The Unfolding Epic Recession

Jack Rasmus

THE DEPARTMENT OF Labor’s June 4 release of May 2010 U.S. employment numbers sent shock waves through the business community, erasing all doubt that U.S. economic recovery — much touted by business press and government policymakers in recent months — may not actually occur.

Front pages for June 4 and 5 in the Financial Times, New York Times and Wall Street Journal nervously headlined, “Markets Rocked as Jobs Data Disappoint,” “Job Data Casts Pall Over Economic Recovery,” and “Stocks Reel As Hiring Slows.” Within hours of the data release, the stock market immediately fell 323 points, pointing ominously to further volatility at best and, most likely, to further declines in the weeks to come.

Yet the government’s employment numbers for May were the highest thus far in 2010, at 431,000 new jobs created. What then explains the broad, panicky response?

Of the 431,000, only 41,000 private-sector jobs were created — significantly fewer than the 180,000 private jobs economists had predicted. The 431,000 included 411,000 temporary workers hired by the federal government to complete the 2010 Census — jobs that will be gone in a matter of weeks following the November 2010 midterm Congressional elections.

Economists had been predicting a total of 540,000 new jobs in May: 360,000 temporary census workers and 180,000 private-sector jobs. Thus the private sector fell 140,000 short of prediction while federal temp jobs added 50,000 more.

Bottom line: Private-sector job creation ran into a wall in May. Worse still, behind the noise of census worker jobs, combined federal, state and local government hiring turned negative as well. At the federal government level there was no hiring whatsoever apart from the census jobs, while state and local governments and the postal service shed a combined 25,000 jobs.

But May’s just one month, critics may reply. That doesn’t make a trend. The prior months show healthy job growth that represents the stronger, and the longer-term trend. However, that’s simply not the case.

The False Job Recovery

Since the beginning of 2010 the Obama administration and business press have been doing their best to puff up claims that the long string of month-to-month job losses since late 2007 were ending. Jobs were finally being created. The numbers since January were not great, they admitted, but at least the economy has turned the corner. A “below the surface” look at the jobs data shows a contrary picture.

The U.S. economy has lost at least 500,000 full-time permanent jobs since January 1, 2010. That loss is being covered up by the hiring of temporary census workers on the federal government side, and by the hiring of involuntary part-time workers on the private-sector side of the economy.

Since January 1 of this year, a total of 574,000 temporary census workers have been hired: the 411,000 in May and the remainder from January through April. Total federal government hiring since January 1 for all categories stands at 575,000. Thus, virtually every hire by the federal government has been a temp census worker — a remarkable fact given the economy’s total jobless of somewhere around 23-25 million today, and given that more than four million additional jobs were lost during Obama’s first year in office.

One would think with that record going into 2010 the federal government would be hiring directly in the hundreds of thousands or millions, as it did in the 1930s for example. But unlike President Franklin Roosevelt then, the Obama administration approach to jobs is to rely almost totally on the markets for job creation.

State and local governments, since January 1, shed a total of 81,000 jobs with the May loss at 25,000. The flood of layoffs, moreover, is just beginning. The February 2009 fiscal stimulus bill included significant grants to the states to prevent layoffs. That stimulus is now dissipating and will be gone just about the time of the upcoming November 2010 elections. Mass layoffs in the public sector will most likely become the rule in 2011.

A similar surge in layoffs can be expected in school districts by mid-year 2011, the early wave of which will begin this fall. Finally, the business-driven momentum to cut the federal deficit will likely result in hundreds of thousands of federal employee layoffs with the start of the new fiscal budget year in October 2010 — the full impact coming conveniently for Washington politicians after the November elections.

The new “austerity” drive at all levels of government spending, now beginning to take shape, will reach its full force and effect in 2011. As 574,000 census workers are laid off, they will join the ranks of surging regular federal, state, local and school district employees at year’s end and into 2011.

A similar “jobs numbers shell game” has been occurring since January 1, 2010 on the private-sector side of the economy. Here the minimization of the continuing jobs crisis is not 574,000 temporary government workers, but a surge in almost as many involuntary part-time worker hires.

The U.S. Department of Labor, it is important to note, considers a part-time worker just as fully employed as a 40-hour a week full-time permanent worker. One can work one hour a week and still be not be considered unemployed by the Labor Department. Since January, Bureau of Labor Statistics data indicate that a total of 495,000 non-farm private (i.e. excluding government) workers have been hired. However, the data also show that a total of 468,000 involuntary part-time workers have been hired. That can be interpreted to mean that nearly all private-sector net hiring has been involuntary part-time.

To sum up thus far then: 575,000 federal hires since January — all census temps: 81,000 jobs lost in state and local governments; 495,000 private-sector hires, of whom 468,000 are involuntary part-timers. The next step gets even more interesting.

