Tuesday, June 11, 2013 - Jobs, Jobs, Jobs

Jobs, Jobs, Jobs

by Sinclair Noe

DOW – 116 = 15,122
SPX – 16 = 1626
NAS – 36 = 3436
10 YR YLD - .02 = 2.19%
OIL - .86 = 94.91
GOLD – 8.80 = 1379.20
SILV - .27 = 21.78

Remember the jobs report on Friday? It seems like a long time ago, so to refresh your memory, the economy added 175,000 jobs in May and the unemployment rate inched up to 7.6%. This is not good. You might think that this is one of the more important issues facing the country. In fact you probably do think it's important. A Gallup poll last month showed 43% said the economy or jobs was the most important problem in the country. And then you look at what's going on in Washington and there doesn't seem to be anything happening.

The Federal Reserve has addressed the issue, or at least they have finally acknowledged that maximum employment is one of their mandates, or they have at least targeted 6.5% unemployment as a goal, if not a mandate, even if it isn't maximum employment. And they have buried interest rates in a shallow grave and they have opened their printing press to buy up bonds and mortgage backed securities, and they have been frightened by their own shadow, and so now they think maybe they'll taper, or not, or maybe they will taper, even though they are a long, long, long way from maximum employment.

Maybe the Fed is just acknowledging they aren't very good at achieving maximum employment with monetary policy; that they are more likely to do harm than create jobs. What about fiscal policy? Good question. Alan Blinder, the former vice-chairman of the Federal Reserve, raised this point in an article in the Murdoch Street Journal today. Blinder points out that fiscal policy is not just complacent about jobs but has been actively destroying jobs:

Private employment comprises about five-sixths of total employment in the U.S. while government employment is one-sixth. Since the economy as a whole created 5.41 million net new jobs over the past three years, you might expect that about 4.51 million of them were in the private sector and about 900,000 were in the public sector. In fact, the private sector created 6.56 million net new jobs over the past three years while about 1.14 million net government jobs were eliminated via layoffs and spending cutbacks.

Never before in postwar history has government employment declined during a recovery. Compared with historic norms, we're down over two million government jobs.

A second calculation reaches more or less the same conclusion. Real GDP growth has averaged a paltry 2% per annum over the past three years. But growth of GDP excluding government purchases—the things governments buy, including hiring workers—has averaged 3%. If government purchases had increased enough to leave overall GDP growth at 3% instead of 2%, history suggests that an additional three million to four million jobs would have been created. 

Blinder suggests tax breaks for companies to hire more people. Not exactly a revolutionary approach to the problem but an idea that should find bipartisan support, except that it doesn't. In fact, Blinder's fiscal ideas are a bit stale, which he seems to acknowledge, with the caveat that the fiscal cupboard is not bare, and something should be done, and not doing anything is bad.

Why not the Republican idea of hiking taxes to create jobs? Like Reagan signing the lame duck 1982 bill in January 1983 that doubled the gas tax and increased spending to create jobs fixing the roads and bridges.

And then I read that Kevin Hassert, a senior economic adviser to the Bush, McCain, and Romney campaigns. Hassert has suggested direct government employment with stimulus dollars. Hassert says we could have hired some 23 million people with the stimulus money. Of course, we would also need work-sharing programs, wage subsidies, and privatized training programs. He wasn't talking about hiring people for government jobs, no building bridges to nowhere, or even re-building bridges that are falling down. Nope, his idea is to pay for people to be hired by private business for about a year, with the hope that it will turn into a permanent job, and we won't have long-term unemployed who become permanently unemployable. And if there are no job openings in the private sector, then he proposes we invent private firms to find the long-term unemployed and get them a job.

Meanwhile, Bruce Bartlett, a senior policy advisor to Reagan and the first Bush writes that finacialization might be part of the problem. The idea here is that the growth of the financial sector of the economy has been siphoning off blocks of the gross domestic product, resulting in income inequality and slow growth. Financial services, as a share of GDP rose to 8.3 percent in 2006 from 2.8 percent in 1950 and 4.9 percent in 1980.  Compensation in the financial services industry was comparable to that in other industries until 1980, but since then, it has increased sharply and those working in financial services now make 70 percent more on average.

The impact of finance on economic growth is very positive in the early stages of development, but beyond a certain point it becomes negative. Investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.

The idea here is that the financial sector may provide some lubricant for the wheels of commerce, but once commerce gets up to speed, the financial sector does nothing more than collect economic rents, something for nothing, and worse than a tax.

Bartlett suggests the financial sector also leeches growth from other sectors by attracting the best and brightest workers, depriving other sectors of their skills. And as more income goes into financial assets, less is contributed to labor. The financial sector creates wealth, but the bulk of it is going to those people at the very top of the income scale in the financial sector. The share of US income going to the average worker, meanwhile, has been shrinking steadily for the past 30 years. And this is a global problem. The International Labour Organization, a UN agency puts most of the blame for workers' diminishing share of income on financialization, which the agency estimates accounts for 46 percent of the global decline.

The ILO says "These results open up the possibility that the impact of finance may have been underestimated in many of the previous studies, and suggest that overlooking the role of financial markets may have serious implications for our understanding of the causes of labour share trends."

As labor's share falls, this results in rising income inequality, which results in slow growth.

And there was basically no mention of the giant risk factor of the financial sector; remember the idea that the global financial system would melt down without a bailout.

There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability, and it is possible for financial activity to extract rents from the real economy rather than to deliver economy value. Financial innovation and deepening may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted. In other words, we haven't seen any real life, actual, honest, tangible benefits from financialization.

And then the conclusion: It’s not yet clear what public policies are appropriate to deal with the phenomenon of financialization. The important thing at this point is to be aware of it, which does not yet appear to be the case in Washington.

And again, that's not quite right. There are public policies they have been studied, they have been tested, and they are far better than the negative consequences of complacency and inaction. (Check this) There are monetary policies that the Federal Reserve has not yet utilized; tools in their toolbox that gather dust. The Fed has already acknowledged that the too big to fail banks are too big; so, why not make them smaller? The Fed has the regulatory authority to do this. The Fed knows that financialization has negative consequences. They don't do what they must.

If the goal is smaller, less complex banks, less dangerous banks, why not just mandate smaller, less complex banks? Why beat around the bush with capital requirements and minimum long-term debt levels? Those tools might be appropriate if you think huge, complex banks should exist but you want to make them safer. But if you’ve already concluded that banks need to be smaller and less complex, then they’re just a waste of time.

And the fiscal policy is likely to get worse before it gets better, and part of the reason is that we have been adding jobs to the economy for 3-and-a-half years. Just not enough; we're not losing jobs; we're just muddling along; so there is a certain sense of complacency. The politicians should be running around like their hair is on fire; they should be running and screaming about jobs, jobs, and more jobs. We don't seem to have a sense of urgency.

And so the financialization of America continues and the financial sector grows bigger and bigger. The problem with the game of Monopoly is that someone eventually holds all the money and all the properties, and of course, when that happens, the game is over.