Why We Won’t See Much of a Recovery

As we trundle on through the current recession I continue to be amazed at how otherwise smart folk talk about green shoots and recovery.  At any given moment one can find a talking head on CNBC absolutely convinced and trying to convince you that recovery is right around the corner.

Just once I’d like to have the same amount of airtime to pose a couple of nagging questions to these guys.  For example, the banking crisis may have acted as a trigger for what we are currently experiencing but the underpinnings of this calamity were manifesting themselves much earlier.

I’ve included two rather simple data sets for your review.  The first is job creation by President.  While I don’t think Presidents create jobs their tenure is a nice viewing point for economic success in terms of job creation.

Nixon/Ford 114,000
Carter 213,416
Reagan 165,000
Bush I 47,542
Clinton 251,802
Bush II 31,250

The rule of thumb is the economy must create 100,000 jobs a month to break even.  So anything above that is job growth and anything below is job shrinkage.  Neither Bush had much luck (as opposed to success) in being President during job booms.  The point of the chart however is to offer some evidence that our economic malaise is more systemic than most “experts” would admit.

George W Bush left office with a 6.5 million shortfall in jobs created during his watch.  Again, I’m not blaming him for this but simply making a point that jobs in the US have been shrinking rather than growing for the better part of a decade.  The current occupant of the oval office has seen even more dramatic job losses.  Today, as I type this we have roughly 7.5 million people on unemployment.  The U2 labor figures have unemployment north of 9% and U6 which is the labor underutilization rate has unemployment approaching 16%.

I can offer a number of plausible reasons for this.  Globalization for example has created a philosophical argument that shipping jobs offshore is good for America.  The financial community has also created a philosophical argument that wealth created doesn’t have to result from a tangible product.  Simply moving money rapidly through the system can result in great wealth.

I’d make two points.  First, if your balance of trade is negative you are buying more than selling and eventually that can’t be sustained.  Second, man has gone from being a hunter/gatherer to agrarian to manufacturer to service sector and we are in dire need of the NBT (Next Big Thing).  We have simply matured our economic system to the point that we need some new innovation in our economy to create an abundance of new jobs.

My real point is that the economy can’t really come back without a wealth of new jobs and those jobs that have been lost in the last decade aren’t coming back in any real sense.  Something will have to come along to create a demand for new jobs.  So Mr. Talking Head what driving factor in the economy do you see creating 10 million new jobs that pay a living wage?

My second reason for pessimism about our economy is the MEW (Mortgage Equity Withdrawal) chart.  We went through a six-year period illustrated below where our economy was very anemic in terms of real growth.  As the graphic shows we had something less than 1% GDP growth from 2001-2006.

Again in a simple sense we spent 2001-2006 maintaining our lifestyle by spending down the equity in our homes.  We need real growth to maintain our economy.  What should we do as a society to renew America?  We will need that renewal to sustain our economy.

I’d offer a number of suggestions:
1)    Any manufacturing job that was off-shored with a final cost of labor of 15% (many experts would argue 20% -25%) can and should be made here.
2)    We spend 17% of GDP on healthcare mostly financed by business.  They compete globally against competitors that finance healthcare through their governments.  We spend too much (going from 8% to 17% in twenty years or so) and it is a tremendous drag on our competitiveness.
3)    We spend more on Defense than the next thirteen countries in GDP COMBINED.  Many of these countries are our own trading partners and they use our willingness to be the world’s 911 so they can offer export incentives to use against us.  That has to stop.  We can’t afford it anymore.
4)    We need a world class education system and we will never get it unless parents take responsibility for parenting.  Children don’t pop out of the womb knowing they need to learn.  Parents and mentors create the discipline for children to want to learn.  It’s not about how much we spend but rather that someone cares about each student enough to make him want to learn.
5)    We need energy independence.  It’s the biggest drag on our balance of trade.  We can’t get there unless we peg gas at $4 a gallon to allow alternative fuels to be competitive.  We need to suspend the war between environmentalists and carbon users until we can bridge the gap between a carbon dominated world and cleaner energy.  So raise the prices, drill everywhere including my backyard in the short run.  Invest in alternatives and move us to energy independence.

Without these kinds of adjustments to our economic system there will not be a sustained recovery.