Business World

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Tim Iacono puts the November jobs report into perspective by looking back at the past two recessions. In 1991 and 2001, the first positive nonfarm payrolls number was followed by an extended decline in jobs. See the following post from The Mess That Greenspan Made.

With yesterday’s labor report showing a decline of 11,000 in nonfarm payrolls and with upward revisions of more than 150,000 to the payrolls data from prior months, some people are, understandably, thinking that the unemployment rate might soon be going down.

A natural question that some might be asking this weekend is, “Based on the experience of the last two ‘jobless recoveries’, when might the jobless rate be expected to fall”?

Well, if past is precedent, the news isn’t good.

After the last recession in 2001, nonfarm payrolls first produced a positive number in June of 2002 but, from that time on, the unemployment rate rose for a full 12 months, from 5.8 percent to a peak of 6.3 percent in 2003.

The peak in the jobless rate came at around the same time that nonfarm payrolls posted their last decline for the cycle, a loss of 42,000 in July.

Contrary to what some might believe, once nonfarm payrolls produce a positive number, they don’t just keep climbing. In fact, back in 2002 and 2003, from the time of that first plus sign in front of the payrolls number until the last minus sign one year later, there was a net decline of 506,000 jobs.

The jobs picture wasn’t much better after the 1990-1991 recession.

After the first post-recession payrolls increase in June of 1991, job growth was much steadier than after the 2001 recession but, here too, the unemployment rate continued to rise for an entire year, in this case, by almost a full percentage point from 6.9 percent to 7.8 percent.

Based on the last two recessions, we’re still more than a year away from a sustained decline in the jobless rate.

This post has been republished from Tim Iacono’s blog, The Mess That Greenspan Made.

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A paper by a think tank at the Levy Economics Institute calls for a temporary bank closure and increased government spending in order to help the economy recovery. However, at some point government spending can become counterproductive and the burden of proof should be on those who call for more spending. James Picerno from The Capital Spectator discusses this in the following blog post.

Is it time to consider more radical strategies for repairing the U.S. economy? Perhaps, although as a recent essay from the Levy Economics Institute argues, it’s also clear that the old game of trying to reflate bubbles isn’t going to work this time.

“Like the Bush administration before it, the Obama team appears to be trying to re-create the bubbly financial conditions that led to disaster,” a research paper from LEI asserts. “This tack is not likely to succeed, and it is displacing policies that might actually prevent a recurrence of the Great Depression.”

The paper continues,

In our view, most administration proposals are fundamentally misguided, since they are based on the twin presumptions that Big Banks face only a liquidity problem and that, if this problem is resolved, the economy will recover. We believe these presumptions are entirely mistaken. The Big Bank problem is insolvency, and these banks should not be saved because they form a barrier to a sustainable recovery. Given a chance, they will resurrect the bubble conditions that led to the current crisis.

What’s the solution? LEI argues that a banking “holiday” is needed. The biggest institutions are temporarily closed and the books are closely analyzed, including a careful look at cross-bank liabilities. The immediate goal is “consolidating the balance sheets” in order to “downsize the financial sector and reduce monopoly power.”

The basic motivation for these changes, according to LEI, is that borrowers can’t service their debt. But the think tank’s solution isn’t exactly novel. “A major increase in government spending is the only way to smooth the deleveraging process.”

The reasoning, the paper concludes: “It is better to spend on a much bigger scale now in order to create jobs and rekindle private sector growth. If we do that, the budget deficit will shrink and GDP will grow, while government debt- and deficit-to-GDP rates will fall.”

Even assuming that huge amounts of new spending are the intelligent choice (a debatable proposition, to say the least), the conceit here is that Congress will make intelligent decisions when it comes to directing the new monies.

Ultimately, there’s a question of whether the government, any government, can create jobs worthy of the name on a grand scale over long periods of time. One problem: the funding of such a massive public enterprise has to come from somewhere, which raises questions of whether we’re simply borrowing from Paul to pay Peter. There are three basic methods for such programs: raise taxes, borrow more, or quietly devalue the currency. Perhaps a mix of all three is coming.

Yet the burden should be on those who call for a colossal increase in government’s role at this juncture in the economic cycle. Does history suggest this is a logical path that will bear fruit? We think not, although the devil’s in the details. But as a general proposition, economic growth doesn’t flow from government mandates. Governments have some capacity for keeping disaster at bay, but that’s quite a different state of affairs than promoting growth.

We can make a case for intervention to stave off some immediate threat. But let’s not fool ourselves into thinking that economic expansion can be engineered as one more state program. The limited response (so far) of the so-called stimulus program from earlier this year suggests as much. Clearly, many disagree, although the “solution” in some corners is always: spend more. If $800 billion wasn’t enough, $1.6 trillion would have been. Ah, if it was only that easy.

And so we ask a simple question: What does history say? To be precise, what does history say about government spending on promoting growth beyond some immediate crisis?

By all means, we need to encourage economic expansion by all reasonable methods and use government levers in a prudent fashion. But there are limits to everything, just as public spending at some point becomes counterproductive. And so let’s not kid ourselves: we’re looking at a period of subpar growth on a number of levels, and the brilliant ideas cooked up in, say, the U.S. Senate or the Department of Energy probably can’t save us from this fate.

The only thing worse than an unsatisfactory recovery is one that’s also laden with an even higher level of excess debt and questionable expansions of the public sector.

This post has been republished from James Picerno’s blog, The Capital Spectator.

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