Time to Panic (II)

Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month.  In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House.  This isn’t just a “bump,” but a fully-fledged New York City style pot hole.
First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations.  In addition the prior two month payroll increases were revised down by -44,000 overall.  That’s weak – but not terrible.

Dig a bit deeper into the data and it looks absolutely awful:  The household measure of employment fell by -445,000.  Okay, it’s a noisy number. But, as Frank Veneroso has pointed out to me in an email correspondence, this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three.
But it gets worse:  The work week was down one tenth.  Overtime was down one tenth.  The labor participation rate at 64.1% was the lowest since 1984.  The broad U6 unemployment rate rose from 15.8% to 16.2%.  In other words, as Frank suggested to me this morning, “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”

Are there seasonal factors which could explain this?  Perhaps, especially in the gap between the BLS and ADP payroll numbers.  But as Philippa Dunne of “The Liscio Report” suggested:

After the release, some bulls turned to that old reliable excuse – bad seasonals. According to one analysis making the rounds, had the BLS used last year’s factor – computed, of course, using exactly the same concurrent technique as this year’s factor – the gain would have been 221,000! (Whoever did this made a mistake by comparing the NSA and SA levels for the two months–you have to compare the over-the-month changes.) Still, if you’re going to play this game, you should be consistent, and apply last year’s seasonals to several months, not just one. If you do that, May’s gain of 25,000 would turn into a loss of 19,000, and April’s gain would be a mere 73,000. In any case, why should you do that? The seasonals are recomputed every month based on recent experience and calendar quirks, and should be more aggressive in a recovery. (Hope we won’t be using the trend set in the depth of the recession as the bar going forward.) Also, there is no adjustment to the headline number – the sectors are adjusted separately (96 different industries at the 3-digit NAICS level, to be precise) and the total is the sum of those components. The whole argument is bogus.

Many of us who contribute to this blog have been concerned about these trends for months.  We expressed concern that the prevailing deficit hysteria and corresponding cutbacks in government spending (based on a wholly misconceived notion of “national solvency” or “fiscal sustainability” – whatever that means), would engender precisely the kinds of economic conditions that we’re seeing today.  Unfortunately, the President, his ineffectual Treasury Secretary and Congress all remain in thrall of Wall Street Pollyannas and mainstream economists, who have continued to predict significantly above trend economic growth quarter after quarter after quarter.
Yet quarter after quarter after quarter growth has come in less than they expected.  Why?   Because of this persistent tendency to diminish the importance of fiscal policy and an irrational belief in the efficacy of gimmicks such as QE2.  The reality is much more grim:  Growth  has come in at less than a 2% rate in the first and second quarters of this year,  and instead of responding to the real crisis of unemployment, our policy makers remain fixated on deficit reduction, and cutbacks in “unsustainable” entitlement programs, in effect withdrawing even more income out of an economy steadily heading back toward the precipice of recession.
And with a deal on the debt ceiling likely to include yet more cuts in government spending, and a major squeeze on real consumer incomes from commodity prices buoyed by speculation to the point of manipulation, the Administration inexplicably continues to forecast, yet again, a resumption of significant growth, because its fundraising buddies on Wall Street continue to reassure them that this will be the case.

Not if we keep proceeding along the path we’re going down.  Further declines a la Europe (where fiscal austerity remains fully in swing), gives some clue of where we are heading.  Spanish retail sales have been a disaster.
They were down 6.6% versus a year ago.  That is much worse than the already horrible 4.4% decline during the prior five months.  Spain’s unemployment rate is 21%.  Greece, which has just implemented yet another round of cuts in government spending, has an unemployment rate above 16% and trending higher.  And Italy is finally coming up in the headlines; per-capita income in that country has grown 0% over the last decade.  Today the Bank of France put out their monthly business survey: 

“Industrial activity declined in June due to the weaker performance of the automotive, equipment manufacturing and other industrial goods sectors. The capacity utilisation rate fell. Order books were still considered to be above normal levels but appear to be in a less favourable position than in past months.” 

That’s the core, not just the periphery.  It’s no longer just a problem of the “Mediterranean profligates.”



