Unemployment rate ignores the millions who have stopped looking

The employment rate is the key measure of Main Street’s economic health and the Labor Department’s April 5 report was weak and discouraging at best. After adding more than 200,000 jobs per month since last November, American employers added only a paltry 88,000 jobs in March, less than one-third the number created during February.

The country needs about 250,000 new jobs each month for five years just to get back to the headline unemployment rate we had in 2007. What’s more, this recent report found stagnant wage growth. We are not exactly witnessing a revival of breadwinners’ jobs.

Job creation was at its slowest pace since last June, totaling less than half the number economists had expected. The headline unemployment rate stands at 7.6 percent, shockingly high for a recovery that is nearly fours years old. This is not even remotely close to the pre-recession 4.7 percent rate in 2007.

Unemployment would be even higher if not for the large numbers of working-age people who have simply dropped out of the job market. Nearly 500,000 people just plain gave up looking for work and are no longer counted in the official employment numbers. Where they have disappeared to is anyone’s guess.

As a result, the labor participation rate fell to 63.3 percent, the lowest since 1979, which was before women entered the labor force in large numbers. If you count this exodus of Americans from the labor force as well as those still counted as unemployed and the involuntary part-timers, the true, actual joblessness rate is closer to 13.8 percent. Our friends in Washington, D.C., are stuck in the tar sands of an old paradigm continuing to focus on the “official” unemployment rate, but this masks the true crisis in the labor market.

Last December 12, Ben Bemanke, the fourteenth chairman of the Board of Governors of the Federal Reserve system, said the Fed would keep running the printing presses and thereby keep interest rates ultra-low for as long as the unemployment rate remained above 6.5 percent as long as its official forecast for inflation does not surpass 2.5 percent.

A jobless rate that low is not valid if it is predicated on a shrinking labor force. By only counting people who actually tried to find work within the previous four weeks, the unemployment rate ignores the millions of Americans who have stopped looking. The result? A falling official unemployment rate is not always a good economic omen.

We want the unemployment rate to go down because more people are getting jobs, not because they are giving up. During an economic recovery, an expanding economy usually brings people back into the labor market. This time, many are staying on the sidelines and more are joining them.

What happens if the real world economy regains its footing and starts to show signs of life? Many of these discouraged workers will probably resume their job searches.

But this will actually increase the size of the active labor force and cause the official unemployment rate to increase as well. This is good news hidden behind seemingly worst statistics. But it is really an admission of how bad things have been all along.

Alternatively, if the  conomy is facing a long twilight of no growth, maybe the Federal Reserve believes these people who have stopped looking for work will never return to the hunt; in this case, the headline unemployment rate will continue to decline as American workers remain on the sidelines.

Of course, this will result in the continuing growth of transfer payments such as unemployment benefits and food stamps, with the average worker leaning on government for relief, and flirting with poverty. They wouldn’t have far to go.

originally posted: April 27, 2013

It’s a wonderful life

Those of you who’ve seen Frank Capra’s classic 1946 movie “It’s a Wonderful Life” (at least once, since it’s been a Christmas Holiday perennial on television for decades) will remember one of its most famous sequences.

George Bailey (played by James Stewart) runs a one-horse Savings and Loan bank in the All-American town of Bedford Falls. And one day he’s confronted by a group of his depositors who’ve come to withdraw their savings money because they’ve become nervous about its safety, the classic run on the bank.

He tries to clue them in on the realities of the banking business, explaining that he doesn’t keep their savings in a safe in his back office. Instead, he’s used most of the money to grant each of them affordable mortgages on their homes.

Sam’s money is in Chuck’s house. And Chuck’s money is in Dick’s house. And Dick’s money is in Sam’s house … So it goes.

With each of them able to own the homes they live in instead of having to pay rent to Old Man Potter, the hard-hearted villain who owns the leading commercial bank and most everything else worth owning in town.

What George was trying to describe to his nervous depositors is how the home mortgage and banking business worked in the “Good Old Days.”

If “It’s a Wonderful Life” were made today, its description of banking would have to be updated to reflect last month’s goings on in Cyprus. To secure a 10 billion euro bailout, Cyprus slapped a tax on deposits that ranged from 9.9 percent on amounts above E100k to 6.75 percent on deposits under E100k which translates into $130,000 (the limit for deposit insurance). It then revised the terms of the proposed haircuts to reduce the levy on smaller depositors and raise them on larger ones. In other words, they would tax the bank accounts of citizens and businesses to recapitalize the banks. Afraid that the government was coming for their cash, Cypriots ran to the bank. Much was made of the government’s attempt to get its pound of flesh from bank accounts; people had to wonder if their own money was safe. We were told Cyprus was an isolated case and it could not happen here.

