mr. Smith may have confirmed suspicions of Asylum Watch.

Academic economists and political progressives would have us believe that the only thing restraining employers from hiring millions more people is lack of access to cheap credit.

The explicit assumption here is that cheap credit is all employers need to expand their workforce. This is so out of touch with reality that it beggars description.Progressives and academic economists generally claim the Federal Reserve’s zero-interest policy (ZIRP) and its other policies of flooding the economy with liquidity “are working,” i.e. boosting the economy.
Here is what the Fed’s policies are boosting: financial sector profits Please compare this chart with the chart above of full-time employment, and then decide where the Fed’s free money/easy credit is flowing.

So, Mr. Bernanke’s three trillion in QE stimulus has helped the economy of the financial sector, but not much else. It has not helped reduce unemployment as he said it would. Was he really just looking out for the banking industry? I am cynical enough to believe that is exactly what he had planned.

Charles Hugh Smith does an excellent job in this article. I highly recommend it to you. I am going to use some of his graphs along with others to try to build a picture of what is going on in the US economy. Mr. Smith closes his article with this paragraph:

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keep rising. That vise forces businesses large and small to reduce labor costs while boosting productivity. There is no other way to stay solvent in a post-bubble, over-capacity, over-indebted consumerist economy awash in too much of everything but energy, common sense and fiscal prudence.

Clearly the US is having its problems competing in this global economy. Our businesses pay the highest taxes in the world. There is little semblance to a free market economy in a country with thousands of laws and hundreds of thousands of regulations. But, with all due respect for Charles Hugh Smith, there seems to be more at play than he has noted. Our problems did not start with Barack Obama; although he is doing his utmost to make things worse.

To be sure America’s high costs hurt our competitiveness and that causes companies to take their production to countries with lower taxes, lower wages, and less regulatory controls. That is logical. What else could be happening? Maybe some graphs can help us understand. Let’s start with a graph of our GDP over time:

We see that except for the effects of the 2008 recession that  the GDP has grown steadily. Now lets compare that to what has happened to the velocity of money (taken from Part I) and to workforce participation rates. Please pay special attention to the trend of these curves from 1999-2000 to the present.

Graph of Velocity of MZM Money Stock

So, between 1999 and the present, GDP has continued to grow except for the 2007/2008 recession. But, both the velocity of money and workforce participation have been in steady decline over that time period.  So, what do all these graphs mean? The Financial Profits graph means the Feds money printing Quantitative Easing has only helped the banking industry. The GDP graph means that the overall economy is growing; all be it slowly. The Workforce Participation graph tells us that, in spite of a growing economy, job creation is slower than the growth of the potential workforce, which means high unemployment. The velocity of money graph coupled with the growing GDP means that upper income people are benefiting more from this economy than everyone else.

Confused? Let’s see if I can explain the structural changes that have occurred in the US and that are affecting job creation.

What Is Affecting Economic Competition and US Employment?

  • Globalization: The United Sates emerged from World War II as the only  industrialized nation left standing. As a result, the US would become the richest of nations and Americans would enjoy the highest standards of living. But, it also fell to the United States to become the world’s peacekeeper or policeman. That alone meant our government would have to grow, which would eventually affect our competitiveness. The US rebuilt Europe and Japan, and they would become serious economic competitors. As tax policies and regulatory policies and wages in Europe and Japan approached that of the US, the playing field was leveled somewhat and a new Asian Tiger appeared: Korea. This pattern would repeat itself and the competitive edge would shift to different Asian Tigers. In more recent years, new Tigers have emerged: China, India, and Brazil, for example.
  • Big Nanny Government: As government grows in size and, therefore in spending, it is competing with the private sector in the economy. Governments are never as efficient as the private sector. But, when government becomes the nanny of its citizens. things get worse, because the government is taking money from the productive sector and giving it to the non-productive sector. To make matters worse, the Nanny Government in the US has not asked its citizens to pay for all the social programs that are redistributing the wealth. This was purely for political reasons. Therefore, they have buried the nation under a mountain of debt; soon to reach $17 trillion.
  • Reaction By The US Business Community: It is only natural and rational than when companies find they can not compete with the products and services coming from emerging nations that many will move some or all of their production to countries where their costs will be much less. We consumers all benefit from that. The price is that some people lose their jobs and others don’t get hired. Please understand, my friends, this would have happened on some scale even if the nanny state had never occurred. The added cost burden of the nanny state has accelerated and accentuated the process and more people lost their jobs than would otherwise have happened. The beginning of the downward trends in the velocity of money and workforce participation rates seems to have coincided with the end of the Dot.Com bubble. Maybe we can call that the point in time when the world moved into the Information Age. It became much easier for emerging nations to copy, buy, or steal the technology that otherwise would have given the developed nations a competetive edge. What about the companies that are still producing and doing well in the US? Well, as their profit margins were being squeezed, that have made use of technology to make their workforce more productive; and, as a result they are not growing their workforce as rapidly as we have seen after other recessions.

