Was I Wrong, Or Did Something Change?

On any number of occasions from October through February, I predicted that this recession would top out at perhaps 9% unemployment at the most, and would probably not be as bad as the recession of the early 1980's.  My logic was that we had a mortgage-driven banking crisis, but that the crisis was perhaps not as bad as that of the late 1980's and that many fundamentals (e.g. interest rates) were looking way better in this recession than in the early 1980's.  I honestly thought that Bush and Obama Treasury and Fed officials were declaring the sky was falling more from the danger to their beloved former employers on Wall Street than due to any economic fundamentals.

Well, obviously I was wrong.  Unemployment has topped 10% and could be headed higher.

So the question is, do I accept that others saw something I did not, or do I crack open the self-serving excuses.  Well, at the danger that this will fall into the latter category (I will leave that to readers to decide) I do think some things have changed since late last year that have contributed to worsening the economy.

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.   Over the last year the Congress and Administration have:

  • Printed trillions of dollars of new money, raising the risk of future inflation
  • Borrowed trillions of dollars, sucking capital out of private lending markets
  • Run up deficits that pretty much guarantee future tax increases
  • Toyed with health care bills that will substantially increase the cost of labor
  • Toyed with climate bills that will substantially increase the cost of fuel and electricity
  • Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)
  • Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).
  • Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.
  • Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder.  If you do not understand or believe this, you have not run a business that employs people.
  • Shown a general philosophic hostility towards markets and capitalism

I am sure this is just a subset (Louis Woodhill has more in this vein here), but these all have negative effects on investment.  My company for one has backed out of several planned expansions this winter for four reasons:

  1. Half of my costs are labor, and I don't know how much Congress is going to increase my labor costs.  Current health care bills will increase it at least 8% -- given that my typical margin in 5-8% of sales, a government action that increases half my costs by 8% is worrisome.  Worse, my smaller competitors will not bear this expense under certain versions of the legislation.
  2. My second highest expense is fuel and electricity.  I have no idea right now how much Congress may raise these expenses.
  3. Capital for small businesses is gone.  I can get secured equipment financing, but that is it.
  4. Assuming I make any money from these investments, I have no idea how much I will be able to keep.  I would not be surprised at all if Obama pushes my marginal rates over 50% -- and investments in my business are just too much work and risk to keep less than half if I make any money.

I used to work as for several years in St. Louis as VP of Planning for Emerson Electric.  I worked for a guy named Chuck Knight, who could be a real pain in the *ss to work for, but was a) brilliant and b) always willing to speak his mind without the typical filters a lot of other executives apply.  It appears that his successor Dave Farr, who I also knew at Emerson, is following in this tradition:

Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas."Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing," Farr said today in Chicago at a Baird Industrial Outlook conference. "Cap and trade, medical reform, labor rules."...

Companies will create jobs in India and China, "places where people want the products and where the governments welcome you to actually do something," Farr said.

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Emerson, which Farr said employs about 125,000 people worldwide, has eliminated more than 20,000 jobs since the end of 2008 to lower expenses.

"What do you think I am going to do?" Farr asked. "I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs."

Politicians in both parties are generally clueless about this kind of thing, because very few of them have ever run a business or even even been in a real business position other than as lawyer or lobbyist.  Just look at how George McGovern feels now that he has run a business.

But the Obama administration is almost scary clueless.  In defending their promotion of a good business environment, they cite the most hostile item on their agenda:

"This administration has made a significant commitment to U.S. manufacturing, including reforming the country's health insurance system to bring down costs and make American companies more competitive globally," Griffis said.

Not. One. Single. Clue.

Actually, I think the Obama administration may believe this, which just accentuates their preference for a corporate state wherein "business friendly" means support for the top 20-30 corporations in the country.   In the context of a few old-line corporations with politically powerful unions, health care reform is helpful in that it dumps a bunch of the corporation's commitments to present and past workers onto the taxpayers.  But these are not the companies that grow the economy -- they are just the ones with out-sized power in political elections.


