There is no silver lining to the dark cloud that has enveloped America. A slight decline in the rate of job losses at the end of last year, coupled with a rise in the gross domestic product, gave hope that we were at the beginning of a sustained recovery from the Great Recession. The December jobs report has doused that hope. Unemployment has graduated from being a difficulty, a headache, a setback, a worry. Now it is nothing less than a catastrophe. The true measure of it is that nearly a million Americans have become so demoralized that they are no longer even trying to find work. No fewer than 929,000 men and women who want a job haven’t looked in the past year. That is nearly 50 percent more than the number who felt it was a hopeless quest a year ago (642,000 in 2008). With 15.3 million out of work in the longest and deepest downturn in our economy since the Great Depression, the unemployment rate managed to hold at 10 percent in December only because of an extraordinary shrinkage in the labor force: Some 661,000 gave up their searches for work. (Job losses totaled 85,000, according to the Bureau of Labor Statistics’ nonfarm payroll data; the bureau’s household survey indicated a loss of 589,000 jobs.) Roughly 40 percent of the unemployed, or a total of 6.1 million, have been out of work for more than 27 weeks. The average period of unemployment exceeds 26 weeks, the highest level in postwar history; the previous peak, in July 1983, was just 21.2 weeks. The better and more comprehensive measure of both the unemployed and underemployed, the household survey, edged up to 17.3 percent, up from 8.4 percent two years ago and just a shade below the all-time record. But the bureau’s unemployment numbers are extrapolations from only 60,000 household interviews. Experts who have looked at these statistics and made adjustments to account for the survey’s limitations get an unemployment/underemployment rate of a staggering 22 percent. Since the recession began, some 8.6 million jobs have been lost! There is no end in sight. Because our potential labor force is expanding by almost 1.3 million job seekers annually, even if we had the strong job growth we saw in the 1990s, it would take at least six years to get unemployment down to 5 percent. Instead, businesses continue to slash labor costs at rates not seen in any downturn since World War II. The fall in employment is so bad that last year’s decline of 3.7 percent was the worst since 1938, when Franklin Roosevelt misjudged an incipient recovery and cut public investment, resulting in a 5.8 percent plunge in employment. See our descent: Last year’s average unemployment rate was 9.3 percent, compared with 5.8 percent in 2008 and 4.6 percent in 2007. The employment-to-population ratio for men ages 25 to 54 is the lowest since the Bureau of Labor Statistics began keeping track in 1948. Those without a high school diploma have an unemployment rate of 15 percent, compared with 5 percent for those with a bachelor’s degree or higher. For adult heads of household younger than 25, the unemployment rate is approximately 16 percent, reflecting the dearth of jobs for recent graduates and other young people. More than 4 million people have exhausted their regular unemployment benefits and are surviving on emergency jobless insurance. And months after we supposedly emerged from the recession, we are facing about 450,000 monthly claims for unemployment insurance. Small businesses, the normal source for new jobs, are still shedding workers. Fewer than 10 percent added employees, while more than 20 percent cut back–and the cuts averaged nearly twice as many per firm as the hires at the expanding companies. Economists may see the recession as being over, but the man in the street sees it differently. From his perspective, these are by far the worst times for American workers since the 1930s. Expectations are low, too. Roughly 60 percent of the public believes the recession still has a way to go, compared with 52 percent in September. Only 29 percent of those polled in a Wall Street Journal/NBC News Poll believe the economy has hit bottom. Even those who have not suffered know someone–a friend, a neighbor, a family member–who is being hurt. Two in three say the rally in the stock market has not changed their views. There are sound reasons for this gloom. Consumers have learned a bitter lesson. They understand that increased consumption–private and public–will have to come from income and not borrowing, and income will have to come from employment. This is the new normal, and it is not going away for a long time: We will have unemployment rates of 8 percent or higher for years to come. A University of Michigan survey of consumers finds that family finances have been deteriorating for more than 13 consecutive months, the longest decline in the survey’s 60-year history. With 85 percent still believing we are in serious economic difficulties, mainstream Americans are going on a financial diet. They know now that they cannot spend what they don’t have. Household attitudes toward borrowing have made a U-turn as the painful consequences of too much debt have hit home. For years, homeowners borrowed against soaring home values. They can’t now. Home prices are down by some 30 percent, on average, and possibly heading for a fall of an additional 5 percent to 10 percent. With 25 percent of home mortgages exceeding the value of the properties, more than 10 million homeowners