Saturday, November 08, 2008

Jobs, Not Unemployment, Key to Recovery

November 8, 2008, 5:35 a.m.

Why America Needs a Jobs Program:

Because When Your Automobile (Industry) is in the River
It Makes More Sense to Go For the Shore
Than to Continue Bailing it Out

Executive Summary: This morning's (and probably this weekend's) blog entry is stimulated by President-Elect Obama's comments yesterday (November 7) regarding the need for taxpayers to transfer billions of dollars of their own money to the automobile industry.

My own view -- buttressed by the New York Times' reports yesterday and today, below, regarding (1) the automobile industry (especially General Motors), (2) retail sales, and (3) unemployment -- is that the best interests of the business community, as well as the American people, will be served by providing public jobs programs, and economic support to the unemployed, rather than continuing to pour billions of dollars into failed and failing businesses.


The Automobile Industry.

Yesterday Obama said, "I have made it a high priority for my transition team to work on . . . policy options to help the auto industry."

If you haven't yet learned the vocabulary, "policy options" is Obama-speak for transfers of, ballpark, $50-100 billion of additional taxpayers money to GM and Ford.

It seems to me when the ship is going down the better part of wisdom is to put the passengers on the lifeboats rather than continue bailing.

GM went through nearly $7 billion in cash in the course of losing over $4 billion during the last three months! Pouring more billions of taxpayers' money into this bottomless pit can do little more than postpone the agony for three or four more months.

GM's problem is that customers don't want to buy its cars. In part that's because for decades GM has been making cars customers didn't want to buy -- while Toyota, manufacturing cars in the U.S., providing jobs for American workers, has been capturing ever-larger shares of the market. Indeed, if the taxpayers are going to be forced into the automobile business wouldn't they get more bang for their billions of bucks by giving them to Toyota, a company that makes cars they do want to buy? Wouldn't that provide more jobs, and get more dollars flowing through the economy? As long as we're going socialist, doesn't it make more sense to reward business success than failure?

But another major part of GM's problem is that laid-off GM workers, and the 10 million other unemployed Americans, don't have the money to buy anybody's cars right now (or see higher priorities for the limited funds they do have).

I'm fully aware of the jobs involved in GM's dealerships and suppliers. But there's little likelihood much of the billions given to GM (whether "loans" unlikely to be repaid, "bailouts," or money said to be for "re-tooling" or research on more energy efficient vehicles) is going to find its way to UAW workers, suppliers and dealers -- unless GM would be stupid enough to increase its production, and inventories, of cars that neither its dealers nor its customers can afford. (And UAW members pension funds are guaranteed by the taxpayers anyway.)

If the automobile industry is the lynch pin to economic recovery the new president thinks it is, the solution is to get more money into the hands of consumers -- especially the unemployed (and soon to be unemployed). Enabling auto executives to have tens of billions of additional dollars to spend at their discretion in postponing bankruptcy doesn't strike me as a solution to anything except perhaps helping to hold Michigan's electoral votes for the Democrats in 2012.

Other industry sectors -- especially retail.

Another problem with Washington's willy-nilly giveaways, aside from the fact that they are unfair, don't work and will ultimately bankrupt our nation, is that they are irrational.

As the New York Times reports, below, "Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. . . . Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains . . .." ("Neiman Marcus . . . dropped nearly 28 percent in October . . ..")

Now I have no more enthusiasm for bailing out, or subsidizing, the retail sector than I have for the automobile sector. If Target's sales are down (as they are), I'm not confident that giving its executives billions of dollars will increase its "discretionary spending" sales to customers who barely have money for food.

But if Obama is looking for economic sectors to which to transfer taxpayers' money, wouldn't the one that represents "two-thirds of the nation's economic activity" make more sense in a recession/depression than bailing out the one that makes $30,000 new vehicles?

And surely there are other sectors of the economy that would like to nominate themselves.

