Posts Tagged ‘economy’

One major reason the economy has yet to gain momentum is the sluggishness of the labor market. Not only are many workers still unemployed, but many others are employed below their capacity either in the type of job or the number of hours.

In a New York Times Economix blog post yesterday, Jared Bernstein of the Center on Budget and Policy Priorities in Washington, DC, makes some excellent points about the anemic progress of job creation in this economy, and how harmful it is not only to overall economic health, but also to the personal economy, if you will, of anyone who isn’t rich. One of his main points is that because most of depend on our jobs rather than our investment portfolios for economic sustenance, the fact that employment is still on a slow track is a huge issue.

There are a couple of problems that impact the economy and individuals when job creation is weak, regardless of how well the rest of the economy is doing. Here’s the cliff-notes version:

  • Millions still can’t find a job: Despite the fact that the unemployment rate has fallen significantly since it’s recession high, there are 12 million unemployed workers, and more than four million of those have been out of work for more than six months.
  • More millions are underemployed: Again, as noted above, millions of workers are underemployed below their capacity — college grads working in jobs that don’t require a degree, for example as well as those working part time who would rather work full time.
  • Slow wage growth: Because of the slack in the labor market, as the economists would say, there is no pressure on employers to raise wages. And while the “official” inflation rate may be low, costs are rising for the average family in the grocery store, at the gas pump and in bills related to the home.

Because we are very far away from the full employment of the 1990s, those at the bottom of the wage scale are suffering the most. When there are lots of unemployed and low demand, workers at the higher end of the food chain — those aforementioned college graduates, for example — move down the food chain and displace other workers, who are then forced to move down themselves.

So college graduates are filling jobs previously filled by high school grads, high school grads are filling jobs that non-high school grads had, and inevitably someone gets pushed out of the labor market, usually the least skilled or the ones who have been unemployed the longest, who become less skilled as their skills degrade from lack of employment.

So while it’s a good thing that other segments of the economy are perking up in and of itself and because those trends will likely spill over into employment, the economy is not, by any means, in a sustainable growth mode. It may be closer to getting there, but until the employment problem is solved or at least shows ongoing signs of significant improvement — and that means more than the creation of 100,000 or 150,000 a month — we aren’t out of the woods yet.

As a deficit reduction and economic policy, austerity never made any sense. It’s ridiculous to think that by cutting budgets in a time of economic recession, you can shrink budget deficits in the future, ultimately increasing economic growth. The policy defied common sense; unfortunately, the powers-that-be fully embraced it, to the misery of countless millions in Europe and here in the U.S. I’ve written about it previously, in a post two years ago entitled Austerity = Suffering and last year, Greece brutalized by more austerity.

Despite the evidence, these powers-that-be have continued to stubbornly cling to this failed policy, imposing it on more countries (Cyprus anyone?), sharing the misery with countless millions more. And finally, concrete evidence has emerged that points out serious flaws in the economic research that underpinned austerity, driving what one hopes is a final stake in the heart of this nonsensical and destructive policy.

As pointed out yesterday in the Roosevelt Institute’s blog The Next New Deal by Mike Konczal, known as @Rortybomb on Twitter, original austerity research basically twisted the facts using selective data and unconventional weightings to reach a flawed conclusion. Rather than forcing economic growth downward, higher budget deficits (for countries carrying a debt-to-GDP ratio of more than 90 percent) produce an average 2.2 percent GDP rate not the .1 percent cited in the original research.

As Konczal notes, “The debt needs to be thought of as a response to the contingent circumstances we find ourselves in, mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are.” Exactly! When an economy is on it’s knees, stimulus spending, even when it creates significantly higher deficits, is needed to bring it to it’s feet again. Then, once the economy has recovered, deficit reduction efforts, can, and should resume. And when they do, they will be more productive and effective, because they will be in the context of a healthy economy, which will contribute the efforts. See the Clinton years.

By depriving an economy of stimulus during hard economic times, it is doomed to exist in a sub-basement of economic recession, if not depression (see Ireland, for example) that will actually increase deficits. The austerity mindset reacts to these higher deficits with even more austerity, creating a vicious cycle which makes it incredibly difficult for an economy to gain any positive traction and causing untold suffering to millions who lose their jobs and are forced to live on the margins.

