Janaury, 2014 Economic Crisis Update, Part 1: The Dwindling Working Class, The Growing Washington Economic Ineptness

We will move beyond the past week or so of depressing news about political class insanity, idiocy, and wasteful spending and move onto depressing news about the economy. As a quick recap, consider the general economic and employment trends we have had to endure over the past five years or so:

• There are a record number of Americans, over 20 million, that are either unemployed or under employed.
• There are a record number of Americans that are receiving food assistance from the Federal government, almost 50% more than when Obama took office.
• Over half of the recent college graduating classes could either not find a job or could not find a job in their area of interest.
• A very high percentage of jobs created over the past few years have been only part time or temporary jobs.
• Household income has dropped steadily over the past five years despite the fact that the recession ended well over three years ago.
• Until recently, official national unemployment levels (U3) had been at record highs for record lengths of time.
• Increased costs of health insurance as a result of Obama Care will likely result in less disposable household income available in the coming years to expand the economy.
• The national debt has jumped to about $17 TRILLION, up over six TRILLION dollars since Obama took office in 2009.
• Monthly trade balance deficits with other countries continue at very high rates.

Not a pretty picture. These dismal economic realities occurred even though:

• The Obama administration spent over $800 billion on an economic stimulus program.
• The Federal Reserve has kept interest rates at record low levels for a record length of time.
• The Federal Reserve flooded the market with over three TRILLION dollars worth of printing press money via its Quantitative Easing Programs. 
• The country is in the midst of an energy revolution, generating record amounts of lower cost domestic energy.

Despite these four incredible economic drivers and positive circumstances, the ineptness of the Washington political class when comes to economic policy, strategy, and planning is incredible, given the poor economic results listed above. Never have so many in political office done so little with so much going for it.

And last week’s economic results from the Federal government are not much better:

• Only 74,000 jobs were created last month despite it being the busiest retail shopping month of the year. 
• This is the smallest monthly increase in jobs since the beginning of 2011.
• Almost three times as many jobs were expected according to most economic forecasts.
• While the unemployment rate dropped to 6.7%, the lowest level it has been in years, the drop was due almost solely to the fact that many more people stopped looking for a job vs. those Americans who actually landed a job, distorting the true economic picture of the country.
• This is because the labor participation rate dropped one fifth of a percentage point to its lowest level since 1978.

Unbelievable. Massive Federal Reserve stimulus, massive Federal government spending stimulation, and massive energy industry expansion and all this administration and Congress can accomplish with those tools is a measly growth of 74,000 jobs in a country of well over 300 million people. Pathetic.

Let’s look into some of the details of this economic malady. First, is the unemployment rate really down to 6.7%? If so, that would be great news since at one point in the past few years it was up around 10%.

Well, the official unemployment rate, the U3 unemployment rate, is really down to 6.7%. But that is only because some Americans have become so frustrated in their job search that they have stopped looking for a job, not becuase we have a robust economy generating oodles of jobs. Consider a simple hypothetical example of how the math works for the U3 unemployment calculation:

1. Assume you live in a nation with 100 working age adults.
2. Assume that 90 of the 100 adults have a job, 10 are actively looking for a job, and none have become frustrated in their search for a job and have stopped looking.
3. In this scenario, the unemployment rate is 10% = (the number of people looking for a job)/(the total number of people looking for a job and those that have a job) =10/100 = 10%.
4. But assume that five of those unemployed people stop looking for a job out of frustration that they were unable to find a position. This reduces the number of people actively looking for a job to five.
5. The recalculated unemployment rate is no longer 10% but 7.69% = (the number of people looking for a job)/(the total number of people looking for a job and those that have a job) = 5/95 = 7.69%.
6. Thus, in the U3 calculation, even though in both scenarios the number of people working and the number of people not working remain the same, the unemployment rate is actually lower.

In this hypothetical example, nothing has changed as far as an improvement in the economy via this measure of unemployment: ten people still do not have a job and ninety do, and the same thing is going on in the real economy. With only 74,000 hobs created last month but hundreds of thousands of Americans dropping out of the workforce from frustration of their job seeking, the U3 unemployment rate did drop to 6.7%. not because of economic improvement but strictly because of the math technique employed.

Want a truer picture of how badly managed the political class has managed the economy? Consider a recent analysis that appeared in The Federalist. In that example, they kept the labor participation rate where it was at the end of the recession in June, 2009 and then recalculated the U3 unemployment rate with a constant labor participation rate. They explained their methodology and logic as follows:

• In June of 2009, the labor force participation rate was 65.7 percent (by way of comparison, the average over the last decade is 65.1 percent, while the peak was 66.5 percent in June of 2003). Since the end of the recession, that number has nose-dived. At the end of last month, it hit 62.8 percent — on par with what the U.S. experienced in the late 1970′s (although at the time, the number was on the upswing).
• What does this all mean? Rather than being the sign of a vibrant economy, the falling unemployment rate is actually an arithmetic artifact of the BLS head-counting process. If the labor force participation rate had held steady since 2009, the number of people in the labor force today would total nearly 162 million people. Instead, the Federal Bureau of Labor Statistics reports the official number to be just shy of 155 million.
• And thanks to how BLS calculates and reports the official unemployment rate, those 7 million people are not included among the ranks of the unemployed. Add them back in and you have an unemployment rate that averages a very high 10.8 percent since the end of the recession.
• Pictorially, their depressing but more realistic analysis looks like the following:



Thus, our economy is performing so poorly under poor management from Washington that our true unemployment rate is probably 50% than the unemployment rate Obama and the Federal government is publishing, 10.8% vs. 6.7%.

[Note: I will make one concession. While I also believe that the 10.8% is much closer to reality, it might be a little high. Since a lot of baby boomer adults are retiring every day, it might be a little unfair to hold to the same labor force participation rate that was in place in June of 2009. That rate might have deteriorated a little due to baby boomer retirements. However, the analysis is sound and I doubt that the results would have been significantly below 10.8% if baby boomer retirements had been considered, certainly nowhere close to 6.7%].

Consider another view, another analysis but basically the same results. The following graph contains the official government U6 unemployment rates over the past years. The U6 government unemployment rate calculation tries to take into account those Americans that have dropped out of the actively searching for a job mode because of frustration:






A few observations:

• The U6 shows a much higher more realistic view of unemployment than the official U3 rate.
• Even during the recession after the 9-11 attacks early in the Bush Presidency, the U6 rate never stayed above 10% vs. the U6 during the Obama administration that has always been above 12%. And Bush did not have an $800 billion stimulus program, record low interest rats, record Fed paper money, or an energy revolution to help him control unemployment.
• The Clinton demonstration also was able to keep the U6 unemployment rate at a much more reasonable level without all of the stimulus that Obama has had.

The bottom line is that this administration and recent sessions of Congress, along with those sitting in both institutions, have done a pathetic job in creating economic hope and opportunities for Americans. Given the current rhetoric and cluelessness from Washington, it is also unlikely to change anytime soon.

Einstein once said: “The definition of insanity is doing the same thing over and over again and expecting different results.” The current American political class is doing just that: the same tired, ineffective economy policies and tactics that have failed every time. That is why we still have a true picture of unemployment that is well north of 10%, why we still have over 20 million Americans unemployed or under employed, and why we have nothing to show for a national debt of $17 TRILLION. Insanity.

If you are as frustrated by the economic ignorance of Washington as many other Americans are, please consider joining our drive for term limits at:

www.howmuchworsecoulditget.com

Because really, from an economic perspective, how much worse could it get if we replaced every member of Congress with new folks who might at least have a chance at understanding economics?

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