have negative home equity. Many others have little equity. Naturally, consumers are increasing their savings when they can. Even the top 20 percent of the nation’s households, who account for 40 percent of all spending, no longer trust their home equity or rising stock portfolios (up by almost $5 trillion this past year) as a basis for spending in lieu of saving. All they see ahead are taxes, taxes, taxes. So the dollars have not yet started to flow. In summary, we have overleveraged households weighed down by debt and worried about layoffs, thus curtailing their spending. We have businesses unwilling to hire until they are certain that the recovery is solid. They are unlikely to invest in new machinery and plants when they are using less of the nation’s industrial capacity than they have at any time since the end of World War II. What this means is that larger-than-typical head winds face two of the three normal engines of recovery: consumption and residential investment. These usually make up about 4.5 percent of the growth in the gross domestic product in the first year of a recovery. This represents a subtraction on the order of three quarters of a trillion dollars annually from consumer spending. Given how high our fiscal deficits are, it is hard to imagine how consumers will be in any position to make up the difference. Rather than pumping more cash willy-nilly into a fragile economy, the government will have to focus on its next big task: drawing up credible plans for bringing bloated budget deficits under control without triggering another downturn. The public understands this. The prospect, therefore, is sluggish GDP growth; employment gains that are too slow to prevent further increases in the unemployment rate; slowing and probably falling inflation; a Federal Reserve policy that may be forced to unravel some of the Fed’s unconventional monetary stimulus but still will keep the fed funds rate at its current near-zero level; banks more willing to lend, but only gradually; and firms probably still very reluctant to hire vigorously. How can we accelerate a substantial recovery in job growth that will generate additional labor income? There is no snap answer. If government officials try to pretend that there is, they will undermine what little is left of their credibility. But this is no argument for inertia. We don’t need another Andrew Mellon at the Treasury Department advising the president, as Mellon did Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” We must have programs that create some degree of confidence America can be rebuilt, and jobs with it. I have written before of the benefits that would flow from a national infrastructure bank. The unemployed have to be supported, but it would be better if the financial support employed labor in rational, long-term, major infrastructure projects. These wouldn’t be entitlement programs but regeneration programs. Infrastructure projects–broadband Internet access across the nation, restoring decaying bridges and canals, building high-speed railways, modern airports, sewage plants, ports–have the highest multiplier for employment. One worker in an infrastructure project leads to almost 1.7 jobs for others. And we will be fulfilling a desperate national need. It is time the obstacles created by the profusion of bureaucracies at the local, state, and national level were cleared away. The second proposal would be to enhance technology, the area of our greatest strength. We are depriving ourselves of productive talent by a fearful attitude toward immigration. We make it hard for bright people to come and we make it hard for them to stay, so once they have graduated from our universities they go home to work for our competitors. This is not the way to run a railway. Foreign students are a significant proportion of those with graduate degrees in the hard sciences in American universities. We should restore the quotas for H-1B visas to 195,000 annually. This has been blocked by shortsighted special-interest groups that fear jobs will be taken from Americans. On the contrary. The kind of people we should be striving to keep are those whose work in technology and engineering provides more than their share of new jobs. Technology has given us our greatest job growth over the past decade. The administration must initiate policies that help reignite the investment-driven engines of our economy. This means we must support continuous technological and business-model innovation. The good news is that deep economic recessions tend to produce dramatic innovation. Just think: In 1800, about three quarters of the U.S. labor force was devoted to agriculture. Today, it is less than 3 percent. Manufacturing employed one third of the workforce at the end of World War II. Today, it is down to about one tenth. We are accustomed to economic transformation, but we must focus on accelerating the role of technology in our economy, especially since consumer spending will probably fall as a part of GDP for many years. However, America will never recover its full prosperity and the jobs it can create as long as individual legislators yield to the blandishments and blackmail of special-interest groups. We must follow rational economic policies in the interest of the nation and not in the interest of narrow parochial groups that will lobby individual legislators. Otherwise, we will deteriorate into a politics of corruption. Cross-posted from U.S. News & World Report