Why We Need a Jobs Program

Look at the numbers. There are now over 10 million unemployed. Unemployment stands at 6.5 percent, and is projected to go to 8 percent next year -- 22 percent of whom have been out of work for more than six months, something we haven't seen for a quarter-century. The rates are increasing. Of the 1.2 million jobs lost this year 284,000 were in September and 240,000 in October.

In the 1950s over 50 percent of the unemployed received benefits; today, because of various restrictions, only 32 percent qualify -- more unemployment, more holes in the safety net.

The Times reports, "'The economy is slipping deeper into a recessionary sinkhole that is getting broader,' said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh."

Put it all together and the answers seem, to me, rather obvious.

You can't improve business (profits, returns to shareholders, executive compensation) without improving retail sales; you can't improve retail sales without putting money in the hands, and confidence in the heads, of potential consumers; and unemployed consumers don't have money unless they are provided either unemployment compensation or wages from a public sector job (in an economy with a shrinking private sector).

Given our rotting, unattended, infrastructure (roads, bridges, pipelines, schools) resulting from the last 30 years of "tax cuts" it seems to me, given the same amount of money, that using it to create "jobs" makes more sense than providing it for "unemployment compensation."

But either makes more sense than trying to turn an economy around with "trickle down" -- whether tax cuts for the rich, or bailouts for the rich.

Referenced Times articles below:

President-Elect Obama's News Conference

Here is an excerpt from a transcript of President-Elect Obama's news conference of November 7, 2008, regarding automobile industry bailouts:

The news coming out of the auto industry this week reminds us of the hardship it faces, hardship that goes far beyond individual auto companies to the countless suppliers, small businesses and communities throughout our nation who depend on a vibrant American auto industry.

The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.

I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America.

And I was glad to be joined today by Governor Jennifer Granholm, who obviously has great knowledge and great interest on this issue.

I've asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.
"Transcript: 'I'm Going to Confront This Economic Crisis,' Obama Says," CNN, November 7, 2008, 2:59 CST.

General Motors Economic Condition

General Motors is edging closer to running out of money, as slumping sales and deteriorating economic conditions drove the automaker to a larger-than-expected loss of $4.2 billion in the third quarter . . ..

The carmaker’s results came on the heels of similar dismal quarterly earnings from the Ford Motor Company . . ..

G.M. said its revenue in the third quarter declined 13 percent . . . on weak demand in its core North American and European markets. . . .

The company also reported that it burned through $6.9 billion in cash during the quarter, and it ended the period with just $16.2 billion. The rapid depletion of its cash puts G.M. perilously close to dropping below the level needed to finance its operations. . . .

G.M. said that it “will fall significantly short” of the cash needed to run its business in the first half of 2009 unless economic conditions improve and the company gets access to financial aid from the federal government. . . .

The rating agency Standard & Poor’s cut G.M.’s debt by one grade to CCC+ on Friday, citing concerns about its cash supply. . . .

Earlier, the Ford Motor Company said that it burned through $7.7 billion in cash in the third quarter . . ..

Ford’s automotive business lost $2.9 billion in the quarter, and the company announced more cuts to conserve cash . . ..

Over all, Ford said . . . Excluding . . . one-time items, the company lost $2.7 billion. . . .

The company will eliminate as many as 2,200 salaried jobs by January . . ..

Underscoring the dire circumstances, the chief executives of G.M., Ford and Chrysler met with Nancy Pelosi, the House speaker, and Harry Reid, the Senate majority leader, on Thursday about an emergency loan package. The meeting focused on a request by automakers for up to $25 billion in loans to help the companies get through the worst vehicle market in 15 years and avoid bankruptcy protection. . . .

The loan request is in addition to $25 billion in low-interest loans administered by the Energy Department to assist automakers in developing more fuel-efficient vehicles.

In his news conference Friday afternoon in Chicago, President-elect Barack Obama urged the current administration to do everything possible to accelerate disbursement of $25 billion for the vehicles. . . .

Ford is also using up cash at a surprising rate — $7.7 billion in the third quarter. . . .

