Friday, October 2, 2009

Unemployment soars. Will Madison and DC politicans respond?

In another sign that the Great Recession is far from over, the Bureau of Labor Statistics reported this morning that the nation lost 263,000 jobs last month, far more than predicted. As a result the official unemployment rate increased to 9.8 percent.

The largest job losses were in construction (64,000), manufacturing (51,000), retail trade (39,000) , and government (53,000).

The nation has lost 2.1 million manufacturing jobs and 1.5 million construction jobs since the onset of the recession in December 2007. Unemployment has surged from 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent.

Unemployment rates for the major worker groups--adult men (10.3 percent),adult women (7.8 percent), teenagers (25.9 percent), whites (9.0 percent),blacks (15.4 percent), and Hispanics (12.7 percent)--are much higher than at the start of the recession.

The actual rate of unemployment is significantly higher than the 9.8% figure. The U-6 rate, which includes discouraged workers (those who have given up looking for work) and the involuntary part time (those who want full time work, but cannot find it) jumped to a Great Depression level 17%.

The number of long-term unemployed (those jobless for 27 weeks and over) rose by 450,000 to 5.4 million. In September, 35.6 percent of unemployed persons were job-less for 27 weeks or more.

In another ominous sign, the Labor Department's reported earlier this week that there there are only 2.4 million full-time permanent jobs available. Yet there are 15.1 million people officially unemployed. That's one job opening for every six people looking for work, the worst ratio since the government began tracking open positions in 2000.

During the last recession in 2001, the number of jobless people reached little more than double the number of full-time job openings. By the beginning of this year, job seekers outnumbered jobs by four-to-one, with the ratio growing ever more lopsided in recent months.

The four county Milwaukee area lost 50,400 jobs over the last twelve month, the largest annual decline since 1967.

Midwest Airlines, Badger Meter, GE Medical, Harley Davidson, GM, Quad Graphics and Delphi have shed thousands of workers. The Department of Labor reports that Wisconsin was one of eight states to reach a record high in average weekly new unemployment claims in August.

The city of Milwaukee has been especially hard hit. The number of employed residents in the city fell by 18,333 between August 2008 and August 2009 in what the UWM Center on Economic Development calls "a stunning decline of 7.03 percent."

This is the largest “over-the-year” employment decline in Milwaukee in any month since the Great Recession officially began in December 2007 and the second worst in the nation. Only perpetually distressed Detroit, the epicenter of the auto industry collapse-- suffered a larger employment decline. African American male unemployment remained at almost 50%.

Milwaukee, like the state and the nation, is mired in an employment crisis. Ivory tower discussions about lagging indicators, the economy's green shoots, and market corrections ring hollow as jobs continue to hemorrhage and lives are uprooted. The unemployed are losing their homes, their health insurance and their hopes..

The employment crisis demands action.

Democrats who claim to care about working people control the levers of power and the public purse in Madison and Washington D C. They certainly didn't create this employment crisis. But they are in charge now.

The federal stimulus plan, the American Recovery and Reinvestment Act of 2009, watered down by Republican demands for less stimulus spending (demand) and more ineffective tax cuts, helped keep the economy from collapsing. It has slowed, but not stopped the loss of jobs, Nor has it revived the economy.

The employment crisis demands decisive action at the state and federal level.

Where is the Obama administration's plan to put people back to work?

Where is the planto provide aid to states and local governments so they don't add to the nation's unemployment rolls by laying off even more people.

Where is the Wisconsin plan for jobs and training?

If policymakers in Washington and Madison don't move quickly to address the employment crisis, they will likely find their own jobs are in danger come November 2010.


Anonymous said...

Great article, especially about the U6 rate and the ratio of job seekers to full time workers. The question is what to do about it. There is a great deal of confusion, in my opinion, about how deficit spending works. If deficit spending brings new purchasing power into circulation in the domestic economy, it increases jobs. It it does not, then it does not create jobs. For example, if there are tax cuts on the wealthy and the wealthy simply lend their increased disposable income to the government to finance the deficit, there is no new purchasing power injected. Borrowing from the wealthy is simply substituted for taxes from the wealthy. I wonder how much of this has occurred. In fact, taxing the wealthy to pay for increased government spending may be a way of injecting purchasing power if the wealthy pay the tax from idle funds rather than from income and then the government uses these formerly idle funds to finance increased spending. On the other hand, I believe tax cuts or stimulus checks to people who will spend (not lend) their increased disposable income can be very effective in stimulating the economy. In this case, the govenrment must fund their continued spending (or increased spending if they issue stimulus checks)from borrowing from excess bank reserves or from newly printed money (if the FED buys the bonds) and new purchasing power is injected into the system.

I believe we need a new stimulous that increases the disposable income of people without jobs who do not have unemployment compensation (either through a federally funded jobs program or a series of stimuls checks.) Aid to the states and local governments should also be increased. What's your take? Jim Carpenter,

Michael Rosen said...

It is clear that the economy needs an additional infusion of stimulus spending. Without it the economy will continue to shed jobs and be mired in stagnation. Even the Office of Management and Budget (OMB) projects unemployment will remain at 10% through 2010, 8% in 2011 and above 7% in 2012. This is unacceptable for at least two reasons.

First and foremost, we should not allow so many of our fellow citizens, hard working Americans who are unemployed through no fault of their own, and their children to be thrown into poverty. Increases in unemployment are directly related to increased social costs as child and spousal abuse, addiction, crime, suicide, heart attacks and depression increase. Allowing children to grow up in poverty is inhumane. It is also a virtual guarantee that their lives will be less productive and secure as adults. I

Second although related, high levels of unemployment result in lost productivity and growth.