If we add the 574,000 temp census workers and the 468,000 involuntary part-time workers, the total is 1,042,000 net new jobs created since January 2010. Other government data corroborate this number, showing that the total U.S. nonfarm (private plus all government) workforce grew by just about the same amount, from 129.5 million to 130.5 million since January.

[The July report showed the number of jobs declined by 125,000, with only 83,000 private-sector jobs created.  — ed.]

But this still isn’t the whole picture. Two other acts of statistical legerdemain are at work here obfuscating the real jobs crisis.

Statistical Trickery

First, Labor Department data show that there was an increase of 154,000 “discouraged workers” since January 1, a very conservative number and likely underestimated but one we’ll use for calculation purposes.

Discouraged workers are workers without jobs, and should be considered jobless. But because of the narrow way the government defines jobless, a worker who hasn’t actively looked for a job in the past four weeks is not considered unemployed, or even in the labor force. That 154,000 actually represents a monthly job loss of 30,000 from January through May.

A second, even larger distortion of the jobless totals occurs with what is called the “New Business Birth-Death Model” (NBBD). This is a statistical manipulation on the raw unemployed data that serves to reduce the actual number of jobless.

In the spring, the NBBD adds roughly 200,000 assumed jobs to the totals for the month. It does this because it assumes net new businesses are created in the hundreds of thousands every month based on a long-run historical average.

That average ignores sharp downturns of the business cycle when obviously far more businesses disappear than are created, as at present. But because it “smoothes out” the averages, the Labor Department can plug in a positive number of major magnitude and thereby significantly reduce the number of jobless for that month.

In an online “chat” with the Department of Labor on May 11, 2010 in which this writer participated, representatives publicly admitted the NBBD “plug in” number for April was an assumed jobs gain of 188,000. In the two preceding months it was between 200,000 and 225,000.

It is difficult to believe in the current economic climate, when small businesses in particular are being denied bank loans and after lending to small business has been declining for more than 15 consecutive months, that new businesses are forming at a rate of 200,000 jobs a month greater than they are dissolving. But as the Labor Department representatives noted, the NBBD model adds or subtracts the same number of jobs for the same month as in previous years. “No matter if the economy is growing or declining, the birth-death model is the same.” And the spring season is the period “with generally strong increases.”

Correcting for the NBBD model’s distortions, it is therefore reasonable to assume that perhaps as many as 500,000-600,000 jobs were actually lost. Add to that the 81,000 state and local government jobs that were lost and recorded. Then add the 154,000 discouraged workers.

Just correcting for these three items means a total of about 785,000 jobs disappeared since January, or about 157,000 a month, replaced by involuntary part-timers and government temp workers.

A way to interpret all this is that the U.S. economy is “churning” more than 150,000 jobs a month, shedding full-time permanent jobs and replacing them with private-sector involuntary part-time jobs and federal temp jobs (and the latter only until November) — not a picture of nascent jobs recovery.

There is also a likely second “churn” also taking place in the form of low-quality, lower pay (and no benefit) private-sector temp jobs as well. This too gets lost in the aggregate numbers.

The government estimated private-sector temp job creation in the 1980s and 1990s, but that was discontinued in 2001 by George W. Bush. Now only private studies and estimates occur. Based on those, it appears that about 200,000 private temp jobs were added since January, especially in professional services, education services and even manufacturing where some modest net gains in jobs have been noted since January. These temp jobs appear as net new jobs, but their quality of pay, benefits and working conditions are significantly substandard.

The trend toward this churn has been growing with every recession since the 1970s. Employers escalate replacing full-time permanent (and often union) workers with part-time and temp workers with each downturn of the business cycle. When that cycle later turns up, they retain a growing percentage in these categories among their total workforce. This contributes to a major “consumption fragility” in the overall economy, which this writer has analyzed in depth elsewhere recently. (Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave-Macmillan, U.S. distributor, May 2010).

Unique Characteristics of this Crisis

The present, ongoing crisis in jobs is like no other in the post-1945 period. It is a reflection of what this writer calls an “epic recession.” Its character was immediately obvious as job loss escalated to a rate of about a million a month from November 2008 to April 2009. That rate of job loss exactly tracked the rate of job decline in 1929-1930. It has since slowed significantly, but jobs are still being lost and, to the extent they are being created, are taking the form of part-time and temp work.

The current jobs crisis is unique as well in that, after almost three years since the crisis erupted in its initial financial form in August 2007, jobs are still being lost. In normal recessions, job recovery begins within less than 12 months on average. Today’s job erosion has been so great that, were the economy somehow to start creating 300,000 net jobs a month, every month starting tomorrow, it would still take approximately seven years just to return to the level of jobs that existed in July 2007. That’s not until July 2017.

