Which is more important? Jobs or keeping the federal deficit down?

The Media Consortium has posted an excellent post at OpenLeft. Consider this:

...take a look at Friday's jobs report. As Tim Fernholz notes for The American Prospect, this report was the most disappointing piece of economic news in months. While the economy gained 431,000 new jobs during the month, 411,000 of them were temporary hires by the U.S. Census, meaning the private sector is not able to support much new hiring.

There's a critical lesson there: The only serious engine of job growth in the month of May was the federal government. Absent government hiring, the economy is not improving at all. There is an almost bottomless supply of critical social needs that require work right now, but no private-sector momentum to meet those needs.

The BP oil catastrophe should underscore how important new, green energy is to the U.S. economy-yet U.S. efforts to develop green energy solutions have fallen far behind those of China and other industrial powerhouse nations. Major federal investment into the research and implementation of green energy would be good for our environment and good for our economy."

The only strength in the American economy is federal spending. It is maintaining some employment where the private economy simply cannot.

Why does this matter? The Great Depression II was limited to merely the Great Recession in 2009 by this federal deficit spending. Right now is too damned soon to stop deficit spending that maintains jobs!!

Is deficit spending inherently bad?

Should a family ever borrow money to buy a house? If they can't, then available housing drops throughout the economy and so do jobs. but housing itself builds and protects families so that the children can grow up to join and expand the economy. It's investment spending both for the families and for the economy.

That contrasts with families that gamble away their income and have nothing to show for it, or economies that borrow money to go to war and have nothing to show for it. Some deficits are good, some are bad. Spending to protect jobs is inherently good spending, because ultimately the borrowed money can be repaid from the increased work performed by the economy overall.

The Employment Recession is the worst since the 30's and not improving

If you don't read Calculated Risk regularly, you should. This is from this morning.

Here is a graph with an estimate of the impact of the preliminary estimate of the annual benchmark revision. (ht John)

Click on graph for larger image.

The dashed line is an estimate of the impact of the large benchmark revision (824 thousand more jobs lost).

The graph compares the job losses from the start of the employment recession in percentage terms (as opposed to the number of jobs lost).

Instead of 7.2 million net jobs lost since December 2007, the preliminary benchmark estimate suggests the U.S. has lost over 8.0 million net jobs during that period.

But it's not just Calculated Risk. The following is from yesterday's Paul Krugman editorial.

Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.

Yes, the Federal Reserve and the Obama administration have pulled us “back from the brink” — the title of a new paper by Christina Romer, who leads the Council of Economic Advisers. She argues convincingly that expansionary policy saved us from a possible replay of the Great Depression.

But while not having another depression is a good thing, all indications are that unless the government does much more than is currently planned to help the economy recover, the job market — a market in which there are currently six times as many people seeking work as there are jobs on offer — will remain terrible for years to come.

Indeed, the administration’s own economic projection — a projection that takes into account the extra jobs the administration says its policies will create — is that the unemployment rate, which was below 5 percent just two years ago, will average 9.8 percent in 2010, 8.6 percent in 2011, and 7.7 percent in 2012.

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. Moreover, unemployment that remains that high, that long, will cast long shadows over America’s future.

Krugman goes on to point to a recent study that shows that after prolonged periods of greater than normal unemployment, the economy itself has a much harder time recovering. Then he adds:

Wait. It gets worse. A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. “The path of output tends to be depressed substantially and persistently following banking crises.”

The same report, however, suggests that this isn’t inevitable: “We find that a stronger short-term fiscal policy response” — by which they mean a temporary increase in government spending — “is significantly associated with smaller medium-term output losses.”

So the problem is that the stimulus has been inadequate and that while it has stopped us from sliding into a repeat of the Great Depression of the 1930's, it is not enough to keep our economy from being crippled by the financial recession for many years, even for decades.

Why don't we hear just how "iffy" the economy is? The news media and the politicians can't sell bad news. If they try they'll quickly be replaced by alternatives that say when most of the public wants to hear.

The news media cannot sell advertisers to buy ads on shows or in papers that report mostly bad news. So the business news the public gets is all about "Economic Happy Talk" or as we in the Army used to call it, "Happy, Happy Bullshit." What passes for economic news is primarily salesmen standing up and trying to sell the financial products.

The politicians in charge have exactly the same problem. If they provide realistic but negative evaluations of the economy to the public they will quickly be replaced by someone who promises a quick turnaround. So we can[t expect Ben Bernanke or Tim Geithner to level with the public.

Then there is the "Loyal" Opposition. They have committed themselves to a strategy of total obstructionism. This is a non-violent method of making the nation ungovernable unless they are called in to govern. (Terrorism is the violent form of the same strategy. The anti-abortion groups, the more radical militia and the Neo-Nazi groups are waiting in the wings to conduct this strategy.) But they are after power. Economics is secondary to their desire to gain political power.

So there it is. The American economy is in the worst shape it has been since the 1930's because of macroeconomic mismanagement by the conservative government and the right-wing politicians. Because of political constraints the government cannot take many of the actions needed to prevent the economic situation from continuing to get worse, or even to tell the public that recovery will not automatically start in the near future. And the right-wing and libertarian politicians who have created the mess will not let the government actively fix the mess they created because are waiting for the economic failure that will return them to power. This will allow them to loot the economy for their own benefit.