The collective embrace of fiscal austerity has gone beyond perverse.  It’s as if Josef Mengele was reborn as an economist, working on some weird new social experiment to inflict the maximum amount of damage on the maximum amount of people.  It’s a sick variation on that old joke:
Patient: “Doctor, it hurts when I do this.”
Doctor: “Then keep doing it.”
Twenty eight developed governments have moved to get the oil price down to save the global economic recovery.  Professional investors, speculators and fellow traveler manipulators have given these governments the finger over the last week and a half by bidding the oil price up.  Given this report and the terrible front end economic data coming out of Europe lately, these governments had better find a way to keep food and fuel prices from taking off once again or its Great Recession Part II right around the corner.
But, hey, what’s the worry?  Just a bump in the road!  Let’s cut some more government spending (Social Security looks to be the next target) because of course the realization that we are “being responsible” about no longer “living beyond our means” will do wonders to restore confidence and get us out of the ditch in which 95% of the world finds itself.  Or so our President will no doubt be telling us if and when he “celebrates” a deal on the debt ceiling.   In reality, the only people who ought to be celebrating are the GOP hopefuls in the upcoming Presidential election, one of whom looks increasingly likely to turn Barack Obama into a one-term President.

10 responses to “Time to Panic (II)

  1. The bump in the road was last month. This month it's "headwinds". It is important not to read too much into any one monthly metaphor.

  2. The objective should never be to balance the budget as a currency issuer. The objective should always be to optimize the budget. Fiscal optimization at any level of public spending requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It is a digital resource – a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries. For those of you interested I’ve outlined a laymen’s explanation here – DollarMonopoly.com Well-intended policymakers are only as good as their economic advisers. Economists are giving the wrong advice to policymakers because they misunderstand monetary operations.

  3. Bill,It's always as if they want the citizenry to revolt. I don't get it.

  4. Craig, does your blog ever discuss the need for taxes in a Monetarily Sovereign nation? Warren (Mosler) and Randy (Wray) used to say federal taxes were necessary to create demand for money. But I reminded them there are plenty of state and local taxes to fulfill that purpose, and they now agree.So, why do you feel taxes are necessary?Rodger Malcolm Mitchell

  5. RMM, I think there are three reasons for taxes. The first is to create demand for currency, and you're right that the various States can do that as ling as they must use Federal currency. The second is to reduce demand to stop inflation, if that should become necessary. I think it is hard enough, politically, to get the Congress to do that. It would be completely impossible to get the 50 State legislatures to do that when it was necessary. And third, I think federal taxes are needed for leveling economic inequality, at least somewhat. The level of economic inequality is greater than it has been since 1929. This level now threatens our democracy itself. We have to reduce this inequality. Taxation is necessary to do that.

  6. Joe,Agreed, fed taxes not necessary for demand.Taxing to stop inflation would work, but for three problems: 1. It's way too slow (Imagine Congress deciding which taxes to raise. Also, by the time any tax is collected, the situation would have changed.)2. It's not incrementally controllable — like fixing a watch with a sledge hammer. (If inflation were 4%, and you wanted it to be 3%, how much would you raise the gasoline tax? How much would you raise the each income tax level? How would you adjust the tax code?)3. Reductions in money growth cause recessions and depressions. (See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/)Rather than cutting the supply of money, increase the demand for money by increasing interest rates, a system the Fed has used for many years. It's fast, incremental and doesn't cause recessions and depressions.Somewhat, partly, almost agree re. economic equality. However, rather than trying to achieve equality by tearing down the rich (which never works), how about bringing up the poor with stronger social programs, reduced low-end taxes, fed support for education, etc.?Rodger Malcolm Mitchell

  7. Salutations,I apologize in advance if this is off topic, but I'm just wondering what you guys think of taxing economic rent or the "unearned increment"?Regards,William.

  8. The Fed taxes are necessary to give value to our treasury bonds. It's hard for even our government to borrow money if all they can promise is "we'll print it up for you", don't you think? So, they have the taxpayer guarantee repayment.

  9. Bosscauser, why would it be necessary for the gov't to sell all their debt, instead of just owing it to the CB?

  10. Also, RMM, the interest rate is a blunt instrument itself. It hits different groups (demographic, geographic) differently with no regard to social justice. I for one cannot accept that. Also a very variable interest rate causes uncertainty in the markets, if i'm not completely off.