Today’s recession is also unique in terms of the magnitude of excessive long-term unemployment. About five million are jobless today for more than six months. That’s a record since data collection began.

Moreover, today there are six workers for every new job that appears. An incredible one in every four workers in 2008-09 experienced some period of unemployment. Millions are without any unemployment benefits whatsoever, and Republicans and conservative Democrats in Congress are balking anew at extending benefits for hundreds of thousands more.

From U-3/U-6 to U-9

The true number of total jobless in the United States now is around 23-25 million, when properly calculated. The official number announced by the Labor Department is about 15 million. That is called the “U-3” unemployment number, and it ignores the nine million or so involuntary part-timers (who should be considered the equivalent of 4.5 million full-time unemployed and added to the 15 million). It also excludes the officially 2.5 million more so-called “discouraged” and “marginally” unemployed, whose true numbers are at least 3.5 million.

Adding the latter two categories provides what is called the “U-6” unemployment number, which has remained steady at 16.5-17.0% of the total workforce since January — yet another indicator that the jobless situation has not improved.

But even the U-6 is a deficient indicator of total jobless in the U.S. today. There should be a “U-9” unemployment rate. That is because of the way the Labor Department estimates the jobless totals at present. Its surveys, for example, do not pick up three important groups. The first is the inner-city youth.

The Labor Dept. estimates jobless numbers by conducting 50-60,000 phone surveys a month — calls to established residences with phones and interviewees who are willing to talk to government officials.

Inner-city youth are typically working “off the books” and are part of the shadow economy that constitutes at least 10% of the U.S. economy. They don’t get interviewed. Neither do the approximately 11 million undocumented workers, nor do the millions of itinerant workers in construction and other industries who regularly travel around the country to find work.

These groups are either outside the survey pool, or refuse to talk to government callers, and their incidence of unemployment is much higher than the rest of the U.S. population. They constitute the “hidden unemployed,” along with the underestimated “discouraged” and “marginally” unemployed.

In short, the official (U-3) jobless number of 15 million at present should be increased by 4.5 million additional underemployed, 3.5 million discouraged-marginal, and at least two million “non-accessible” unemployed. This total of 25 million plus is the true number of “Effectively Unemployed.” The “U-9” rate is thus around 18-19%.

Record Jobless As Austerity Measure

A final, perhaps most important, characteristic of the current jobs crisis is the fact that hiring may not return in the way it had in past recession recoveries. The defining characteristic of the jobs crisis today may not be that the economy is losing a million jobs a month, as before. It is that hiring may not ever return to previous levels.

One hears talk already among policymakers and mainstream economists that the new “natural” rate of unemployment, or NRU, today is perhaps around 7-8% unemployment, the “new norm,” the argument goes, below which unemployment cannot be reduced and which government should not spend resources to try to reduce.

This compares to NRUs estimated at 4%-4.5% just a few years ago. Of course, what this view really means is that business interests do not want government to expend necessary resources any longer to reduce unemployment to reasonable levels. They want workers to accept the higher levels and get used to “living with it.” In other words, they don’t want government to raise taxes on wealthy investors and corporations to pay for the necessary stimulus to reduce unemployment to civilized levels.

The outcome of this view is that the electorate must be conditioned to accept obscene levels of unemployment for years to come. We are going to hear more of this drumbeat in the near future. This viewpoint has been gaining momentum, in the wake of growing business pressure for cutting government spending and deficits. It should be soundly rejected.

Conservatives now argue that the Obama stimulus has failed to create jobs and is thus an example of how government spending fails to create jobs. Therefore, the argument goes, job creation spending should be curtailed. But the Obama program has failed to create jobs because it was of insufficient magnitude and its spending composition was poorly structured.

The $787 billion stimulus package dedicated too much to business tax cuts (approximately $350 billion) that don’t create jobs in the early stage of the business cycle in which it was implemented. It did not target enough public investment job creation, but instead focused on safety net spending that, while necessary, nonetheless does not directly result in jobs creation.

There can be no sustained economic recovery with 25 million unemployed. Period. The federal government must spend a minimum of $1 trillion on job creation over the next 24 months in order to break the current severe job stagnation which is preventing a sustained general economic recovery.

This writer has proposed and defined such a program elsewhere (see Epic Recession, concluding chapter), as well as how to fully finance that spending without further raising the federal budget deficit.

It is not likely that the Obama administration, which has allowed the decline of four million jobs in the first year of its term and has been unable to get a second “jobs stimulus” package passed so far in 2010, will come close to implementing such a required massive jobs creation program. Nonetheless such a program should be demanded, and raised as a centerpiece of a program for sustained recovery.

ATC 147, July-August 2010