The automaker is moving to increase its cash by as much as $17 billion by cutting more jobs . . ..
Bill Vlasic and Nick Bunkley, "Carmakers Report Losses as They Burn Cash," New York Times, November 7, 2008.

The Retail Sector

Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.

The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.

Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. . . .

Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. . . .

Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. The reports highlighted once again the depth of the economic problems confronting President-elect Barack Obama.

Consumers are cutting their spending for many reasons, but high on the list is the weakening employment picture. . . .

“October was every bit as bad we feared,” said John D. Morris, a retailing analyst with Wachovia. “Maybe worse. October’s numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season.” . . .

A few retailers have strong balance sheets, but many do not, and with credit hard to find they can ill afford a disastrous Christmas season. Analysts said they expected a new wave of bankruptcies after the first of the year.
Stephanie Rosenbloom, "Retailers Report a Sales Collapse," New York Times, November 6, 2008.


The American economy lost another 240,000 jobs in October, the government reported Friday, as cash-strapped consumers pulled back and businesses hunkered down, intensifying the distress gripping much of the country.

The unemployment rate spiked to 6.5 percent from 6.1 percent, the highest level since 1994. Many analysts now expect unemployment will reach 8 percent by the middle of next year.

Coupled with revisions to September’s data — which now show a loss of 284,000 jobs . . . — the economy has shed 1.2 million jobs since the beginning of the year. . . .

“The economy is slipping deeper into a recessionary sinkhole that is getting broader,” said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “The layoffs are getting larger, and coming faster. We’re likely to see at least another six months of more jobs reports like this.” . . .

Democratic leaders in the House said this week that they would seek swift passage of $60 billion to $100 billion worth of measures that would extend unemployment benefits and food stamps, while aiding states whose tax revenues have plummeted. They would then pursue a broader package of measures that could reach $200 billion after Mr. Obama takes office in January.

The Bush administration has criticized Democratic proposals for immediate aid, raising the specter of a veto. . . .

The number of unemployed Americans increased by 603,000 in October to 10.1 million — the largest number since 1983. More than 22 percent of all unemployed people have been out of work for six months or longer — another level not reached in a quarter-century.

Only 32 percent of all unemployed people were drawing state benefit checks in October because of restrictions on eligibility for part-time workers and those who were not in their jobs long enough to qualify. More than half of all unemployed people drew benefits in the 1950s, and about 45 percent received state checks during the last recession in 2001.

“It’s a national shame, the state of our safety net,” said Andrew Stettner, deputy director of the National Employment Law Project in New York. “We need to be helping these families avert financial disaster, and help make up for the loss of consumer demand, and the best way we can do that is to get people unemployment checks.” . . .

The latest monthly snapshot of the jobs market reinforced how the economy remains gripped by a potent combination of troubles — plunging housing prices, tight credit and shrinking paychecks — with all three in a downward spiral.

Companies have been hiring tepidly and laying off workers throughout the year, as business has slowed, while cutting working hours for those on the payroll. That trend continued in October: The so-called underemployment rate — which includes people working part-time for lack of full-time positions and those who have given up looking for work — rose to 11.8 percent, up from 8.4 percent a year earlier.

“What you see now is this cascading of unemployment moving from hours cut to hiring freezes to layoffs,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “At this point, we have a very toxic combination of all of the above. There’s almost no economic activity out there that’s going to generate jobs right now. This is the front edge of the deeper trough of the recession. It’s going to get worse before it gets better.”

Wages have effectively shrunk for most workers, as rising costs for food and fuel have more than absorbed meager increases in pay. . . .

All of this came on the heels of the revised September data showing that 284,000 jobs were lost that month — the worst toll since November 2001, in the aftermath of the terrorist attacks in New York and Washington.

Fewer people working translates into less spending power: Consumer spending dropped between July and September — the first quarterly decline in 17 years — further eroding the motivation for businesses to hire.

Recent days have offered fresh indications of trouble. On Thursday, major retailers reported a sharp pullback in sales in October, presaging what is likely to be the weakest holiday spending in many years.

