Dr. John David: 'What is to be done?'
CHARLESTON, W.Va. -- As efforts to re-ignite the economy sputter, many ask the famous question, "What is to be done?"
Prescriptive remedies are highly varied and numerous economic repairs, such as those dealing with toxic assets, health care and financial dalliances, are in place for the long haul. Efforts, however, to more quickly reduce unemployment and increase the purchasing power of consumers have been troublesome.
Recent monthly data indicate that the private sector is only increasing jobs at a fraction of the number necessary to reduce unemployment. For example, the data released for July 2010 showed that the number of private-sector jobs increased by only 71,000 while more than 200,000 would be needed to reduce the official unemployment rate which continued to hold at 9.5 percent. Coupled with the reduction of 143,000 terminated government census jobs, there was actually a net loss of 131,000 jobs in July.
To date, the recession has cost nearly 9 million jobs. In order for the economy to stay on an even keel with population growth and similar variables, jobs must increase by 100,000 a month. In order to reduce the unemployment rate to an official 5 percent to 6 percent over the next four years, jobs must increase by 200,000 to 300,000 month. Clearly, the light at the end of the tunnel is not yet visible.
The problem is even worse because the long-term unemployment rate, defined as 27 weeks or longer, is at the highest level since data began to be collected 70 years ago. The Pew Research Center "found more than half of adults in the U.S. labor force have suffered a spell of unemployment, a pay cut or reduction in work hours," according to The Wall Street Journal. Those who are unemployed for excessive periods are more vulnerable to losing their skills and keeping up with new training developments. Furthermore, even if they finally find employment, the loss in skills can lower their productivity for a time. Most troublesome, perhaps, is that those unemployed for long periods simply abandoned their employment search. In February, for example, 1.2 million people did exactly that, which was three times the number than exactly one year prior. This development camouflages the real unemployment rate, which many experts estimate to have risen to 22 percent overall and 40 percent for younger adults. Accompanying this situation is the rise of unemployment claims -- which in May 2010 jumped by 25,000, to 471,000, after holding flat or declining over 2009 -- and the decision by many to opt for early social security benefits.
Currently, there is a debate whether to continue a key component of the recovery program, namely stimulus spending. Globally and domestically, there is a major push to cut budget deficits and reduce spending. Yet, as many know, there is a major difference between a stimulant and a catalyst. A stimulant is like a push or prod which increases activity and accents progress. However, a stimulant does not guarantee the same result as a catalyst, which ignites a new reaction that is both self-perpetrating and expansive.
It is apparent that the initiated stimulus activity was insufficient to re-ignite the economy and that it needs to continue to the point of becoming a catalyst. This is not to say that spending alone will solve the problem. There also are many other critical issues.
CHARLESTON, W.Va. -- As efforts to re-ignite the economy sputter, many ask the famous question, "What is to be done?"
Prescriptive remedies are highly varied and numerous economic repairs, such as those dealing with toxic assets, health care and financial dalliances, are in place for the long haul. Efforts, however, to more quickly reduce unemployment and increase the purchasing power of consumers have been troublesome.
Recent monthly data indicate that the private sector is only increasing jobs at a fraction of the number necessary to reduce unemployment. For example, the data released for July 2010 showed that the number of private-sector jobs increased by only 71,000 while more than 200,000 would be needed to reduce the official unemployment rate which continued to hold at 9.5 percent. Coupled with the reduction of 143,000 terminated government census jobs, there was actually a net loss of 131,000 jobs in July.
To date, the recession has cost nearly 9 million jobs. In order for the economy to stay on an even keel with population growth and similar variables, jobs must increase by 100,000 a month. In order to reduce the unemployment rate to an official 5 percent to 6 percent over the next four years, jobs must increase by 200,000 to 300,000 month. Clearly, the light at the end of the tunnel is not yet visible.
