November 18, 2009

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Today’s themes are jobs and recovery. We start with Peter Schiff, then add Ed Morrissey, IBD editors, Nouriel Roubini, James Pethokoukis, and Robert Samuelson. Daniel Gross was the one outlier who said job growth will start soon. So he’s here too. Fair and (somewhat) balanced, you decide.

In Euro Pacific Capital, Peter Schiff explains why Obama’s economic policies are not creating jobs.

…Obama is pursuing, with unprecedented vigor, the same policies that have for decades undermined our industrial base and yoked us to an unsustainable consumer/credit driven economy. This doubling down on Washington’s past failures is destroying jobs at an alarming rate. Today we learned that the September trade deficit surged by 18.2%, the largest gain in ten years. Much of the deficit resulted from Americans spending Cash-for-Clunkers stimulus money on imported cars – or “American” cars loaded to the sunroof with imported parts. In exchange for more domestic debt, we have succeeded only in creating foreign jobs. …

…As our economy becomes less competitive due to higher taxes, burdensome and uncertain regulations, and capital flight, more manufacturing and services will be outsourced to foreign firms. However, the flaw in GDP calculation allows the output of those foreign workers to be included in our domestic tally. Since we count the output but not the worker responsible for it, government statisticians attribute the gains to rising labor productivity. To them, it looks like companies are producing more goods with fewer workers.

The reality is that we are producing less with fewer workers. The added “productivity” comes from higher unemployment and larger trade deficits. This is a toxic formula that will have lethal economic consequences. …

…If profit opportunities exist, jobs will be created. Otherwise, they will not. Of course, anything the government does to raise the cost of employment, such as a higher minimum wage, mandated heath care, or greater regulatory burdens, not only prevents new jobs from being created but also causes many that already exist to be destroyed. Anything that diminishes the profit potential of extra hiring will diminish the number of job opportunities that are created. Also, since it is after-tax profits against which employers measure risk, the higher the marginal rate of income tax, the less likely employers will be able to hire. …

In Hot Air, Ed Morrissey comments on the last month’s deficit that is even higher than predicted. The deficit for the first month of the fiscal year was $176.36. Eleven more months like that we’ll have a $2,000,000,000,000 deficit; just about $6 billion a day.

What better way to kick off Barack Obama’s first full budget year as President than with a deficit that exceeded the White House’s own projections as well as analysts’ expectations?  The federal government busted the budget worse than last October by $20 billion with a deficit of $176.36 billion for the month.  That used to be considered a decent deficit target … for an entire year…

…Higher deficits mean more borrowing.  More borrowing means more debt service.  As deficits continue to rise, the federal government will have to direct more and more of its revenues to paying the interest on the accumulated debt.  In September, that came to over $17 billion — just for the interest, not for principle reduction.  Investors Business Daily warns that Obama’s spending spree will eventually force Washington to spend 40% of its revenues on debt service…

…Obama now says he wants to attack the deficit, but without serious spending cuts and reduction in the size of government, any such reductions would have to rely on heavier taxation — which would kill the economy, reduce federal revenues, and put us even further behind on debt reduction.  The only way to fix the problem is to dismantle Leviathan, and unfortunately Obama is headed in the opposite direction.

Call off the jobs summit! The IBD Editorial board has a simple plan to create jobs.

…This isn’t rocket science. Any business owner, entrepreneur or manager can tell you that job creation requires new businesses, new investment in plant and equipment, and economic policies conducive to both….

…Job creation closely tracks investment in plants and equipment. So anything the government does to remove barriers to business investment — whether by cutting regulations, slashing taxes or reducing government spending — will lead to more jobs.

Of particular importance are small businesses, which — as a new report from the Kauffman Foundation noted — created virtually all the new jobs from 1980 to 2005.

Today, small firms suffer the most damage from congressional incompetence. The newly passed health care bill, for example, slaps families with more than $500,000 in income with an added 5.4% tax. But, according to Congress’ Joint Tax Committee, a third of this will be paid by small, family-owned businesses. …

In the Toronto Globe and Mail, Nouriel Roubini says there are two economies and the larger one is still suffering.

