Like The Matrix’s Spoon, There is No Recovery

In the 1999 film The Matrix, there's a scene in which the main character Neo encounters a child who is seen bending a spoon simply by staring at it. Neo, confused by what he's witnessing, asks the child how this manipulation of reality is accomplished. The child offers guidance to Neo, with the conclusion being "there is no spoon." Neo recognizes that what he has been conditioned to believe to be true is not necessarily so.

This analogy brings us to our topic. Yesterday’s non-farm payroll numbers came in, and were about as disappointing as anyone had expected. Approximately 125,000 jobs had been shed, with much of the fluctuation attributed to the release of the temporary Census workers. Private employers added a modest 83,000 jobs instead of the 110,000 or so anticipated. In addition, the 9.7% unemployment figure fell to 9.5%.

What does this all mean? First off, we need to clarify the unemployment figure and why it dropped. The government’s unemployment figure unfortunately incorporates two oddities: the exclusion of the “underemployed” people in the country, and the “birth-death” ratio. To explain:

First, the underemployment aspect: this basically refers to the fact that if people are working less hours than they want to (they’re in a part time job but are seeking full time employment), they aren’t considered unemployed, just underemployed. Also, if they’ve been searching for work and have given up the search due to discouragement, lack of opportunity, or whatnot, they are no longer considered unemployed.

With respect to the birth-death ratio, what this essentially means is that when companies go out of business, the government automatically assumes all affected workers are hired thereafter, unless reported otherwise (such as when the individuals themselves report to the unemployment office). Of course, in reality, we know that in such economic times as we’re experiencing now, it’s foolish to assert that laid-off workers are able to immediately secure follow-on employment.

So you can see why it makes more sense to pay attention to the underemployment figure, which yesterday fell by a tenth of a percent, from 16.6 to 16.5%. Hardly anything to celebrate. Moreover, the anemic private sector job growth underscores the ineffectiveness of government economic policy.

So aside from this statistical nonsense that the government engages in to pad the numbers, the real question is, if we were supposed to be in a recovery, where are the jobs? The answer to this is simple: there is no recovery. The small amount of positive data that filtered in during early 2010 is anomalous, and suggests that during the lull in the housing market crisis and run-up to the European debt crisis (see my May 24 post), the maligned economy got a breather and some small measure of relief. But that relief is steadily disappearing.

Think of it this way: each dollar the government has spent (and here I’m mostly referring to the stimulus package begun in February 2009) is one less dollar available to the private sector. It’s important to understand that when the government spends money above and beyond what’s readily available to it in the way of taxes and so forth, it must borrow it or print it – neither of these activities comes without a cost to our economy, businesses and individual citizens. This is because the government’s spending brings ill side effects such as new and higher taxes, inflation, and misallocation of capital resources into ventures that are often less productive than those that might be accomplished by the private sector.

The fundamental question that is rarely asked is this: how many more jobs could we create if the capital reallocated by the government were instead available to the private sector? Every time a government official touts the latest job growth (or downplays the latest job losses), I ask myself “at what expense?” The simple fact is that as government has grown and thus become more costly to maintain, it is crowding out businesses and requiring more and more capital to operate. Obviously, this is money no longer available to companies to re-invest into their businesses and expansion of their workforces.

Simply put, the recovery isn’t over; it never was. There is much more hardship remaining in this economic climate. The next wave of the housing crisis is right around the corner, as new and pending home sales have plummeted with the removal of government subsidies, combined with looming mortgage defaults stemming from the Option ARM and Alt-A mortgages on so many banks’ balance sheets. The European debt crisis is in its infancy, with several more nations due to declare bankruptcy, introduce austerity measures, and request fiscal aid from the EU, IMF, US or whomever else might be willing to provide relief. China’s unsustainable economic growth will eventually slow down, producing a ripple effect across its trade partners and upsetting its internal economic (and perhaps even political) dynamics. Given all this, we must be prepared for continued difficulty in the growth of jobs and the economic recovery as a whole. Now that the administration has taken credit for the supposed recovery, it will be interesting to see who gets the blame for the second (and likely far deeper) dip in this recession.