Don't Break Out the Champagne Yet

Economists have been spewing happy talk lately like it’s going out of style. I thought they would have learned something from the last two stock market bubbles fueled by irrational optimism. Apparently not, because the consensus now is that the recession is over and that the US economy has entered a “slow” or “Jobless” recovery.

At least they’re being somewhat cautious about their excess exuberance. I can’t say the same thing about investors, who’ve driven the stock market over 10,000 again without any sign that these stock prices are justified. We might blame the Fed for this, with Ben Bernanke’s insistence that a summertime bump in housing sales means the recession is over; never mind that sales are mostly in the low-end of the market, and overall housing prices are still falling in most parts of the country. No one knows what will happen once the First Time Homebuyer Credit expires later this year.

The phenomenon of a “jobless recovery” is an interesting one, worth more discussion than it usually gets in the media. Economists toss out the term as if we all should understand intuitively what it means, leading to a widespread suspicion that it is, in fact, a meaningless term. But it does have a meaning—just one that, for political reasons, economists and politicians would like to keep secret from the average American.

In US economic history, recessions (including the Great Depression) were followed by periods of economic recovery during which business activity expanded. This meant that employment increased, too, since businesses had to hire more workers. But a curious thing has developed over the last twenty years: recessions have been followed by long periods of high unemployment. We’ve had three opportunities to witness this: first, in the early 1990’s (coinciding with the first Gulf War and high oil prices), in the late 1990’s (the bursting of the tech stock bubble), and the current mess we’re in right now. In all three situations, businesses have reported upticks in their economic activity or improvements in their balance sheets, but they’re not hiring people, and most are laying people off.

Some of that is related to “increased worker productivity,” a term that means bosses are laying off people and expecting the remaining staff to pick up the extra work. But there’s only so much slack in that rope before employers have to go looking for new employees. Unfortunately, many of them are looking overseas, where labor is cheaper. Outsourcing is a phenomenon that started in the 1980’s with US manufacturers relocating their production plants overseas. US government foreign aid programs (with the help of the World Bank and the IMF) provided money to developing countries to build “infrastructure” to attract business investment—in other words: factory buildings, roads, and port facilities for US companies that wanted to relocate abroad to take advantage of a cheap labor force. And cheap oil made it even easier to produce everything overseas and ship it all back to the US for consumption. In the 1990’s, even the US service industry got on the bandwagon by setting up call centers and customer service centers in India to save money.

Much of the “jobless” aspect of the last two recoveries can be accounted for by outsourcing. But there’s no indication that outsourcing is playing the dominant role in the current “recovery” (if you believe that we’re really in one, which I don’t). The most recent unemployment figures show that the US lost 263,000 jobs in September. More important are the revised figures for the first quarter of this year. The rule of thumb has been that we lost about half a million jobs each month at the beginning of this year. In fact, the figures are much, much worse, culminating in a revised total for March 2009 of 824,000 jobs lost in that month alone. Currently, the official number of people looking for work is 15 million, or about 35.6% of the unemployed. This doesn’t count the underemployed (those working part-time or as temps who are searching for full-time, permanent employment). Some economists put the real unemployment figure (which counts everyone who’s out of work, including the “discouraged” who no longer looking for work) at close to 20% of the US adult population—one in every five people.

So what is accounting for the profits on the balance sheets of US corporations? Well, for one thing, most of them are paring down by selling off pieces of their businesses. The business press has been full of headlines announcing mergers and sales, many of which are being financed by US taxpayers through the federal government’s bailout plan, one aspect of which is to provide low or no interest loans to businesses, ostensibly to help them fund operations. (The US government is doing this because banks won’t—that’s what they mean when they say “credit has dried up.”) But once the money goes into the bank accounts of American businesses, the Treasury and the Fed have no means to ensure that the money is being spent on day-to-day operations and not being used to buy up other distressed companies. In fact, Fed Chief Ben Bernanke and Treasury Secretary Timothy Geithner are satisfied that funding mergers is a legitimate use of taxpayer money, because that’s what the US government did with the Bank of America/Merrill Lynch bailout in 2008 (which was engineered by Bernanke and former Treasury Secretary Henry Paulson, but Geithner was on the board of the New York Federal Reserve at the time, and he pushed for these kinds of bailouts).

Your taxes and mine are paying for the “jobless” recovery and sparking a run-up in stock prices, which is keeping the rich happy, and naturally leading to lots of happy talk. But there’s another, more sinister reason why US businesses have healthy balance sheets.

There’s been a lot of talk about increasing financial regulation, but not much action. For example, it’s still legal, eight years after the Enron and Worldcom collapses, for businesses to hide their debts in off-balance-sheet entities. In other words, they set up special “holding companies” that only hold debts or worthless “assets,” like mortgage-backed securities. And in March, the Financial Accounting Standards Board extended another benefit to US businesses by repealing the mark-to-market rule that forced companies to value mortgage-backed securities and similar derivatives at current market rates (the prices they’d get if they tried to sell the securities today—for many of those securities that price would be $0.00).

These accounting tricks, which contributed to the last stock market bubble, are still be used by businesses today to hide the true state of their finances. So, no, I don’t believe that we’re in a recovery. In fact, I think we’re heading into yet another bubble…with another implosion headed our way.