Beyond the substantiative problems of this research, Matt O’Brien, aka Obsolete Dogma on Twitter, in an article “The Great Debt Delusion: How Math Keeps Proving Austerity Wrong” notes that what is equally astonishing is how such a “shoddy” piece of research gained such a following in public policy and political circles. It’s depressing that so much misery has been inflicted on so many people based on a misguided, flimsy policy.

The question is whether these revelations will actually do anything to dissuade those who pursue them with so much vigor. I’m guessing not, which means it is the responsibility of the electorate here and in Europe to show them the door.

With the stock market closing in on new highs, there are legitimate questions about the market being overbought in that it seems to be disconnected with economic fundamentals in the U.S. and overseas. On the heels of that, PIMCO’s Bill Gross is raising new questions about valuations in the credit markets, which he calls “somewhat exuberantly” priced.

First, the stock market: while there is certainly cause for optimism for the growth prospects for the U.S. economy this year versus the past couple of years, optimism is just that. True, housing markets are on the rebound, the job market is inching forward and consumer and business confidence is decent. OTOH, the upcoming sequestration and debt ceiling dramas (the sequester on the table now and the debt ceiling again in August) could potentially trim economic growth and dampen consumer confidence and events in Europe aren’t anything to write home about. Most EU economies are in active recession, even “official” unemployment numbers are alarming and voters are actively rebelling against austerity (see Italian elections).

I honestly don’t see where all this optimism is coming from and what is driving the stock markets to new heights, outside of the fact that the Fed’s low interest rate policies are driving investors into risk assets and overt speculation.

In terms of the bond markets, as interest rates have fallen and stayed at rock bottom lows during the past several years, various sectors have had their time in the sun, most recently, as Gross states, corporate credit and high yield. Before that Treasuries were on fire. He views the bond market at a six on a scale of one to 10 in terms of overvaluation.

The real shadow over the bond markets is the prospect of higher interest rates and inflation. Various pundits have been predicting inflation, followed by higher rates, for years but it hasn’t happened yet. There does seem to be more incipient inflation in the economy this year than in recent years and any inflation spike that is extended could force the Fed to raise interest rates sooner than expected.

All in all, both U.S. stock and bond markets seem to be in frothy territory, where asset prices aren’t supported by fundamentals. Time to be wary…

Until today, my answer has been unequivocally NOT to blog. I didn’t feel passionately enough about any one topic to commit to blogging week in and week out or day in and day out. Seemed like way too much work for way too little reward.

It’s a paradox: I write for money, not for fun, but if I’m gonna blog, it’s got to be about issues that tear me apart; stuff that makes me want to pound my desk with my fist; argue and shout about enough to matter, at least to me. This blog is for me, my platform, in a sense, to opine about the issues that mean something to me, to take what I’m tweeting about to another level beyond 140 characters per post.

So, every so often (could be daily, couple of times a week or weekly, not sure right now), I’ll be writing about whatever is going on in the world that strikes my interest, including economics, the housing market, currency issues, politics, the Red Sox, Green Day, Wall Street, the markets, investing, employment, economic inequity, Osama Bin Laden or #OMB, #legendofjedlowrie (nach), social networking and revolution in the Mid-East.

And because I spent a lot of money on an expensive accounting education that I’m not using much, I’ll post about accounting standards too, because where that goes has an impact on how investors understand companies and their operations, which is critical in our economy. And taxes, because I got an A in that class.

That’s just about enough, but here’s some food for thought in the form of some links before I close:

  • You Call that Tough? Joe Nocera of the New York Times calls out the government for not initiating nearly enough criminal prosecutions of bad banking behavior. Right on the money; such prosecutions are hard to win, but necessary to try to show both bankers and the world that reckless, criminal behavior should be at least called out, if not punished criminally.
  • When Benefits Bite Back Think that you can rely on you corporate benefits department to be straight with you about your benefits? Maybe not. The Supreme Court is hearing a case about whether employees and former employees can justly rely on representations made by corporate benefits departments both in writing and verbally. It’s likely that the corporations will win, in which case you better take out your magnifying glass and hire a lawyer to interpret your plan benefit document.
  • Red Sox Can’t Afford to Give Games Away Duh. The continuing debate over why the team that was supposed to be the best in the AL and the entire game in the pre-season can’t get it together when it matters.
  • The Breakup of the Euro Area An oldie but goodie by dollar/currency/econ guru Barry Eichengreen about why breaking up the Euro would/will be much harder than it seems. Tip to @cate_long
If you’re on twitter, and want to follow my ramblings there, I’m @lecreative