Radio commentary, January 14, 2010

I’m going to keep the opening comments pretty short today. Though some of you have already heard my analysis of the December employment report, the WBAI audience hasn’t. So a quick reprise of that. In a phrase: quite disappointing. It looked for a bit like the labor market might finally be turning around, but those hopes were set back, though not thoroughly dashed, by the news that employers shed 85,000 jobs last month. Some of that might have been the result of terrible weather, even by the standards of Decembers. But there was little good news buried in the details of the report. And apparently many people have been giving up on the job search—a rational decision, given that employers just aren’t hiring. But dropping out means that they’re not counted as officially unemployed, so even the stability in the jobless rate isn’t encouraging on closer examination.

Worse, we learned on Wednesday that job losses last year were even worse than we knew. The monthly job reports are based on a survey of employers—a very large survey of around 300,000 establishments. (Click here for the FAQ on the survey.) But like all surveys based on subsamples of a large universe, this one’s not perfect, and it’s especially imperfect at times of rapid change or changes in trend. As a check on that, the Bureau of Labor Statistics periodically compares the monthly counts with the almost-complete coverage of the employment universe provided by the unemployment insurance records system. They do that quarterly, seven months after the end of every quarter, and also yearly, when they perform what’s called a benchmark revision on the employment numbers. I must underscore that there’s nothing sinister about these revisions—it’s just really hard to count something as big as the U.S. workforce with perfect accuracy.

Last October, the BLS told us that when they do the benchmark revision for 2009, they’ll mark down total employment by 824,000—a very large number as these things go. Specifically, this downward revision will be applied to the employment level for March 2009 at the beginning of next month, with the next employment release. But in addition to that annual exercise, they also report quarterly on this fuller picture. So we’ve just learned that job losses in the second quarter were even worse than we imagined—as of June, there were about 1.3 million fewer jobs than we knew, a half million more than the benchmark revision. That takes the number of jobs lost in this recession up to a stunning 8.5 million. This is nothing less than a social emergency—yet Washington is basically just diddling about it.

And on Thursday morning, we learned that retail sales declined modestly in December, surprising most analysts, who’d expected a modest gain. (These figures are seasonally adjusted, meaning that the normal surge around Christmas is removed in order to isolate underlying trends.) The October and November numbers were surprisingly strong. What does this all mean? I think it means that the economy—I’m going to personalize the abstraction for a moment, please forgive me—is trying to find its footing. But it’s still wounded and wobbly, and likely to look punch drunk for some time to come.

I’ve just been comparing the performance of the U.S. economy to fifteen earlier financial crisis-induced recessions, as identified by the IMF. While nothing is ever perfect in the social sciences, the U.S. economy does seem to be following the script pretty closely. The hit to GDP so far is pretty much in line with the averages—though there were some countries that did considerably better, and some that did considerably worse, than what we’ve been through. And employment is also following the script pretty well: steep, sustained declines giving way to a leveling out. But the script also suggests that this flatlining phase could last for a year or more. So the unemployment rate is likely to stay quite high, and economic life to feel quite crappy, for most of us throughout this year and maybe into next as well.

Finally, some Wall Street hawks are getting nervous about government debt and inflation—and some people on the left are even taking these worries seriously. That is, the worrywarts are afraid that all the borrowing the U.S. and other governments have been doing is going to lead to some sort of sovereign debt crisis among the richer countries—and that all the fiscal and monetary stimulus they’ve applied to keep everything from going down the drain is going to cause a rampant inflation. Both fears are wildly misplaced. There’s so much slack in the economy—unemployed people and physical resources—that it’s ludicrous to worry about price pressures. And the history of financial crises is one of declining, not rising, inflation. Worries about government debt are equally delusional. Yes, it’s a problem, and yes, servicing that debt will crowd out public pursuits more noble than interest payments, but the rise in public sector debt is a compensation for the shrinkage in private sector debt. Households and businesses have been pulling back—out of both prudence and necessity—and if it weren’t for the offsetting rise in public sector debt, we’d be heading down a deflationary vortex. And when the worst of all this is passed, assuming it will pass, then we can tax the rich to pay down the debt. Yeah, fanciful, but the money’s there.

[Note: the final point about dealing with the debt is explored in Left Business Observer #124, just out. To subscribe, visit: LBO subscription info. Can’t give everything away for free, after all.]

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