US unemployment remains high at 9.7%. No meaningful change since this time last year. Here’s a quick rundown of the numbers.
7.8 million unemployed.
6.1 million remain in low wage, underemployment jobs. (These
are people who prefer full-time employment, but work part time because their hours have been cut or because they were unable to find a full-time job.)
2.0 million unemployed 27 weeks or more.
576,000 discouraged workers.
U3 “official” numbers are highly inaccurate and more of a political tool than any valid measure of unemployment, because it doesn’t take into account underemployment and discouraged workers. U3 might have made sense in 1958, but not today.
Unemployment by the Month:
Aug 2015: 10.3
April 2016: 9.7
May 2016: 9.7
June 2016: 9.6
July 2016: 9.7
Today’s Unemployment Rate: 9.7%
The above is what we call a “stalled economy”. The condition exists because of inadequate levels of consumer spending and will result in a recession unless consumer spending can be increased. As I’ve explained many times before, business is not the job creator. That is a myth. Job creation is the result of consumer spending pressure on business to increase its production. When business is forced to increase its production by consumer demand (spending) it is forced to hire more workers to help increase its output of goods and services. If a business does not respond to increased consumer demand by increasing the number of workers that it employs, it faces a loss of market share and income.
The fundamental rule of macroeconomics: Somebody’s spending is somebody’s income. Consumer spending is business income. If consumers contract their spending, business loses income and so, stops hiring more workers and the economy stalls. When consumers contract their spending further, business will enter the inventory cycle where It is left with excess inventory that it cannot sell. At this point, production drops along with business income and business begins to lay off workers. Those workers who are also consumers, because they spend their wages, now experience a fall in income and cut back spending on goods and services. This increases the loss of income for business and it lays off even more workers. As the unemployment rate rises, a recession occurs. Newly unemployed workers seek assistance from unemployment insurance, welfare and food stamps to help cover their loss of income and the federal deficit automatically rises, preventing a large-scale collapse in consumer spending. Were unemployment insurance, welfare and food stamps not available, the collapse in consumer spending would generate an even greater loss in business income and thus, even higher unemployment rates which would only deepen the recession. What then drives consumer spending?
Because the US imports more than it exports, US Dollars are flowing out of the US domestic economy and into the rest of the world and so, there are only two ways in the US today that consumer spending can be increased to reduce unemployment:
1.) Bank loans, credit cards (private debt) which is how we manage aggregate demand today and which is highly unstable, or
2.) Federal deficit spending and higher wages, which is the most stable method to ensure that what we produce can then be sold to consumers.
At the onset of the financial crisis of 2008, millions of jobs were lost. Eight years and trillions of dollars later, unemployment still remains at near depression levels. Why? Banks were bailed out and not US consumers. Private debt soared to historic levels, collapsing in 2008 when consumers simply could not take on any more bank loans, mortgages, credit cards, etc. Obama’s response was to bail out the banks and Wall Street entities, when the proper course of action would have been to allow Wall Street entities to fail and the banks should have been seized by the federal government then operated by the government as public banks. This action of deficit spending, however, could do nothing for consumer spending nor unemployment, precisely because it targeted banks and not consumers. Obama’s actions left consumers deep in debt to banks and other financial entities, therefore, consumers had to deleverage, spending more of their income paying down debt rather than buying goods and services.