  1. AnonimnCo:

    Very similar thoughts in this long post on jobs, the lack thereof, and the future lack thereof: http://barbariancapital.blogspot.com/2009/10/views-on-jobs-and-why-they-aint-coming.html

  2. m:

    I tend to think the reason for the "jobless recovery" is pretty simple. The decision to hire is based on future growth expectations, not current conditions. Businesses must fund growth, usually by borrowing. Banks aren't lending, therefore firms can't see themselves funding much growth in the future and, therefore, don't hire.

    Why aren't banks lending? My guess is it has a lot to do with the Fed paying interest on reserves.

  3. Jess:

    I don't know where it's gone, but you're correct - private lending has vanished. I do not mean "diminished", or "available at some higher price" - it's just gone. Secured financing does remain (and in fact has become somewhat more readily available, YMMV), but it isn't a substitute.
    I won't be adding projects or staff in the current situation...

  4. ElamBend:

    #3 is a much more massive event than it looks on your list. The size and scale of the contraction of credit is the reason why we are experiencing deflation in a lot of quarters (particularly assets purchased with leverage), even though the printing presses at full tilt.

    That being said, I think your other reasons are definitely in play. The Wall Street Journal had an article ( http://tinyurl.com/yaqofz6 ) titled "Jittery Companies Stash Cash".

    No doubt a lot of companies are reacting to last years collapse in credit. However, I think a lot of holding back due also to the uncertainty of what the current administration will do. The two massive changes proposed by the administration (Cap and Trade & Health) have such a potential to change things that; I agree, businesses are going to wait and see which way things break before making a decision.

    Some buddies and I were talking yesterday and we speculated that when companies do find that they have a need to get some things done, they will move toward the hiring of temp contractors in order to avoid putting new people on the rolls. One of the group has noticed an increase of such job postings on the online jobs sites.

  5. morganovich:

    first off, all recoveries start off jobless. this is a consistent and immutable feature of recovery from recession. when the economy has excess capacity, it takes a while to work it off, therefore the first growth of a recovery requires no no workers and layoffs may even continue. peak unemployment is usually 2-3 quarters after GDP growth returns.

    this does not invalidate any of the job destruction arguments made above, all of which i believe to be true. an excellent history of how all the uncertainty and new costs surrounding FDR's new deal froze the economy and deepened the depression can be found in amity schlae's book "the forgotten man".

    the real question is if we are actually in a recovery. there are strong reasons to say no.

    if we use a set basket of goods as opposed to the geometrically weighted and hedonically adjusted nonsense basket the BLS uses to calculate CPI, inflation is currently 6%, not the -1.5% being reported. (this not some crackpot number, it's the old BLS methodology from the pre-clinton era before greenspan destroyed CPI as a meaningful number)

    this means that real GDP growth is still strongly negative (if we use this calculation we also see that real GDP growth has been negative for nearly the entire period since the dot-bust).

    monetary policy is ludicrously loose, leading to concatenated bubbles in assets, but actual price inflation so high that the economy itself is shrinking in real terms.

    this is why jobs aren't coming back.

    credit at the moment is frozen out by government policy. banks borrow at 25bp, buy govvies at 3.5%, lever 10:1, and make a killing while keeping tier 1 ratios looking good. the same idiots in washington who are demanding massive capital ratios for the banks then excoriate them for not lending. they appear ignorant of the contradictory nature of the two demands.

    this also destroys growth, especially for small firms. why lend to a small risky company when you can lever up a massive riskless arb on treasuries?

  6. Mark:

    I lost my job when congress and the president decided that companies should no longer buy business jets, and portrayed them as luxurious airlines, when they are actually swashed tin cans, which barely fit the people trying to fly. They allow you 10 million per year CEO and his staff to prep for a meeting while flying rather then fiddling ours away in separate seats on a commercial plane.

    When congress verbally banned bus. jets, Cessna laid of 2/3 of their manufacturing, some of their engineering, and shut down new development programs. This caused third party vendors (I worked for one which supplied aircraft displays) to also cut back on employees. Finally as companies shuttered jet operations, pilots, ground crews, mechanics lost their jobs. And Cessna was not the only one Gulfstream and Bombardier also cut back.

    I would guess that in total over 100K high ($20 - $50 per hour) paying jobs were lost. And to replace them - shovel ready ditch digging jobs @ 10 bucks per hour, and they don't even know how to count them.