Forget the stock market. It is being propped up by government stimulus money. Just watch the unemployment rate to see what is really happening. And don't feel to happy about a one or two month improvement. Until workers start taking home more money the consumption sector will not improve on its own, and until that happens, the economy will remain on government life support or it will be falling.

Likely effect of disastrous employment figures

Bonddad referred me over to Mish's analysis of the really, really bad employment report. His analysis is:

Two days ago in Mass Layoffs Soar I proposed "One of these months there is going to be a massive "unexpected" downward jobs revision. More than likely that will be used as an excuse by the Fed to cut (or further cut) rates. It won't help."

So Soon?

The August BLS Employment Situation Report shows that "One of these months" has already arrived.

Nonfarm payroll employment was essentially unchanged (-4,000) in August, and the unemployment rate remained at 4.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 3 months, total payroll employment changes have averaged 44,000 per month and private sector employment changes have averaged 72,000 per month (as revised). In August, employment in manufacturing, construction, and local government education declined, while job growth continued in health care and food services.

Participation Rate Sinks to 65.8%

How does the BLS hold the unemployment rate low with such pathetic numbers? The answer is of course the participation rate.

"In August, the civilian labor force edged down to 152.9 million, and the labor force participation rate decreased to 65.8 percent. The declines were largely due to a drop in labor force participation among teenagers; their participation rate fell to 39.7 percent."

Well participation rates can't go negative so this source of nonsense will eventually have to stop.

Mish is saying that the employment figures were only as positive as they were because the Bureau of Labor Statistics (BLS) is fudging the figures like mad. Or, as he states it, there is a great deal of BLS "moonbat activity" designed to make the already bad looking numbers from showing the true dimensions of the disaster that has occurred. If economic numbers in tables don't cause your eyes to glaze over I strongly suggest that you go read his report in full.

From the macroeconomic point of view, these numbers point to the coming problem in the economy.

Gross Domestic Product (GDP) = Consumption (C) + Investment (I) + Government Expenditures (G). [GDP=C+I+G)]

But since Bush took office, "I" and "G" have not become significantly larger. Think about it - for the tax cuts to have kept the economy working, "I" would have had to increase. it didn't. What has kept the economy from going into recession has been the continued consumer ("C") spending.

But real wages have not increased since the Clinton administration. Consumption spending ("C") has been the main cause of any increase in GDP since Bush entered office, and that has been manipulated to prevent recessions from causing Bush to be defeated for reelection in 2004.

As I wrote earlier, Federal Reserve Chairman Alan Greenspan wanted Bush reelected and the Republicans to remain in power. He did it by lowering interest rates and by failing to regulate the quality of mortgage loans that banks were issuing.

The resulting housing bubble kept both employment its resulting consumption spending artificially high. But the economy needed to go into recession early in Bush's first term, so the efforts to artificially pump up the economy required more and more effort as time went on. Or to say it another way, the housing bubble was created to artificially pump up the economy for political purposes, but the longer the bubble was permitted to last, the more damage it did to the economy.

Greenspan started slowly rising the interest rate in February 2005 to try to slowly correct the damage he had done, but it didn't work.

A housing bubble takes a long time to demonstrate its damage. I'm sure that the mortgage companies could see it in 2006, but it did not become publicly known until the largest mortgage company in the nation (Countrywide) announced that it was having problems in early 2007. The damage of the bubble has been slowly surfacing since then, The credit crisis from this Summer are just the latest effects. Countrywide has announced that it expects a 25% drop in mortgage lending next year, and is now laying off 20% of its workforce (a number that has not yet made it into the BLS statistics.)

There are more economic problems to come. The only thing no one knows is how severe they will get. Recession? More likely now than not.

One thing about this, though, is that the President usually gets credit or blame for the status of the economy because he was in office when it happened, no matter what he did. In this case, however, George Bush and the Republicans are directly responsible, and demonstrably so.

The Bush administration has been faulted for politicizing a lot of things that should not be politicized so that they can keep Republicans in power. Attorney General Alberto Gonzales has just resigned over the scandal of politicizing federal Justice. Michale Brown was fired as head of FEMA because FEMA had been made a dumping ground for unqualified political activists and the disaster in New Orleans proved it. Here we can see how the same process of politicizing everything the government touches has also effected how the economy is managed by the Federal Reserve.

There is nothing in America (or Iraq) that the Republicans and the Bush administration have touched that is not the worse for it. Our next recession (among many other disasters) has been worsened by our Republican party.

Remember that when you go to vote next. That vote is the only protection we, the average American people, have from the Republicans.

What's wrong with the economy?

Kevin Drum has another of his excellent charts.

Everything in the economy (except corporate profits) is running a lot lower than has been true in past average economic recoveries. If real wages have not increased in five years, while employment, equipment and software investment and residential investment are all running well below average, where are the corporate profits going? The profits are effectively skimming the renewal capabilities out of the economy and replacing very little.

Any economy is demand-oriented. For the overall economy to grow, demand has to grow. But demand is two-thirds consumer demand and a quarter investment demand. If employment is not increasing significantly and wages are not increasing, then there is no increase in consumer demand. Without increasing consumer demand, why invest in growing a business? The only thing remaining is government spending, which is no more than 7% of the economic demand and as we all know is being increased but is based on borrowed money.

There doesn't seem to be much room for economic growth with that model working.