But how does Cyprus compare to what’s happening to American depositors and savers? The Federal Reserve’s zero interest rate policy (ZIRP) is not a tax, but it reaches into the average American’s pockets.

And it is done for the same reason as the bank bailout in Cyprus: to save the financial system. Average Americans are earning next to nothing on their bank deposits, which are actually losing ground to inflation. Yet they can’t borrow from the bank at these ridiculously low interest rates. Maybe Cyprus doesn’t look so bad after all.

ZIRP sets a dangerous precedent. It suggests that governments are not above taking money from depositors to pay for bailout packages. If deposits are not safe from politicians, why should you trust any bank?

ZIRP has been confiscating the savings of Americans for the past five years.

The average interest on a savings account is less than 0.25 percent, a 10-year government bond yields less than 2 percent and inflation adjusted returns on six-month bank CDs are 0 percent. Average Americans have no safe place to park their money and collect a decent return. Is the difference between these returns and normal interest rates equivalent to a tax? In Cyprus, it was a one- time hit to depositor, in America it happens more slowly.

This blow to traditional savers harms the working class, discourages savings and induces some to speculate in the stock market and reach for higher yields on riskier investments. In America, savers aren’t an endangered species; they’re all but extinct.

originally posted: April 20, 2013

Cyprus crisis can’t happen in the U.S.- right?

“Neither a borrower nor a lender be,” prattled Polonius to Laertes in Shakespeare’s “Hamlet.” Well, maybe. Last month, the European Central Bank, the European Commission and the International Monetary Fund decided that Cyprus needed a fast 17 billion euro bailout. They proposed to offer the tiny island 10 billion euros and demanded that depositors in Cypriot banks fork over the remaining 7 billion.

Specifically, they proposed taxing bank deposits. Depositors with more than 100,000 euros in their account would be faced with a 9.9 percent tax while those with less would see a 6.75 percent levy.

As you can imagine, depositors rushed to withdraw funds from Cypriot banks before the measure went into effect. So the authorities shut down the banks for several weeks and instituted capital controls. This had to be unsettling for retirees and the working class, as well as small businesses that need to make payroll using their bank accounts.

Setting aside for now how the crisis was averted and whether something similar could happen here, in the real world few businesses of any size can operate without access to short-term credit to smooth out mismatches in their normal cash flows.

Suppose your family’s widget factory pays its employees every Friday. That means a weekly cash outflow. But most of your prime customers are wholesale distributors who pay for purchases from firms like yours on the last day of the month following widget deliveries. So you have four payroll outflows for each injection of cash from sales.

Like the overwhelming majority of businesses, you cover these cash flow mismatches by drawing down a credit line from your local bank each week to make payroll and repay the drawdowns as soon as payment is received.

But one Friday morning when you get on your PC to access your firm’s bank accounts and transfer enough cash from your credit line to cover payroll checks, you see a chilling message on your screen: “All credit lines are frozen until further notice.”

You scrounge around among your firm’s bank accounts and come up with enough cash to cover this week’s payroll, leaving you pretty well tapped out until a big group of customer payments is due to arrive in three weeks. But what about your next three payrolls?

One option is to simply close the factory and lay off your employees until the payments arrive. But a closed factory doesn’t produce widgets, so you can’t deliver to your customers, who may tum to other suppliers. In any case, your future cash inflows will be lower, which means smaller profits.

Another option is to close the factory and lay off your employees for just a week, when you try to find enough emergency cash somewhere to cover the next two weeks of payroll. Losing only one week of production will reduce your loss, but what if you can’t find the money?

The widget company’s experience isn’t just limited to Cyprus. It was repeated a few million times in the United States during the fall of 2008. The results were massive layoffs, lost wages (which meant less consumer spending) and lost company profits. All of which made a disastrous recession even worse.

Why did this happen in the U.S.?

Because too many banks woke up one morning to find that some of the dicey unregulated derivative securities they held in their portfolios had lost most of their value. In a panic, they tried to conserve as much available cash as they could by freezing lending to businesses and individuals alike.

Back in Cyprus, the banks became a tax haven for overseas depositors. They then invested the money in Greek bonds to generate big returns. When the bonds tanked, the banks were on the verge of bankruptcy and needed a bailout.

But there’s no need to be alarmed. It can’t happen here. The American economy has been strong for months now, the stock market is rising, and your 401(k) is going through the roof. Right?

originally posted: April 6, 2013