Why Unemployment Stays High, Simply Explained

As you can see from the graph above, drawn from the invaluable FRED database of the St. Louis Reserve Bank, in 39 months of recovery the total number of jobs in the economy today remains below its pre-recession peak and, indeed, has barely returned to its level in 1999. Essentially, the net effect is that we’ve moved sideways for ten years. This has occurred even as the country’s population has increased by 10% over the period of the last decade.

A quick look at the Employment Situation Reports of the Bureau of Labor Statistics over the last dozen years reveals that of the increase that was seen over that period much was in just three sectors: construction, healthcare, and education. That construction jobs will likely never return to the heights seen at the peak of housing bubble and that healthcare and education spending are largely funded by unsustainable increases in public spending or, in the case of education, by unsustainable increases in public spending and unsustainable levels of private debt are discouraging.

Under the circumstances I thought it might be prudent to revisit what I believe is actually happening, explained as simply as I can.

Following the collapse of the housing bubble and the attending financial crisis, much of the attention of the authorities both in the government and the Federal Reserve has been devoted to what I believe to be mostly futile attempts at restoring health to the banking system. The fallacy in the strategy has been that although a healthy economy will revitalize an ailing banking sector, you can’t cure a struggling financial sector without a healthy underlying economy.

Let’s think about the role that the financial sector and all forms of consumption—personal consumption, government consumption, and business consumption—play in the economy and in job creation.

The various measures, especially QE1, QE2, and what’s now being referred to as QEx, do very little of themselves for the underlying economy. Any amount of money—billions, trillions, quadrillions—can be inserted into the banking sector and, as long as that money doesn’t leak out into the underlying economy in the form of private sector loans or spending, it will have little effect on the underlying economy and practically no effect on employment. That’s the point of the anecdote I’ve told several times here of the three shipwrecked merchants.

Even in the absence of a reluctance to lend (generally characterized as a “lack of credit-worthy applicants” which is circular) some money, of course, will leak out in the form of compensation for people working in the financial sector and executive compensation. That’s concentrated in relatively few hands, accounting for a lot of the increase in income inequality, and has had precisely the effects you would predict: prices for things that rich people buy have gone up a lot faster than the prices of things that the rest of buy. Consider the following graph:

Handily, Forbes Magazine keeps track of this stuff for us and has been tabulating a Cost of Living Exceptionally Well for some time. Here’s their latest report:

This year, 18 of the 40 good and services in our basket are more expensive. What went up? A Russian Sable fur coat (increase due to an international increase in demand for fine Russian sable skins), Turnbull & Asser shirts (due to an upgrade in their basic poplin quality), a Steinway & Sons concert grand piano (due to increased costs of the very best materials, especially woods), season tickets to the Metropolitan Opera, a Patek Phillipe watch and a pair of James Purdey & Sons’ Shotguns (12 gauge Side-by-Side) sold by Griffin & Howe in Bernardsville, NJ & Greenwich, CT.

A total of 13 CLEWI items remained stagnant in price. Caviar, chateaubriand, flowers, bedsheets, a face-lift, a swimming pool and a tennis court were the items that remained the same. Three items are cheaper this year. A Hatteras 80 MY motor yacht (with 1,550hp Caterpillar C-32 engines), priced at $5.1 million, is down 3% from a year ago. A dinner at La Tour d’Argent in Paris is down 6%, due to a stronger U.S. dollar. This restaurant, dating to 1582, has a nice view of Notre Dame, a leaning toward duck on its menu and an extensive wine list. The average price of a thoroughbred at the Fasig-Tipton Saratoga summer yearling sale is down 6% from last year. Dubai’s ruler Sheikh Mohammed has been the New York auction’s most powerful shopping force in recent years and a driving force on its performance. He curbed his spending this year by spending millions less than usual. As a result, prices dropped and most of the of money spent was American this time.