There is no doubt that an additional stimulus package is needed if the U.S. wants to avoid a long period of stagnation and deteriorating living standards.

You are correct that some forms of stimulus are effective and others not.

Increasing the disposable income of the unemployed by increasing unemployment compensation and food stamps is the most effective form of stimulus because the money will be spent immediately and set off a chain reaction of spending, what economists call the multiplier effect, in the economy.

The same is true for federal aid to states, local governments, public schools and two and four year universities. The fact that such aid was reduced in the original stimulus compromise means that firemen, police officers, librarians, other public employees, teachers and professors are now being laid off.

While conservatives see this as sharing the pain, it hurts the economy because such layoffs lead to a decrease in aggregate demand and undermine efforts to jump start the economy.

High end tax cuts are, as you suggest, the least effective form of stimulus because there is no guarantee and little evidence that if you cut the taxes of the wealthy they will spend it. Particularly when the economy is weak and consumer confidence low, the wealthy who don’t need the additional money for daily expenses (consumption) tend to hoard rather than spend the additional income they receive. It’s a phenomenon called the paradox of thrift that affects all income groups, but is particularly acute among higher income earners. After all, they can “afford” to put money away for a rainy day.

The economic situation is not as bad as it was last fall. We avoided a 21st Century Great Depression. But the economy has not recovered. Decisive federal action in the form of a second stimulus plan is required.

Brad V said...

"The federal stimulus plan, the American Recovery and Reinvestment Act of 2009, watered down by Republican demands for less stimulus spending (demand) and more ineffective tax cuts, helped keep the economy from collapsing. It has slowed, but not stopped the loss of jobs, Nor has it revived the economy."

I'm glad we can agree that the stimulus has not revived the economy.

But why are you so gung-ho about a second stimulus when the first stimulus was such a failure?

You can blame Republicans all you like, but in the end, Republicans had very little to do with crafting what ultimately passed - a Democratic pork-laden effort that failed to ensure that all stimulus spending began quickly to inject the economy with an actual helpful jolt. As it is, much of the money allotted remains unspent.

Anonymous said...

Its a mess no doubt. Ive just been informed by UC-Madison that Im selected for an audit after applying for 102 positions in 3 months. This audit I'm told make take 4-5 weeks and in the meantime car pmt is overdue, ins. premium is now past due and well its as ugly as ever. This is how Wisconsin operates. In the meantime I can not contact anyone nor expedite anything. Its a mess alright and needs addressing pronto.

Michael Rosen said...

Brad V,

I blame the Republicans for two reasons. First, they insisted the stimulus plan be reduced even when economists like Joseph Stiglitz argued a $1.2 trillion stimulus was needed. Second, Republicans insisted that the least effective forms of stimulus, tax cuts be increased as a percentage of the total package and more effective forms of stimulus, such as aid to the states and investments in infrastructure, be reduced. As a result the stimulus was smaller and less effectively targeted than it should have been.

One could also blame the Obama administration for compromising. But I am sure if they had not they would have been attacked for failing to work with Republicans.
Now to the economics of the matter.

No mainstream economist believed the law would immediately revive the economy and cause unemployment to begin falling. At the time Congress enacted the law, virtually all forecasts underestimated the severity of the downturn. Nevertheless, the law has slowed the decline and is helping the turnaround occur sooner than it would have otherwise.

•The Congressional Budget Office (CBO) concluded last month that “fiscal stimulus will significantly boost economic activity above what it would have been.” CBO “estimates that real GDP will be 1.4 percent to 3.8 percent higher in the fourth quarter of 2009 than it would have been without the stimulus” and “1.1 percent to 3.4 percent higher in the fourth quarter of 2010.”

The recovery law has also had a positive effect on employment.

•“The stimulus results in approximately 2.5 million more jobs by the end of 2010 than would have been the case without it,” Economist Mark Zandi of Moody’s estimated, “and leaves the unemployment rate almost 2 percentage points lower.”

You are misinformed about the pace of spending. The Council of Economic Advisers estimates, through the end of August, that “between one-fifth and one-quarter of the total $787 billion included in the Act will have been spent by the end of the 2009 fiscal year. This is approximately what was projected by the Congressional Budget Office (CBO) when the Act was passed and will will boost GDP by between 1.4 percent and 3.8 percent by the end of this year.

The law “significantly boosted disposable personal income in the second quarter,” CBO wrote, “and (with the exception of the one-time Social Security payments) will continue to support personal income through the end of 2010.”

In addition, states have used $29.8billion through September 11 to avoid cuts and cover increased caseloads in Medicaid, bolstering the health care industry (and providing care to people could not otherwise afford it). Higher benefits under what was previously called the Food Stamp Program (now the Supplemental Nutrition Assistance Program) have pumped an additional $3.9 billion into the economy. (Zandi estimates that every dollar spent on food stamps generates $1.84 in total economic activity.)

The temporary increase in unemployment benefit levels is providing another $1.3 billion per month in help to jobless workers. Also, more than 2.5 million people are now receiving unemployment benefits due to provisions that allow unemployed workers to receive additional weeks of benefits when their regular unemployment benefits run out.
These provisions and other forms of direct assistance to vulnerable individuals are ameliorating the impact of the recession on poverty.

The stimulus appears to be working. The problem is that the design was not big enough nor targeted enough for the size of the problem. And that is why a second round of stimulus including extended unemployment benefits to the 1/3 of the unemployment who are running out of benefits, invesm,nets in infrastructure and increased aid to states so they don’t undermine economic growth by laying off more workers is justified.