The annual pace of auto sales fell off in October, down 15 percent compared to September, according to analysis from Goldman Sachs.

The widely watched Institute for Supply Management survey fell in October to depths last seen 26 years ago, reflecting shrinking industrial activity and suggesting weakening demand for goods as the economy slows. . . .

Many economists expect this picture to worsen. Though a $700 billion taxpayer-financed bailout has staved off fears of an imminent collapse and restored some order to the financial system, it has not persuaded banks to lend freely. Credit remains tight for businesses and homeowners. . . .
Peter S. Goodman, "Jobless Rate at 14-Year High After October Losses," New York Times, November 7, 2008.

Business Types Dominate Obama's "Economic Team"

Meanwhile, here's the list of persons on President-Elect Obama's economics team. By going to the New York Times site for this list, linked below, you can find out more about each one from links provided by the Times. Their bios are not my focus this morning, so I haven't done that -- with the result that what I'm about to say may be off the mark.

But it looks to me that, in terms of "economic expertise," nine of the 17 are primarily business persons (which is not to say they don't have some very practical understanding of "economics;" Buffett, Campos, Daley, Donaldson, Ferguson, Mulcahy, Parsons, Pritzker, Schmidt), three are primarily politicians (Bonior, Grandholm, Villaraigosa), and five combine an academic background and experience focusing on national economic policy (Reich, Rubin, Summers, Tyson, Volker).

Bringing these folks together for part of a day, and having them on display at the President-Elect's first news conference, primarily serves a public relations show and political purpose: it reassures the business community that it needn't panic from its fear there really will be "change," that Obama is getting his advice from folks who are familiar and "solid," no radical economic innovators there. There's a substantive benefit from such a calming move as well, when at least some of what's going on in an economic meltdown is mental.

There's also a substantive benefit from including business representatives, goodness knows.

And of course I have no reason to believe there is anyone in the group who is not selfless, intelligent, knowledgeable, ethical, and offering what he or she truly believes is in the nation's best interest when offering advice to the President-Elect.

But I would feel a little more confident of the group's advice if it included a little heavier weighting from those of the nation's academic and other economists with expertise in public finance -- along with at least one or two of those with less conventional thinking.

Here's the list:

DAVID E. BONIOR Academic; former Democratic Congressman from Michigan; John Edwards’s campaign manager.

WARREN E. BUFFETT Billionaire investor and chairman of Berkshire Hathaway; expected to take part by telephone.

ROEL C. CAMPOS Washington lawyer; former member of the Securities and Exchange Commission; former broadcasting executive.

WILLIAM M. DALEY Senior executive at JP Morgan Chase; former Commerce Secretary; chairman of Al Gore’s presidential campaign.

WILLIAM H. DONALDSON Former chairman of the S.E.C.; long career in investment banking, higher education and government.

ROGER W. FERGUSON Jr. Chief executive of TIAA-CREF, the private financial services company; former vice chairman of the Federal Reserve.

JENNIFER M. GRANHOLM Governor of Michigan.

ANNE M. MULCAHY Chairwoman and chief executive of Xerox.

RICHARD D. PARSONS Chairman of Time Warner; former banker.

PENNY S. PRITZKER Senior executive, Hyatt; national finance chairwoman for the Obama campaign.

ROBERT B. REICH Author, academic, former Labor Secretary.

ROBERT E. RUBIN Chairman of Citigroup; former Treasury Secretary.

ERIC E. SCHMIDT Chairman and chief executive, Google.

LAWRENCE H. SUMMERS Economist, academic; former Treasury Secretary.

LAURA D’ANDREA TYSON Academic; former chairwoman of the President’s Council of Economic Advisors and the National Economic Council.


PAUL A. VOLCKER Former chairman of the Federal Reserve.
"Obama's Transition Economic Advisory Board," New York Times, November 7, 2008. And see the Times Web site, "The New Team: The 44th President," for "a series of profiles of potential members of the administration."

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