The problem is even worse because the long-term unemployment rate, defined as 27 weeks or longer, is at the highest level since data began to be collected 70 years ago. The Pew Research Center "found more than half of adults in the U.S. labor force have suffered a spell of unemployment, a pay cut or reduction in work hours," according to The Wall Street Journal. Those who are unemployed for excessive periods are more vulnerable to losing their skills and keeping up with new training developments. Furthermore, even if they finally find employment, the loss in skills can lower their productivity for a time. Most troublesome, perhaps, is that those unemployed for long periods simply abandoned their employment search. In February, for example, 1.2 million people did exactly that, which was three times the number than exactly one year prior. This development camouflages the real unemployment rate, which many experts estimate to have risen to 22 percent overall and 40 percent for younger adults. Accompanying this situation is the rise of unemployment claims -- which in May 2010 jumped by 25,000, to 471,000, after holding flat or declining over 2009 -- and the decision by many to opt for early social security benefits.
Currently, there is a debate whether to continue a key component of the recovery program, namely stimulus spending. Globally and domestically, there is a major push to cut budget deficits and reduce spending. Yet, as many know, there is a major difference between a stimulant and a catalyst. A stimulant is like a push or prod which increases activity and accents progress. However, a stimulant does not guarantee the same result as a catalyst, which ignites a new reaction that is both self-perpetrating and expansive.
It is apparent that the initiated stimulus activity was insufficient to re-ignite the economy and that it needs to continue to the point of becoming a catalyst. This is not to say that spending alone will solve the problem. There also are many other critical issues.
As history should have taught us, any effort to simultaneously implement a "guns with butter" program is doomed. The war in Afghanistan is consuming an immense allocation of resources, many of which are destroyed or diverted. According to The Wall Street Journal, "more than $3 billion in cash has been openly flown out of Kabul" in the past three years. Annually, this exceeds the amount the Afghan government collects in taxes and consists of diverted USAID, siphoned contracted logistics funds and drug money. In addition, soldiers who return are requiring major long-term support for injuries and health. The money pit seems bottomless.
The Chinese currency continues to be unfairly valued. This means that imports from China are cheap, contributing to stimulus dollars and unemployment benefits being spent on imports while exports from the United States are overly expensive. In fact, the trade gap difference between exports and imports increased to $42.3 billion in May 2010, the widest in any month over the past two years. The U.S. trade deficit with China alone expanded to $22.3 billion in May 2010. China has so much cash that it has become the major foreign holder of U.S. debt, climbing from $79 billion in 2001 to $801.5 billion in 2009. Meanwhile, conditions in China remain horrendous, with the nation averaging over 187 deaths a day in industrial accidents, and one company, which houses 400,000 workers in a dorm complex, has constructed nets around the buildings to prevent employees from committing suicide.
On the home front, personal bankruptcies have increased 33 percent, to 1.4 million, since 2009. Most are Chapter 7 bankruptcies, which liquidate assets, as opposed to Chapter 13, which re-arranges debt repayments. Obviously, this feeds directly into the use of home foreclosures and the slump in housing, which is a major driver in preventing an economic recovery. In fact, Fitch Ratings Limited projected that most people who obtained lower mortgage payments under the administration's Home Affordable Modification Program will default within 12 months.
Last, there is a problem with lending. According to The Wall Street Journal, "U.S. banks posted their sharpest decline in lending since 1942 at the end of last year." In essence, banks are not lending and instead are maintaining a "wait-and-see" posture, thereby choking entrepreneurial and start-up initiatives that make it harder for the economy to recover.
Curiously, the situation is not dire for some. There is increasing evidence that the United States is moving into a highly tiered society. Those who are better off are not feeling the same pinch. Larger firms, with consolidated empires and operations that manufacture products overseas, are surviving with little difficulty. In essence, the United States has entered a new era of extreme economic apartheid, operating increasingly separate economies for people at different economic levels in our society.
The United States has taken pride in promoting democracy, fairness and equality. These noteworthy principles have to transcend from the political arena to economic reality. The backwards shift has to be reviewed if we practice what we preach.
David, a professor at WVU-Tech, is a Gazette contributing columnist.