Price increases for luxury good are mostly due to scarcity. French wines have been at maximum production for a century or more. Caviar and sable production is declining, if anything, as wild stocks are hunted to extinction. The number of tickets available for a Metropolitan Opera season is, essentially, fixed. More money available to be spent on these things won’t result in more employment producing them. It just results in higher prices.

Additional consumption by people in the lower income quintiles doesn’t do much to create American jobs, either. The consumer goods that people buy are mostly food, automobiles, gasoline, apparel, and electronics.

Most of the grain (bread) and meat we eat are domestic. Nearly 20% of the processed food that we eat is imported. Roughly 20% of produce is imported and, importantly, nearly all of the increase in produce consumption over the last twenty years has been imported. See also here. Almost 100% of food additives (coloring, texturizing agents, vitamins, etc.) are imported. The amount of domestically produced food with 100% domestic contents we consume is surprisingly small—mostly fresh meat. Read the package. If it’s been flavor enhanced, color enhanced, texture enhanced, or nutritionally enhanced, it is virtually certain to have imported components regardless of what the manufacturer might say (they may not even know). If you drink apple juice or 100% juice products containing apple juice, the odds are that the concentrate used was imported from China and that includes juice labeled organic.

Increasingly, automobiles are manufactured overseas and assembled in the United States. A very large percentage of tires are imported. We don’t produce internal combustion engines for small cars here. If you drive a small car and it’s gas or diesel powered, its engine was imported. Presumably, it goes without saying that a lot of the oil for the gas that we buy is imported. Oil imports have grown from about 40% thirty years ago to 60% today.

Apparel these days is almost entirely imported—98% or more. Just twenty years ago it was 50%. Buying more clothing will produce jobs but the jobs will be in China, Vietnam, and the Philippines.

Do I need to explain that electronic consumer products are almost entirely imported and those that aren’t are assembled in the U. S. from imported components? Twenty years ago we had a domestic electronic consumer products industry. That’s no longer the case. There are a few design jobs left here but those are increasingly moving overseas as well and the electronics production engineering jobs have been gone for years.

Much of government spending these days consists of transfer payments, e.g. Social Security, Medicare, Medicaid, for which the matching consumption has been discussed above. Most of the direct government consumption is defense-related. U. S. military spending comprises 41% of world military spending and ia larger than the military spending of the next dozen largest spenders combined. I don’t believe that increasing real U. S. military spending is either likely or desireable. That largely rules out government consumption as a creator of jobs.

There’s another component of GDP: business investment. Domestic business investment as a percent of GDP has been declining for decades and it is now at a post-World War II low. Uncertainty is one of the reasons for this but it primarily explains why business investment is so low now but it doesn’t explain why it’s been declining for the last thirty years. This is the area that I think must and will change.

In future posts I will consider direct and indirect production, the services economy, and suggest some of the things that we might change to improve our prospects.

In conclusion let’s review.

  • Money that remains within the financial sector doesn’t do much to produce new jobs.
  • We import too much of what the top decile of income earners consumes for expanding that consumption to produce many jobs and the production of much of what they consume doesn’t expand much with greater willingness to pay, anyway.
  • We import too much of what the lowest nine deciles of income earners consumes for expanding that consumption to produce many jobs.
  • Do we really want to buy more arms?
  • Businesses are in a sort of holding pattern for a variety of reasons. There’s room for expansion through exports and in select industries (e.g. energy production, mining, agriculture) but that’s blocked by trade barriers and regulations.

69 comments… add one

  • Does anyone know anything about the Flexilla garden hose?

  • Icepick

    steve, you simply forgive anything and everything the Administration does. Nothing they can do will give you the least pause in condemning their enemies, the only enemies that count, which is any American that isn’t a Democrat.

    A US Ambassador, a “good friend” of the Vice President, was ass-raped by a gang of terrorists for a few hours before being murdered. This does not happen all the time, as you want to imply. A murder of a US Ambassador hasn’t happened in 33 years. I doubt the other part has ever happened before. The Administration has claimed as recently as last week that the Ambassador had an adequate amount of security. IT CLEARLY WASN’T ADEQUATE.

