I. Unemployment Drops to 8.6 Percent as Many Adults Quit Labor Force
The economy added 120,000 jobs in November, and unemployment fell to 8.6 percent from 9.0 percent in October.
Job growth in range of 120,000 should be expected to accommodate labor force growth but not much lower the unemployment rate—especially not by nearly half a percentage point. However, the scarcity of jobs is causing many professional to establish home-based businesses that really don’t provide full time employment but do take workers off the unemployment rolls.
Also, many adults have quit looking for work altogether, and the adult labor force participation rate fall sharply in November. Working age adults not participating in the labor force—those neither employed nor looking for work—increased by 487,000 in November.
Strong gains were notched in retailing, warehousing and transportation, health care and social services, and temporary business services. Gains in other activities were quite lackluster or nonexistent—for example manufacturing added only 2,000 jobs. Construction shed 12,000 jobs and information technology lost about 4,000.
Gains in manufacturing production are not matched by improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan.
Government employment fell by 20,000, as private sector jobs added 140,000.
The private sector less the heavily subsidized health care and social services sectors, and temporary businesses services, only added 94,000 jobs. Those gains in core private sector employment must increase dramatically if the economy is to halt the decline in real wages and provide federal, state and local governments with adequate revenues, and that is not happening fast enough.
The economic crisis in Europe and mounting problems in China’s housing sector and banks worries U.S. businesses about a second major recession and discourages new hiring. The U.S. economy continues to expand but is quite vulnerable to shock waves from crises in European and Asia.
Factoring in those discouraged adults and others working part time for lack of full time opportunities, the unemployment rate is about 15.6 percent. Adding college graduates in low skill positions, like counterwork at Starbucks, and the unemployment rate is likely closer to 18 percent
Prospects for lowering those dreadful statistics remain slim. The economy must add 13.1 million jobs over the next three years—364,000 each month—to bring unemployment down to 6 percent. Considering continuing layoffs at state and local governments and federal spending cuts, private sector jobs must increase about 375,000 a month to accomplish that goal.
Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years. The second half of 2011, the economy has been growing at about 2 percent, and that pace is expected to continue through 2012.
Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, large federal deficits, expensive and ineffective business regulations, and costly health care mandates do not address structural problems holding back dynamic growth and jobs creation—the huge trade deficit and dysfunctional energy policies.
Oil and trade with China account for nearly the entire $550 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.
Simply, dollars sent abroad to purchase oil and consumer goods from China, that do not return to purchase U.S. exports, are lost purchasing power. Consequently, the U.S. economy is expanding at 2 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.
Without prompt efforts to produce more domestic oil, redress the trade imbalance with China, relax burdensome business regulations, and curb health care mandates and costs, the U.S. economy cannot grow and create enough jobs.
II. Reforms to Save Euro a Tall Order—Even for Germany
Now that the euro has bankrupted Greece and pushed Italy and other Mediterranean states to the brink, Angela Merkel proposes tough, EU-administered disciplines on national deficits. Those would thrust the Mediterranean states into decade-long recessions without fixing flaws in the Eurozone architecture that caused all the borrowing and crushing debt in the first place.
At the end of 1998, wages, prices and government bonds were converted from national currencies into euro according to prevailing exchange rates. To the extent those rates reflected market prices, the euro adequately priced labor, exports and public debt across borders.
Unfortunately, among the 17 members of the currency union, labor market policies, social programs, and industrial policies are separately established and financed, and vary much more than among the 50 states in the dollar zone. Specifically, union and worker protection rules are federally enforced in the United States, the 50 states don’t own big chunks of industrial enterprises, as do German Landers, to build exports and block outsourcing, and Social Security and Medicare/Medicaid are federally financed.
Owing to significant differences in labor-market and industrial policies, investment and productivity grew more rapidly in Germany and other strong northern economies, and labor and exports became overpriced in Italy and other now troubled southern economies.
Generally, the European Central Bank permitted the euro to float, and its value against the dollar yen tends to reflect wages, productivity and economic strength of the 17 Eurozone countries as a whole. Consequently, the euro is undervalued for the German and other northern economies, making them export juggernauts, and woefully overvalued for Italy and other Mediterranean states, imposing on them chronic trade deficits.
In the South, imports chronically exceeding exports created huge holes in demand for domestic goods and labor, and deprived national governments of tax revenues. Huge budget deficits became endemic to prop up employment and finance social programs.
The terrible debt now burdening the balance sheets of Mediterranean states is the direct result of flaws in the architecture of the Eurozone—the absence of unified labor market regulations, genuine limits on mercantilist industrial policies, and a fiscal regime to finance benefits for seniors, health care, unemployment insurance and the like. Chancellor Merkel’s disciplines on member country budgets won’t fix those imperfections.
Recently, I discussed these issues with Peter Altmaier, chief whip of the Christian Democratic Union. He advises that Italy and others adopt German reforms. That’s puzzling.
Germany’s economic strategy is substantially based on an undervalued currency, institutional constraints on outsourcing and amassing huge trade surpluses. As one country’s trade surplus must be another country’s trade deficit, not all European states can simultaneously accomplish Germany’s mercantilistic alchemy and resulting growth.
Austerity and EU supervision of member country finances won’t make troubled states more competitive, but it will leave them woefully uncompetitive and unable to finance health care and pensions, even at levels below those acceptable to most Germans. And, those policies won’t enable troubled governments to pay their debts.
As things stand, labor and exports are overpriced across the Mediterranean states, and their economies must endure tortuous recessions, lasting a decade or more, to push down wages to competitive levels—but such deflation may not be enough.
Draconian austerity would leave those economies with insufficient public infrastructure and outdated private capital, and no matter how much wages fell, those handicaps would keep productivity too low for exports to be competitive.
To pay foreign debts, Mediterranean states must earn euro by exporting more than importing, and they must accomplish budget surpluses. However, such feats would require Germany and other northern countries to endure trade and budget deficits—Germany and others are not likely to come to recognize that requirement easily or happily.
What Merkel prescribes would institutionalize German economic dominance—Germany and other northern states get the exports and Italy and other southern states get the imports, the former makes loans to the latter to paper over the imbalance, and in the end, Germany, as the principal creditor state, controls the EU Commission and debtor states, just as Berlin now calls the shots at the ECB.
To make the euro work, austerity and budget disciplines on southern countries must be complemented by EU-wide regulation of labor markets, genuine disciplines on beggar-thy-neighbor industrial policies and a substantial EU wide value-added tax—matched by comparable reductions in national levies—to finance a Eurozone-wide Social Security and health care systems.
That’s a tall order, but without those reforms, a single currency is more than Europeans can expect.
Peter Morici is a professor at the Smith School of Business, University of
Maryland School, and former Chief Economist at the U.S. International Trade