This Time is Different

Those dreaded words you never want to hear as an investor.  But check out the Fortune Magazine graphic of this recession relative to others since the WWII.   Yes it’s a balance sheet problem and the economy needs more time to heal and delever.

We also maintain, however,  at least some, if not much of the weakness, especially in the labor market, is structural and not cyclical.  Take the U.S. Postal Service (USPS) as the poster child of the current problems plaguing the U.S. labor market.   The USPS  has 571,566 full-time workers making it the country’s second-largest civilian employer after Wal-Mart.  It has eliminated 110,000 jobs in the past four years and according to the FT,

During the next five years, the service plans to cut 220,000 staff – about 120,000 through lay-offs – and close up to 300 processing centres on top of plans to shutter up to 3,700 post offices released last month.

Now why is this?  Not enough stimulus?  Monetary policy too tight?  Insufficient quantitative easing?   To paraphrase James Carville,  “It’s technology, stupid!”   The rise of the internet, e-mail, and Twitter coupled with some piss poor management, which failed to adapt to the changing times,  and the result is one of the nation’s largest employers facing bankruptcy and mass layoffs.

Borders Books Inc. is also in the process of liquidating the last of its stores, which will result in a final mass layoff of close to 11,000 employees.   True, they failed because of  “lack of demand” for their goods and services.  But not because of cyclical forces that could be offset by fiscal and monetary expansion.   The rise of the e-book, Kindle, and iPad shut them down.

The Shumpeterian  “creative destruction” of one sector is not being equally and instantaneously offset by job creation in the sectors benefiting from technology.  This takes time, retraining, political vision and strong leadership.  Companies can’t hire enough software engineers in these fields because the current labor pool lacks the education, training and skills.

Policymakers must recognize the global economy is sitting at the elbow of an exponential curve in technological advances that is and will uproot everything from manufacturing to how we read our mail and books to how medical services will be delivered.

We’ve posted several pieces on the Global Macro Monitor blog about the role of  transformative tech, including medical apps where smart phones can be transformed into EKG monitors and cataract detecting devices.  How do you think this revolution will impact the traditional health care workforce?

We haven’t even touched on the mobile payments revolution, which will reduce the demand for retail salespersons and cashiers.  Not a near-term positive for employment as the the BLS points out,

Retail salespersons and cashiers were the occupations with the highest employment in 2010. These two occupations combined made up nearly 6 percent of total U.S. employment.

The painkillers of fiscal and monetary stimulus,  including negative real interest rates and quantitative easing, has no doubt cushioned the blow of the great crash of 2007-08.   We’re the first to thank Paulson, Bernanke, Geithner and Co. that we are not all farmers living under the freeway.  They all deserve the Presidential Medal of Freedom in our book for saving and stabilizing the global financial system.

But the continued use of cyclical policies to deal with structural issues has created an acute addiction in the markets and economy causing more uncertainty, political angst, and volatility, in our opinion.   This is especially true in the equity markets, which was evident yesterday in its reaction to Mr. Bernanke’s speech.

The policy medicine has now become an additional disease afflicting and distorting markets and the economy, which are now hooked on the painkillers.

Policies that address structural issues, though painful,  will go a long way in healing the economy.   A long-term credible budget plan which addresses the structural deficit will instantly reduce much of the uncertainty holding back investment.  Punishing savers with negative real interest rates “for at least two more years” will not and may actually consume the rest of the decade in cleaning up the unintended consequences of the Fed’s serial distorting of the relative price of money.

There’s now talk of the Fed targeting unemployment.  How ’bout this.  As part of the next quantitative easing,  the Fed creates a $1,000 checking deposit for every citizen who agrees to write ten letters to friends, especially in rural parts of the country.  This stimulates demand for postal services and thus eliminates, for a time, the need for mass layoffs at the USPS.

In no way do we intend to be insensitive to the workers at risk of losing their jobs.   But is this really where economic policy is headed?  Where is the leadership?

(click here if chart is not observable)

This entry was posted in Black Swan Watch, Charts, Demographics, Economics, Employment, Fiscal Policy, Policy, Politics and tagged , , . Bookmark the permalink.

12 Responses to This Time is Different

  1. David says:

    One of your very best posts! You should send this to Paul Krugman and ask for a response. Seriously.

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  3. Steve Hamlin says:

    I thought in general that structural unemployment implies that the workforce supply is not matched to workforce demand – that is, there is someone looking to hire who cannot find a worker with the appropriate skill set. Is that the current case? Or does ‘structural unemployment’ also apply when there are no jobs for a large number of people, regardless of their skill level and prior demand for their services just 20 months ago?

    Long-term unemployment may not be structural if there aren’t employers unable to meet hiring needs. Are wages in certain industries, or certain parts of the country, going up while others are going down? That may be structural. If not, then unemployment may be massively cyclical and long-term.

    Who are the employers unable to find good workers?

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  7. Jason Marcus says:

    Your simplistic response to the USPS problem does not take into account the effect of the issues raised by the following Alternet post asserting that government policy significantly impedes its ability to operate at a profit.

    • macromon says:

      Jason, Thanks for the post. We implied that in our poor management comment. You and the article raise the issue of structural problems at the USPS. Our point of the post is that cyclical policy tools – tax cuts, spending, quantitative easing and zero interest rates — will not fix these structural issues and are doing more harm than good to the economy. Cheers, GMM

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