    Additionally, the Administration has shown a complete disregard for finding out what happened and reporting that information to the American people. Your fall-back defense is that they have used a bunch of weasel words to qualify their fictional narrative. Bullshit. The intent has been to obfuscate and deceive.

    It was known very quickly within the intel community and the State Department that this was not an attack by a mob protesting some random YouTube clip. One of the first things that should have been done once the death of Ambassador was confirmed would be to FIND OUT WHAT HAPPENED. This should be done before telling everyone what happened, yes?

    The Admin should then see to it that the narrative as they understood it was disseminated by the Admin and its spokespeople. Standing orders would be that everyone else speaking on record should SHUT THE FUCK UP.

    Instead the Administration pushed forward with a narrative that their staffers (at the very least) knew was untrue. Five days after the attack the Administration sent forth the US Ambassador to the UN Susan Rice to speak on FIVE Sunday morning political talk shows to spread the Administration’s preferred message. You claim she might have been misled or misinformed by staffers in the intel and State communities. This is irrelevant – she was acting as the Administration’s appointed mouth-piece that morning, and would have been briefed by the White House on what they wanted said. So either the White House completely failed to determine what the actual story was, failed executing basic duties of message control, failed to pass along the correct story to Susan Rice, or Susan Rice ignored what she had been told by the White House to pass along her own version of events.

    How is that not a failure of executive and management abilities?

    But let’s check the Admin’s response. Obama went to bed early. His flacks (both on staff and in the media) claimed that Romney was the problem. Obama called this a bump in the road while yucking it up with Letterman. His Administration repeatedly claimed for almost two weeks that this had be a video protest that got out of hand. The Administration claimed that the only reason anyone cared about a US Ambassador getting ass-raped to death was because of Republicans. Joe Biden laughed about the torture and murder of his “good friend”. Joe Biden implied that either Admin officials were perjuring themselves before Congress or that the White House was being kept in the dark by staffers, or both. Currently the Administration doesn’t seem to have a story as people at the White House and State have dueling carefully-worded accusations of “BULLSHIT” flying back and forth at each other. So far Patreus’s CIA seems to be sitting on the sidelines, unwilling to take sides. That alone speaks volumes about the weakness of the White House. The Administration and its supporters primary defense against all this is that the Admin has frequently couched everything in weasel words. Sorry, the intent has been to deceive all along, and pre-emptively lawyering up (by going to Ivy League law schools, no less) doesn’t change that.

    But you expect me to believe that Mitt Romney shouldn’t be allowed to say anything until he knows every fact about every detail in this story, but the Administration gets a pass for making up stories without bothering to even speak to its own staffers about the basic details?

    Unbelievable.

  • Icepick gets to a point, expressed more graphically than I have, that I’ve made over at OTB: why did the administration elaborate on the disaster in Benghazi? That they knew that the attack on the embassy had nothing to do with the film that was being protested in various places seems clear at this point. At the very least the administration’s official reaction was misleading. Why?

    IMO this is the ongoing legacy of All the President’s Men. While the American people are predisposed to forgive their presidents (we do believe in second chances), not so the press. They smell Pulitzer at every weakness, every chink in the armor.

  • Barbara O'Brien

    Please contact me back via email when you can–just have a quick question!

    B

  • jan

    Wow Icepick

    What a synopsis! Very explicit, but with more accuracy than the WH is willing to give.

    IMO, if Rice had come out and simply said, “We don’t know what happened.” Whether or not if this was true, at least such a statement would not be construed as ‘knowingly’ giving a false reason for this attack to have happened.

    Saying, in almost absolute terms, that it was a irrelevant on-line video, that it was not an act of terrorism, sending in the FBI rather than the CIA, shows every attempt was made to detour people’s minds away from the truth.