  7. Esox Lucius:

    I hate saying it but I thought you were off base when you said that this economy downturn was going to be small. I don't think we have even gotten started. I am betting we have another leg down and when it kills off the optimists the recovery from that will be grueling. Don't forget (or should I say, take heed) that the next wave of implosions will come from the commercial mortgage backed security sector. When this is done, there will be inflation like crazy. Also, Japan is headed for sovereign bankruptcy that should play over pretty interestingly in the US.

  8. alanstorm:

    "Actually, I think the Obama administration may believe this" (re: alleged health care reform and industry)

    If they believe what they say, they're fools.

    If they understand that the real consequences will be vastly different from what they intend, they're evil.

    There is no third option.

  9. Roy:

    Unfortunately, Alan, there is a third option: they intend the real consequences.

  10. Dr. T:

    Your prediction was wrong primarily because you did not believe that the Obama administration would happily let the economy go to hell so it can step in later and save us (by acquiring or controlling more industries). No previous administration behaved this way, so predicting such behavior would be hard. (I predicted Obama's behavior based on his speeches, writings, and associates, but most people though I was a doomsayer.)

    I continue to believe that, in regards to economic problems, the Obama administration will either do nothing or deliberately do the wrong thing. Unemployment will remain high and the recovery will stagnate throughout most of 2010. (Unless the administration actively screws things up by printing more money, making stupid changes to interest rates, or cranking up taxes. Any of those will make the economy much worse.) I don't know if it's possible for the economy to recover despite Obama. Probably not, since the federal government has so much economic power.

  11. Michael:

    After reading Mark Perry, I inclined to believe businesses are simply waiting for a stable government. Why risk writing a contract when the government can void it without any due process. It's a get by economy for the next 3 to 7 years.

  12. txjim:

    Last year two senators intentionally lit the fire under this mess (Reid and Schumer) with a "leak" about Indymac and another warning of the pending failure of an unnamed major insurance company. The economy started tanking along with McCain's chances of beating Obama but the big leg down would have not happened had it not been for the good senators preparation of the battlefield.

    Kinda tin-foily I know but if it was/is intentional, what else will they do to get even more of their strategy implemented?

    Why bother trying to run a business in this climate? You spend all day trying to keep the slimy politicians out of your wallet. If I were an optimist, I would predict the economy starts showing some life that track with Republican's prospects of retaking the congress. If the Pepsi party can restrain the Coke party then maybe excesses can be trimmed. Think 1995 when Clinton was forced to dump the worst of the lefty stuff in favor of re-election.

  13. Texas_Engineer:

    Warren - a little bit of all of your rationale was probably at play. In something as complicated as the economy it is very hard to say.

    But I think you have to add in energy costs. Everyone likes to talk about how far oil dropped when it nose-dived from $147 to the $30's. But it did not take long for it to climb back up toward $80. The economy runs on energy and got very used to cheap energy. But cheap was $20. $80 is a different ball-game. Everything, not just driving, but food, plastics, etc all suddenly are more expensive. The airlines cannot survive on $80 oil unless they significantly increase fares.Energy costs act to crowd out discretionary spending IMHO. You mention that fuel and electricity are your second biggest expense. That is true for many, many businesses.

  14. Bearster:

    Coyote, I thought at the time you first said it your call was wrong. It is attractive to think that Bush/Obama is overstating an economic collapse so they can justify draconian and intrusive State responses. Which they are doing also, obviously, with bailouts and "stimulus".

    But what is happening is about 100 years in the making. In 1913, the government created the Federal Reserve, which embarked on a program to replace real money (i.e. gold) which is an asset with paper based on debt. Two subsequent key milestones were 1933 when FDR outlawed gold ownership and made the paper dollar irredeemable for US citizens, and 197(?) when Nixon made the paper dollar irredeemable for foreign central banks. This accelerated the problem of money creation, causing the inflation of the 1970's. Volcker took over as Chairman of the Federal Reserve and "solved" the problem of inflation by figuring out how to channel it into assets (e.g. bonds) rather than where it had been going which was consumer goods. The real estate bubble and stock market bubble had their origins in 1982, though both trends accelerated exponentially many years later.