While the United States recently reported 3.5 per cent GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest. In fact, official measures of GDP may grossly overstate growth in the economy, as they don’t capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Properly corrected for this, third-quarter GDP may have been 2 per cent rather than 3.5 per cent.

The story of the U.S. is, indeed, one of two economies. There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Consider the following facts. While America’s official unemployment rate is already 10.2 per cent, the figure jumps to a whopping 17.5 per cent when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the past three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest a number above two million. …

In The Street.com, Doug Kass does a take-off of an SNL skit in a piece titled; “What Recovery!?!”

Of course, this is a takeoff from “Saturday Night Live’s” Amy Poehler and Seth Meyers. If you are not familiar with their “SNL” schtick during their Weekend Updates, here are a few of their Really!?! segments.

Really, the economy is recovering? Really, economists?

I mean, really!?! …

…And, really, an economic recovery without job growth? According to the household survey, nearly 600,000 jobs were lost last month, and 15.7 million Americans are out of work. Really!?!

The credit mechanisms of the shadow-banking system and the securitization market remain adrift, and banks aren’t lending. An economic recovery without credit? Really!?!

How about the state and local governments that have provided an anchor to growth in previous economic periods? Only two states have balanced budgets, and New York is letting out prisoners early to save money. Really!?!  …

In Reuters, James Pethokoukis reviews a report from economist David Rosenberg, who says that unemployment will get worse.

Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, thinks the unemployment rate is going to at least 12 percent, maybe even 13 percent. Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn. And even before this downturn, the economy was not generating jobs in huge numbers. If he is right, all political bets are off. I think the Democrats could lose the House and effective control of the Senate.  I think you would also be talking about the ise of third party and perhaps a challenger to Obama in 2012.

So here is what I gleaned from Rosenberg’s latest report (bold is mine):

2. During this two-year recession, employment has declined a record 8 million. Even in percent terms, this is a record in the post-WWII experience.

10. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

12. After all, the recession ended in November 2001 with an unemployment rate at 5.5% and yet the unemployment rate did not peak until June 2003, at 6.3%. The recession ended in March 1991 when the jobless rate was 6.8% and it did not peak until June 1992, at 7.8%. In both cases, the unemployment rate peaked well more than a year after the recession technically ended. The 2001 cycle was a tech capital stock deflation; the 1991 cycle was the Savings & Loan debacle; this past cycle was an asset deflation and credit collapse of epic proportions. And economists think that the unemployment rate is in the process of cresting now? Just remember it is the same consensus community that predicted at the beginning of 2008 that the jobless rate would peak out below 6% this cycle.

Pethokoukis also blogs on Obamacare.

…It turns out the Chinese are curious about how President Barack Obama’s healthcare reform plans would impact America’s huge fiscal deficit. Government officials are using his Asian trip as an opportunity to ask the White House questions. Detailed questions.

Boilerplate assurances that America won’t default on its debt or inflate the shortfall away are apparently not cutting it. Nor should they, when one owns nearly $2 trillion in assets denominated in the currency of a country about to double its national debt over the next decade.

Nothing happening in Washington today should give Beijing any comfort or confidence about what may happen tomorrow. Healthcare reform was originally promoted as a way to “bend the curve” on escalating entitlement costs, the major part of which is financing Medicare and Medicaid. That is looking more and more like an overpromise that can’t be delivered. …

In WaPo, Robert Samuelson discusses the hypocrisy of forcing Obamacare on the nation during such a serious recession.

There is an air of absurdity to what is mistakenly called “health-care reform.” Everyone knows that the United States faces massive governmental budget deficits as far as calculators can project, driven heavily by an aging population and uncontrolled health costs. As we recover slowly from a devastating recession, it’s widely agreed that, though deficits should not be cut abruptly (lest the economy resume its slump), a prudent society would embark on long-term policies to control health costs, reduce government spending and curb massive future deficits. The administration estimates these at $9 trillion from 2010 to 2019. The president and all his top economic advisers proclaim the same cautionary message.

