WHY ARE WE IN A JOBLESS RECOVERY?

That question keeps being asked by politicians and pundits alike. Why oh why, in the face of improving stock prices and other leading indicators, are companies not hiring? The political sides are quick to point at each other. The Republicans are sure that the stimulus bill not only didn't create even one job but that pushing $872 billion into the economy actually killed jobs. The Democrats, on the other hand, are sure that jobs are being created and, by the way, most of the money hasn't been spent yet. I think, in a way, that they're both right.

The problem is that most politicians have no small business or small employer experience. The former governors now either in the administration or Congress know how to make executive decisions but really don't have a clue about day to day employment needs. they had department heads for that. The former business folks are mostly big business types, or worse, come from high finance. Again, clueless. So what is it that these smart people are missing?

They actually believe, I think, that all people make monetary decisions rationally and without emotion. That's why they believe in the rightness of markets. Markets will, they tell us, always reach the correct position, if given enough time. Regular people acting emotionally just confuses them.

The current situation stems from this type of misreading of the population. Let's think back to late summer and fall of 2008. The housing market was reaching a complete freeze up. Banks and financial firms were realizing that the huge stack of mortgage backed securities in the vault were, well, worthless. At this point the Bush administration went into panic mode and pushed for and got the $700 billion bank bale out. The idea was that the financial institutions had all these worthless or toxic assets as the backing for loans and other transactions. No assets meant that the system could not continue to function. The argument was that we had to pour money into the top of the financial machine much as one pours oil into the top of an engine to keep it running. This, to my mind, was the first mistake.

The assumption that pouring billions into the top of the financial machine would grease the gears and thus loosen up the works simply ignored basic human nature. The people in charge of these institutions, while probably just fine folks who you'd enjoy talking with at a picnic, are, by their actions before and after the bale out, still the high priests of American greed. They have to be, you see. It's how they define their job. The highest and best thing that they can do is protect and grow the value of their stockholder's holdings. Nothing else, from 10% unemployment to possible bread lines snaking around block, matters to these people. The money just goes in at the top...and stays there. Can you say bonuses? Of course, it can also be said that they didn't really make a mistake, they knew full well that the money wouldn't trickle down. They just didn't care about anything other than their own bottom line.

Then came mistake number two, the stimulus bill. Now, those who only watch FNC or listen to Rush are sure that the only way to stimulate the economy is...wait for it...TAX CUTS. They sort of skip over the fact that the stimulus bill contains $288 billion in tax cuts! You can see the logic, of course. If pouring money into the top was a good idea for the banks then it's a good idea for the general economy. It just, again, flies in the face of human nature.

So, again, why hasn't the economy created more jobs? Here's the simple answer; the whole system is broken and bale outs and stimulus bills can't fix it. We can't hand bankers a bunch of our tax dollars and expect them to immediately start lending that money out. Not while Congress and the press are screaming to the heavens that loose lending started the mess in the first place. We can't expect businesses, both large and small, to just simply start hiring because we give them a tax break. A business owner will look at a tax break as a windfall for them or for the company. They'll start hiring when they need the labor to conduct their business not before. And the consumer, why won't they start spending again? They can't. They don't have the money.

The dirty, and not so secret, fact of our consumer driven economy is that it was driven by debt. When consumers could no longer refinance their home for a cash infusion they stopped buying. When they open their credit card bill and see that the interest rate has gone from 8% to 30% they stop spending. When they see layoff after layoff they fear for their own job and they stop spending. And let's not forget that the cable news channels have multiple "Finance Correspondents" telling us how important it is to start saving. Save for the future. Save for retirement. Save for your kids collage education. Save, save, save. Of course, saving is the opposite of spending so again, the consumer, if only out of confusion, stops spending. And so the circle comes full around.

Banks won't lend, business won't hire and consumers won't buy. That's not all that hard to understand is it? But our leaders and the pundits keep asking, "when will the consumer start spending again" without seeming to understand that simple equation. I think that both the bale out and the stimulus authors assumed that the consumer would just start buying  again and all would be well. They were so wrong.
 
So what's the answer? Well, if another stimulus is planned I hope that it targets the consumer directly, rather than trying to rely on the trickle down of money that tends to stick to the top rather than trickle. Just think, if the bale out had gone (as Jon Stewart on the Daily Show had suggested) to payoff or pay down actual mortgages the banks would have gained solvency at the same time that the consumers would have been able to continue spending. 

Or how about if the stimulus funds were pumped right into the economy from the bottom. A trillion dollar stimulus would provide $10,000 to 100,000,000 households. Now how much of that money do you think would have been spent and how much saved? How about in your household? Now think about that money working it's way up in the economy. Each purchase is a taxable transaction. Buy groceries and you pay sales tax and the store pays income tax and pays their workers who pay income tax and buy things with their wages and so on. Pour the money into the top and we see that the opposite happens. Give a million dollar bonus to a billionaire and he will invest it. Is that a bad thing? No, but in a troubled economy that does next to nothing to help. No taxable transactions. In fact the guiding principle of the rich is to avoid taxes. They put the money in "safe" investments and hold it.

But we all know that the first idea is never going to happen, so what can be done? I think that local banks and local businesses are going to have to increase their lending and borrowing risks. Sorry, but somebody has to take the first step and I can't see it being the consumers. I'm afraid that our salvation my have to come from a change in the priorities of the banks and bankers. They're going to have to look farther ahead than the next quarters financial report. They are going to have to become good citizens rather than just good business people. Don't hold your breath.