What About the Demographics of Aging Population and Birth Rates?

  • Aging Population: The United States is not alone in this problem. The same is true in Europe, Japan, and even China. In the US, the aging population has a double whammy effect on the economy and on the employment numbers. As the Baby Boomers retire, there are not enough younger worker to pay the cost of the Boomer’s demands on Social Security and Medicare. These programs currently account for the lion’s share of the federal budget. Borrowing to pay these programs is a drain on the economy. Sooner or later, the liberal Democrats will have to come to terms with Social Security and Medicare. They will either have to tax Americans like  Sweden does (70%) or reform the programs and reduce costs. The other problem is that many Boomers are retiring later in life and, therefore, are not making room for new younger workers.
  • Declining Birth Rates: Again, Europe, Japan, and China are also experiencing declining birth rate. In China it is by government edict and in the other countries it do to cultural changes.  Many Americans are concerned about what the long-term effects of a declining birth rate will be on our economy and on our culture. One of my favorite new conservative bloggers did a compelling argument against this trend in her article the other day. She noted that Americas birth rate is currently 1.9. Not enough to maintain our population. She noted that it is only that high because birth rate among Hispanic Americans is 2.35, however, the birth rate of Hispanic Americans has fallen 2.3% in recent years and will probably continue to fall. Besides the impact on traditional American culture, she fears that it will be impossible maintain economic growth because there won’t be enough workers to fill the jobs. My opinion, on the other hand, is that for the next 30, 40, or 50 years, there may not be enough jobs for all those who want and need jobs.

To be sure, your humble observer at Asylum Watch, has painted a gloomy picture of the  future in this series on “What Recovery?” Tomorrow, in Part III, We will review an article by one of my favorite libertarian writers. Gary North. He thinks people like me are being too negative. He believes that freedom and innovation will save the day. At the end of Part III, I will summarize what I think I have learned in this investigation of What Recovery. Then you, dear readers, can decide for yourselves if high unemployment is going to be a systemic problem for America or not.

Well, now you know what I’m thinking. What are your thoughts?

16 thoughts on “What Recovery? __ Part II, Systemic High Unemployment?

  1. Another great post Professor Jim. High unemployment makes for a restless population with way too much time on their minds. Someone has to be blamed, and the Master of tricks will divide us one more time.

  2. Professor Gourdie, the synthesis that “upper income people are benefiting more from this economy than everyone else” arrived by the only thesis of the decoupling of “The velocity of money” from GDP growth cannot be made without other ingredients. It is true what you show about the banks, but the government intervention in injecting liquidity on the system can only be achieved through the financial system. The financial sector participation on total GDP growth is but a part – an not the major part at that – of final GDP growth. So it is with “upper income people” who are only partially directly active in the banking sector.

    I would say that “upper income people” always – I repeat, always – defend and protect their assets – as compared to “benefit” – much more capably than the working class, in any type of economy and under any circumstances, whether growing or shrinking. The “creators” are more “creative” than the dependents.

    It is a valiant and illuminating post. A lot of truth and information in it. You, Professor, are a “creator”.

    1. Wow! I did do a horrible job of explaining what I meant by “upper income people”. Sorry! I was thinking of all highly paid people in government and int he private sector. They have gotten slary increase greater then inflation and many have gotten good bonuses. For everybody else, their cost of living has gone up while their net worth (due to house values) has gone down.

      1. Thanks Prof for the clarification. Yes, I misunderstood you initially.

  3. Jim, you are doing yeoman’s work in trying to bring into resolve a system with so many disparate inputs that it is extremely difficult to see the whole picture. When a complex system breaks down, it’s often because one aspect is breaking down, causing distortions that bring down the system as a whole. In this case, The fly in the ointment, the monkey in the wrench (points if you know what movie I’m referencing) is intrusion of government in the economy. Where would we be with a humble government that didn’t stick it’s nose into everything from social safety nets, to regulations, to constant tinkering with the tax code?

    1. If we had had a perfect small government for the last sixty tears, there would still be competition from emerging nations; but it would have been much, much less of an impact. America would have been light years ahead of whichever country was second.

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