    It flabbergasts me that even the most diehard partisan would not take a moment, turn off their R or D ideology, simply study the timeline without bias, as well as the conflicted and convoluted verbiage the WH has spun out to the public for over a month, and not be disgusted by it!!!!!

  • TastyBits

    @Icepick

    Watch Bill Clinton and the Clinton supporters. They are not going to let Hillary get “thrown under the bus” whether she deserves it or not. If she is going to be able to run in 2016, she cannot be involved in this, but she cannot be seen to cause President Obama to lose. If anybody can do it, Bill Clinton can.

  • TastyBits

    @steve

    The Administration could have said it was an ongoing investigation, and they could not comment. Why they clung to the video protester story is bizarre.

    I would like to believe there is some reason they did it. The likely focus of the raid was the CIA, and Ambassador Stevens got caught in it. If they were trying to cover for the CIA, it would make sense.

    Otherwise, they thought that the American people were too dumb to figure out it was not a protest that got out of hand.

  • jan

    Steve

    Just read the ending of your last comment:

    “So, I guess you are left claiming that the White House intended to keep this all secret somehow because it would make it hurt their (nonexistent) claims that there were no more terrorists. This would be the same admin. you raked over the coals two weeks ago for using too many drone attacks, trying to kill terrorists. “

    If this is aimed at me, it is incorrect. I never claimed they wanted to keep anything secret, as much as they wanted to mute and/or alter the circumstances surrounding this attack.

    Ever since OBL was killed, his elimination has been trotted out by Obama as a sign that Al Qaeda was on it’s heels, seemingly vanquished. He’s endlessly talked about OBL on his stump speeches, at the Democratic Convention, anywhere ears are present. Obviously, this 911 Benghazi attack back pedals such a claim, tainting Obama’s foreign policy record in these very political times of electioneering.

    As for those drone attacks, I don’t recall such a comment, other than maybe wondering why Obama emphasized his roll in a ‘kill list,’ which I think wasn’t prudent.

  • Icepick

    TB, all they have to do to save Hillary from being seen as the cause of Obama’s defeat (should that happen) is control the story line of why Obama lost. They’ve already got the catch-phrase to do it: It’s the economy, stupid! It will have the novel (for the Clintons) feature of being substantially true. I will have lived to see everything at that point!

    Distancing her from this colossal FUBAR will be another thing entirely.

    Meanwhile the President continues to take the hard interviews and address the pressing issues of the day.

  • TastyBits
  • TastyBits
  • Thank you, TB. I’ll be passing a Lowe’s in December. My watering will be basically automatic ’til then.

  • The Administration could have said it was an ongoing investigation, and they could not comment.

    Or they could just have expressed condolences to the families of the slain and said they’d say more when they had a more complete picture. That’s not what happened. They went out of their way to tell a very different story. And they didn’t deflect criticism away from them by doing it. That doesn’t sound like a winning strategy to me.

  • PD Shaw

    My assumptions are:

    (1) The Administration got reports on Benghazi and Cairo at the same time and conflated the two. Negligence, not malice.

    (2) The Administration was and is operating under goals of zero-tolerance for terrorist attacks. See NYTimes piece on drone warfare. That is, it is operating under unreasonable expectations.

    (3) Neither the administration, nor the Romney team, appreciate American unity in the face of attacks on U.S. citizens. Romney moved quickly to politicize the events, also initially conflating events in Egypt and Libya, and the Administration responded by treating the Middle East as an event to be handled politically.

    (4) The delays in retracting the prior statements are entirely political, not informational. Or to the extent they are informational, the Administation waited several days after learning its initial statements were erroneous in the hopes that information would be forthcoming that would make any retraction less painful.

  • Ben Wolf

    @Dave Schuler

    As I can think of nothing significant gained by lying, I can only conclude the President and his people exist in a self-contained information bubble, where biases regularly replace objective thought.
    His debate performance would seem to indicate that as well.