So what do they do? Just the opposite. Their far-reaching overhaul of the health-care system — which Congress is halfway toward enacting — would almost certainly make matters worse. It would create new, open-ended medical entitlements that threaten higher deficits and would do little to suppress surging health costs. The disconnect between what President Obama says and what he’s doing is so glaring that most people could not abide it. The president, his advisers and allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both. …

…Equally misleading, Obama’s top economic advisers assert that the present proposals would slow the growth of overall national health spending. Outside studies disagree. Three studies (two by the consulting firm the Lewin Group for the Peterson Foundation and one by the Centers for Medicare & Medicaid Services, a federal agency) conclude that various congressional plans would increase national health spending compared with the effect of no legislation. The studies variously estimate that the extra spending, over the next decade, would be $750 billion, $525 billion and $114 billion. The reasoning: Greater use of the health-care system by the newly insured would overwhelm cost-saving measures (bundled payments, comparative effectiveness research, tort reform), which are either weak or experimental. …

With a different take on the economy, Daniel Gross, in Slate, thinks that unemployment will improve soon. Gross is here often, so we thought we should include his job comments.

…But some recent data points, and an understanding of the behavior of companies at different phases of the business cycle, suggest we’ll have job creation sooner rather than later.

Before things get better, they have to get worse more slowly. That’s already happening. After the credit meltdown, companies prepared for Armageddon by hacking jobs indiscriminately. Between November 2008 and April 2009, employers reduced payrolls by 645,000 per month. But in October, BLS reported that the U.S. economy lost 190,000 jobs, and it revised down the job loss figures for August and September. First-time unemployment claims are falling.

Other data give more reason to hope. In the third quarter, productivity—econospeak for companies doing more work with the same amount of labor—rose at a 9.5 percent annual rate. We’ve just witnessed the fastest two-quarter productivity surge since the first year of the Kennedy administration. Economists can read these omens the way Roman priests read chicken entrails. And here’s one of their explanations: Just as investors and businesspeople don’t believe things could ever go wrong at the peak of the boom, they have difficulty imagining things can get better at the trough of the bust. And so they respond to rising demand not by hiring new employees but by coaxing existing employees to work harder. But just as hamsters can run only so fast on their treadmills, there are limits to productivity growth. “If you look at economies over many centuries, you can’t grow productivity for 7 or 9 percent for more than two or three quarters,” said Lakshman Achuthan, managing director at New York-based Economic Cycle Research Institute, whose leading employment indicators are looking up. “At a certain point, people will start to collapse at work.” Should the economy expand in the fourth quarter at the same 3.5 percent annual rate it did in the third quarter—as it shows every sign of doing—companies won’t have any choice but to hire, says Michael Darda, chief economist at MKM Partners. “There’s an outside chance we could see job growth by the end of the year.” …

The Economist reports on the increase in college enrollment.

A business that jacks up its prices during a recession is usually asking to lose customers. Not so America’s colleges, which are simultaneously raising tuition fees and experiencing record levels of enrolment. The Technical College System of Georgia, for instance, whose 28 campuses teach everything from power-line maintenance to dental hygiene, has sharply raised its fees, yet the number of students is up 24% from a year earlier. Campus parking lots are so full that “we got them parking in cow pastures,” says a spokesman.

Across the country, college enrolment rates are at an all-time high. In October 41% of 18-to-24-year-olds were enrolled in either two-year colleges (which specialise in vocational training) or four-year colleges (which grant undergraduate degrees) or higher, up from 39% a year earlier. Yet tuition fees have risen by an average of 4-7%.

The economy is the most immediate culprit. The unemployment rate hit 10.2% in October, up sharply from 9.8% in September, the first time it has reached double digits since 1983. Among 16-to-24-year-olds, it was a dismal 19.1%. Faced with the worst job prospects in a generation, many young people are deciding to go to college instead. …

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