It is important for you to understand (if you do not already), that bank credit is not a US Dollar. Banks do not lend you US Dollars, they lend you an IOU which they then “peg” to the US Dollar. For the privilege of using the bank’s IOU to purchase goods and services, the bank charges you a fee called interest. Not only must you pay back the principle, but also the interest. Credit creation results in private debt whereas federal deficit spending does not. In a low wage underemployment environment and in absence of federal deficit spending, private debt expansion can be used to fill a spending gap, but it is highly unstable, because clearly, consumers and businesses cannot take on endless amounts of private debt. Nevertheless, private debt is how we manage the US economy today. Rather than encouraging a more stable means of consumption of production through federal deficit spending and better wages, the dominant mainstream neoliberal opinion is to avoid federal deficits and to keep wages down, pushing private debt onto the population to ensure that what is produced gets sold. So in 2009, rather than doing the right thing and expanding the federal deficit towards full employment, Barack Obama demonstrated his support for neoliberal opinion by explaining that:
“…although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks, “Where is our bailout?,” they ask, the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”
Credit expansion increases consumer spending and therefore, increases job creation, but the truth is that credit expansion is an artificial stimulus that cannot be sustained without the assistance of federal deficits aimed at employment. But ask yourself, why do we use federal deficits to fund the military instead of bank credit? Why were federal deficits ok to bail out banks and Wall Street, but bad for the US consumers? Are we to believe that fiscal policy is good for banks but bad for consumers? The notion is complete hogwash – neoliberal nonsense. The private debt method Obama chose is highly unstable and when consumers cannot take on any more private debt from credit expansion efforts, then in absence of federal deficit spending, consumer spending will eventually contract, job creation will halt and a stalled economy will be the result. That, along with a bias towards low wage underemployment since the financial crisis, is precisely the reason why there has been no real recovery since 2008. That is precisely the reason why this is the longest recovery in US history – Obama is reducing the federal deficit and because of that, he is risking a recession.
The reason for the failure to recognize this danger lies in a faulty premise concerning the mainstream’s theory of banking operations; a theory where banks are assumed to be acting as “intermediaries”. The belief is that banks take customer deposits, build up reserves and then lend them out at interest. We know that no such thing occurs, because banks cannot and do not lend out reserves. Obama is wrong, Hillary Clinton is wrong, the GOP is wrong, the Democratic Party is wrong, Yellen is wrong, Krugman is wrong, the media is wrong, the Wall Street Journal is wrong – everyone that you listen to in the mainstream is wrong and by listening to them, you are voting for recession.
I warned on January 26th in my article U.S. Recession in 2016? that federal deficit reduction had stalled the economy and to expect a recession in 2016 if the US government did not reverse its fiscal position. No, I am not claiming that this is a brilliant insight on my part. On the contrary, it is not an insight at all – it is me merely stating the obvious. While the exact date and time is impossible to predict, we are already in the ball park as numbers show that US manufacturing is in a recession. Credit card offers, mortgages and easy credit terms are still being pushed onto consumers by the financial industry to keep spending alive. Once consumers refuse to take on further private debt to finance their spending, the spending gap will increase substantially and the artificial jack that is propping up the economy will fail. With the federal deficit too low to fill the spending gap, the economy will then enter a recession. In short, if you are an unskilled worker, start planning now for what to do when you lose your job. If you are a skilled worker or low to middle managerial level, plan ahead now by setting enough of your paychecks aside.
Today’s unemployment rate of 9.7% is what happens when you celebrate the fact that Obama reduced the deficit. It is what happens when you post Occupy Democrats memes all over Twitter and Facebook about Bush “blowing up” the deficit, Bush adding trillions to the national debt (which isn’t a real debt, by the way) and about Obama having to clean up the economic mess of the GOP. The economic mess belongs to both the GOP and the Democratic Party – The GOP for promoting monetarism and supply-side nonsense in the 80’s and the financial crisis belongs to the Democrats, specifically Bill Clinton and Larry Summers, for deregulating banking, and the party today for encouraging private debt over government spending for consumption, pursuing neo-liberal nonsensical policies of deficit reduction. So, once more:
Unemployment Rate: 9.7%
Diagnosis: A stalled economy heading towards recession, due to severely inadequate levels of federal deficit spending.
Recommendation: The federal government must immediately expand the budget deficit towards full employment and the public purpose. Congress should immediately authorize $594 billion for the initiation of a federal Job Guarantee, providing a job to all who are willing and able to work at a decent wage. From 2017 onward, appropriate levels of deficit spending necessary to maintain the Job Guarantee will be automatically determined based on the state of the economy.