Friday, December 3, 2010


The latest employment numbers are out and things are not looking good. The unemployment rate increased last month from 9.6% to 9.8%. While I think everyone can agree that this is not a good thing it surprises me that folks who should have a handle on this don't seem to. For example, Davis Leonhardt in the New York Times, says with regard to the bad jobs numbers, "What’s causing this? No one knows, to be honest."

Okay, so no one knows why hiring has stalled. Now, maybe I'm fooling myself, but it seems to me that the answer is really quit simple. It goes like this:

Before the Great Recession the single biggest driver of the U.S. economy was consumer spending, amounting to over 70% of the total economy. This may, or may not, be viewed as a good thing, but it is what it is. Americans purchase goods and services. Most of us don't manufacture anything, that's done in other countries now. Most of us don't grow things to eat, that's done by factory farms using (illegal) immigrate labor. No, what Americans are good at today is consuming. But the financial meltdown, and resulting recession, put a stop to that in a big hurry. Why, you ask?

Because many more Americans than anyone wanted to admit have been living on debt. Not living in debt, living on debt. Let me explain. It's pretty clear that a calculation of many, if not most, American's net worth would yield a negative number, both today and before the recession hit. When the average home price reached $200,000, while at the same time the average new vehicle costs close to $20,000, it's not hard to see that your average family of 4 making $50,000 was behind on the debt to equity ratio as it applied to their stuff. You could add up the value of everything that family owned, but when you subtract what they owe on just the house, the car, and the credit cards the number, in a lot a cases, is less than zero. Negative net worth. In fact, by most definitions, a lot of folks in this country are bankrupt. But, before the recession, they weren't broke. So how does that work?

It's like I said, we were living on debt. We have, as a nation, been spending more than we make, year in and year out. Today, after seeing what a bad downturn can do, that concept seems, well, silly. But make no mistake, it was happening. Remember, wages have been mostly flat for the past decade. The economy created far fewer jobs over the last ten years than were needed just to break even for those young people just entering the job market. So we borrowed. We borrowed from the banks to finance and refinance our homes. We borrowed to buy that car. We borrowed from our credit cards to buy Christmas presents. We could do this because we all knew in our hearts that our jobs were secure, and our house would only increase in value, so we'd be able to make the payments each month. If an emergency came up we knew that another refinance of the house would put thousands into our hands. No worries, be happy.

So, when the hydra-headed monster of this recession emerged we were faced with a host of insurmountable problems. House values tanked so we couldn't tap the old refinance ATM. More importantly, the so called credit crunch meant that even if you had equity in your home the banks weren't lending. Credit cards? In a totally predictable manner, as soon as the credit card companies got wind of "credit reform" raising its head in Congress they raised interest rates and cut available credit for millions of card holders, bad risk, good risk or whatever. So, that money source also dried up. And then came the layoffs. As the number of unemployed Americans skyrocketed, even the most free spending of us pulled up short. As consumer spending declined that lack of demand for goods and services caused even more job loses. And around and around we go. And, contrary to right wing conventional wisdom, companies are not waiting for an extension of the Bush tax cuts to jump start the economy. They're waiting for demand to come back.

So, why do some say they can't figure out why employment is still down. It beats me. All together now, lets follow along:

  • 70% of the economy was consumer spending.
  • Much of that spending was fueled by debt.
  • Debt was an acceptable way to live because with a good job and increasing home prices debt can be "managed."
  • Falling home prices, tight credit and a shaky job market means people don't have the money to spend now or in the foreseeable future.
  • Consumers not spending means that the demand for goods and services also stops.
  • Fixing just one (say jobs) without fixing the others (real estate values and tight credit) just won't work.
I'm sorry. There isn't any magic answer to this. Until that 70% of the economy gets their hands on some (borrowed) money the problem will continue. I just hope that the dunderheads in the government don't make things worse. Anyone want to bet on that?

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