The Long Term Unemployed

I just finished reading a CNBC article http://www.cnbc.com/id/101204809 regarding the plight of the long term unemployed. The article revealed a bias against those who have been out of work longer than a month or two on the part of potential employers. The case study largely was about an older woman who had been out of work for more than two years. She had not given up looking for work that entire time. She had been turned down by potential employers both large and small, even McDonald’s.

The examination of the situation and plight of the long term unemployed revolved around the issue of whether the cause for the underlying economic trouble which precipitated the loss of jobs was cyclical or structural. If it was cyclical then what was deemed necessary to fix it would largely come about in natural order, when the economy righted itself the way that economies do (maybe with the help of a little extra government stimulus here and there – for the more stubborn situations). If the cause was structural then changes such as job retraining would be necessary to solve the problem. This dilemma, what the real issue is behind the stagnant job economy, has a lot of people talking. It shows up when someone complains that ‘We don’t make anything in the US anymore’. It shows up in the rate of tuition increase in higher education. It lives under bridges and sleeps on the open grass at the local park. It veils itself in political speeches denouncing further efforts to provide help, unless some special interest can be included in the bill. It strips the trash dumpster out back of your place of any kind of salvageable metal, and leaves the broken plastic housings all over the ground.

I can recall working as a temp when the economy was hot, very hot. Unemployment was at its lowest in decades. Businesses scrambled to find people to fill posts. Alcoholics, drug addicts and other less desirable types of workers drifted through the workplace alongside those taking advantage of the situation to gain some necessary experience. Opportunity was everywhere, then the Fed began to raise interest rates because, to paraphrase Alan Greenspan, “The unusually low unemployment in the economy would necessarily lead to inflation.”

The Fed was in a difficult position. They wanted to slow down the economy before workers could use their powerful low unemployment position to their advantage and begin to demand higher wages. At the same time, they didn’t want to be seen taking sides politically. The low unemployment numbers made Bill Clinton look pretty good. If they knocked the economy down they might be seen as embracing whatever Republican challenger that would be coming to challenge Al Gore for the presidency. The dotcom collapse, spurred by the inevitable drop in demand post Y2K, sealed the deal. The Fed was able to do what they wanted, only timed such that the results of their actions came just after whatever new president had taken office. Then, having poked a hole in the thing, they could begin to build it up again, this time built around housing rather than tech. George Bush was going to need a housing boom in order to stand up before people and tout the record percentage of home ownership, so that he could get re-elected.

If you believed in conspiracy theories you would just have to stand in awe staring at the capacity some people have for thinking ahead. I don’t believe in conspiracy theories. I do believe that the stated mandate of the Fed, to battle inflation, however, has not necessarily brought about change that has been in the best interest of your average working person. Why should I complain about that? I mean, inflation really has been an evil in the economy going back in history. Before it wrestled first place in the Fed’s eyes the enemy was deflation, brought about by the Great Depression. But even during the Depression many debating what to do in response talked largely about the evil of inflation and the need to keep it in check. The worry over inflation in those days may have helped extend the Great Depression by many years, just as it is helping extend today’s mess.

It’s easy to throw up a large number, in this case referring to the US debt levels, and, without having to say more, encourage ‘shock and awe’. The fact is, people have always been doing that, even back when those levels were a mere fraction of what they are today. Those old levels didn’t go away. In fact, they are included in today’s new levels. What happened was that economic growth came along and changed the nature of money. Economic growth changed the value of money so that those old debt levels, in the millions, seem like chump change today. How did economic growth do this? It did it by way of inflation.

I maintain that the real issue is not inflation, but rather how to use it as a tool. A terrible restructuring has gone on in the absence of the view of inflation as part of a tool kit. That restructuring has seen too much wealth become concentrated in the hands of too few people within the economy. Real wages have come down over time because they have not kept pace with inflation. Personal debt has skyrocketed, and that to cover daily or monthly expenses rather than placed into wise borrowing that expands the money supply because local banks can use it to lend even more. The importance of large institutional banks has taken a position of supremacy over local economies such that local economies are hampered by the status of large institutional banks when they suffer. This ought not to be the case. Local economic growth ought to be a way to combat the deflationary situation that results from the destruction of money when the rate of default experienced by large banks becomes too great.

They can’t do that because too much of the revenue generated by local economies is siphoned off to a small percentage of investors who are very interested in placing their money into large institutional banks and other entities, that is where they can best avoid paying taxes. And that is also where that money can go in order not to participate in the economy in such a way as to sponsor inflation. Therefore the Fed has never worried about the explosive growth in derivatives of all kinds, or in mortgage backed securities.

Now that those people are facing such huge losses, imagine how many times greater the ‘off shore’ collapse must have been than the bank bailout indicated, they are even more reticent to invest money locally. The best investment going is at the Fed window, fattening up on quantitative easing, which is wholly aimed at shoring up the investor class. A slow recovery really helps when it comes to realizing losses at a rate where the swath of investors can survive the shock. There is little incentive to take chances and make money the old fashioned way, by earning it. There is still less incentive to parse a proper portion of that money out to those participating in earning it, in the form of wages, such that they can participate in an economy by having the confidence to borrow wisely, thus producing growth. This is what happens when the Fed can only see inflation at a time when economic growth and participation are the real issue.

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