  • TastyBits

    @PD Shaw

    From what I understand, there was no protest before, during, or after the attack. After the initial attack, the US personnel fell back to a “safe-house”, and a follow on attack took place there. The “safe-house” was supposed to be secret, but the attackers knew where it was located.

    At some point State Department personnel were in contact with the Embassy staff, and there knew in real-time what was happening. A drone was also sent to the area, and it was on station for some part of the attack. When the Embassy personnel got to the safe-house, they thought they were safe, and they were waiting to be rescued. They did not expect a second attack.

    If I have understood correctly, the original consulate was a front for the CIA. Also, I have not heard any good reason for the two SEALs being in the area, but they were not part of the Embassy security team. They saw that the Embassy staff was under attack, and they went to help. I am fairly sure they were not in Benghazi for the tourist attractions.

    The US government knew within hours it was not a protest that got out of control, and when the White House sent Ambassador Rice to the Sunday talk shows, they knew most of what had happened. Why they would stick to an obviously wrong account is bizarre. This is well beyond incompetence.

    I am trying to give President Obama a plausible reason, but other than covering for the CIA or others, it is really hard to come up with something.

    The President should have been on this immediately. If a drone could be sent to the area, the President should have dropped everything, and this should have been his primary focus. To my knowledge, he could not be bothered, and this is the reason. A protest would not cause the President to drop everything, and therefore, this was the reason the Administration stuck to its story.

    I am open to any other suggestions, and I am willing to stretch reason.

  • Andy

    Dave,

    I don’t believe that increasing real U. S. military spending is either likely or desireable. That largely rules out government consumption as a creator of jobs.

    and

    Do we really want to buy more arms?

    In general, I agree. As I’ve said before, my bread is buttered by the DoD, but I realize that defense spending has got to shrink by quite a bit. That said, I’d just point out that defense employment isn’t trivial. The DoD directly employs about 800,000 civilians, 1.5 million active duty military and another 800,000 in the reserve components (some are full-timers, most are part timers). Then there are all the secondary jobs, mainly defense contractors big and small, which employ an estimated 3 million. It’s kind of sad, but weaponry is one of the few manufacturing sectors that’s still largely and actually “American made.” Then there are “defense related” programs that belong to other executive departments (the DOE’s nuclear weapons responsibility is the most obvious). I don’t have estimates for that.

    So let’s just say the total defense budget gets cut by 25%. All else being equal, that would result in the loss of about 1.5 million jobs. Over the long term, we’ll probably need to cut more than that. While necessary for the long-term health of the nation, such cuts will be painful in terms of employment.

  • Andy

    Not sure how we got on the embassy attack, but I might as well throw in my two cents.

    I think people sometimes forget that the enemy gets a vote and it is impossible for the intelligence community to catch everything, especially in a chaotic place like Libya. The fallout from the killings in Libya sort of quashed what could have been a bigger story – the Taliban attack on Camp Bastion a week later.

    Anyway, I thought Ambassador Rice’s Sunday talk-show circuit after the Libya attack was a bit strange. Although she did caveat her statements, I think it’s hard to argue that she wasn’t pushing the video angle to the story. I don’t really get why the administration chose to do that. PD’s explanation is probably right.

    It also reminds me of the aftermath of the UBL raid into Pakistan. The administration couldn’t really get its story straight for quite a while about many non-trivial details of the raid, despite the fact they had plenty of time to plan the media engagement. One should always expect bad information in the early phases of any event, but it exceeded the norm for these two events IMO. I won’t speculate about the reasons or potential motivations, but overall the impression I get from Libya and the UBL raid and other events (The fall of Mubarak, for example) is a White House staff that’s undisciplined when it comes to crisis communication.

  • Drew

    Icepick

    You poor, demented soul. Steve has become the Chris Mathews of Glittering Eye.

    Your words will fall to earth unconsidered.

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