    Then of course Greenspan kept rates too low, causing the final mania stage of the NASDAQ bubble, then raised them causing a recession, then lowered them far too low in an attempt to re-flate the stock market. Instead he caused the final mania stage of the real estate bubble.

    At this point, at the end of a 30-year period of declining interest rates, we are at the end of the road. Short-term interest rates are zero, and the Fed buys sufficient long-term bonds to suppress the 10-yr and 30-yr interest rates also.

    But it gets worse. Individuals, businesses, and governments are all maxed-out on debt. Incomes cannot cover repayment of principal + interest. No one is creditworthy enough to justify lending to at such low rates. The Fed is increasingly having to monetize the government's debt by openly and secretly buying Treasury bonds.

    All those years of artificially cheap credit encouraged massive consumption by everyone, and massive malinvestment. Capital that was consumed or malinvestment is destroyed. We are in the period of recognizing that we have far less capital than we thought a few years ago. Consumption (i.e. the standard of living) will have to decline substantially to enable everyone to rebuild. Whereas before, the average person might have been living on 140% of his income. Now everyone will have to live on 60%. Those who still have jobs; malinvested capital has to be liquidated and everyone employed by it has to find a new occupation. We have far too many retail stores, construction companies, mortgage brokers, etc.

    But it gets worse. The period 1971 to 2009 could also be characterized as the period when the US de-industrialized. Partly due to taxes, partly due to regulations, anti-trust, unions, litigation, environmentalism, and corrupt governments especially at the local level, manufacturing companies were either destroyed or forced to close their US factories and go to China to make stuff. It is hard to imagine how the country can return to prosperity without rebuilding a manufacturing base.

    But with such high minimum costs to employ people, it is illegal to hire anyone who produces less than around $20 per hour of labor. Add to that the substantial regime uncertainty of what the government will do next (it isn't just Obama, it's all of them), and what business would invest capital with a plan to hire people to produce even $25 or $30 per hour.

    In short, we have come to the end of an era. It was not sustainable and it can no longer be sustained. We need something new, but government stands in the way of private investment in this new thing. So we pause. And tens of trillions of dollars of assets need to be written down, but the government is propping up the zombie banks rather than allowing them to be liquidated.

    So, bottom line, even before the election in Nov 2008, a major recession (I would say depression) was already baked into the cake. And Obama's insane policies are making it much worse than it needed to be, just like FDR. I reckon we are in around 1930 or 1931 to use that analogy.

  15. RobTzu:

    Vertical MEI function.

  16. palm beach sugar daddy ken doll:

    bearster, i've been saying "de-industrialization is just national suicide with more syllables" since i was 14 years old. (ford/carter era) in all that time, *each and every* learned teacher or prof i ran that theory by pooh-pooh'd me: saying i was too dense to understand the effects of new technologies, or - later - how & why shuffling financial papers around while making cell phone calls all day long was infinitely preferable to mere "industry".

    they'd admit - grudgingly, and only under duress - that, yes, manufacturing was in fact "creating wealth", but then in the very next breath, they'd say it didn't matter. globalism! new markets! 2 billion chinese & indians driving chevys! new paradigms at work here! (how they loved that word 'paradigm'!) in fact, they usually actually said the very thing that'll probably end up being our epitaph: "it's *different* this time."

    here's the problem with blaming it all on jupiter island and 1913, though: although it pains me deeply to admit it, we americans - john & jane q. public - have gotten *massively* richer and more prosperous since then. (true, we're much deeper in debt, too, but we'll save that for now.) the average middle-class family of 1913 were (probably) farmers who lived in unheated, uncooled, unelectrified, untelephoneable, pretty-damn-small houses with (if they were doing well) a 2-holer out back. if they could see the average middle-class life now (well, the ones who still have houses and jobs), they'd be stunned. all that *luxury*! all those labor-saving *conveniences*!! eating out 3 times a week, just like **millionaires**!! everybody, even the kids, with full closets of clothes and even 2 or more pairs of shoes!!! 2,3,even *4* cars!!! (levittown was supposed to be the height of post-war modern wide-open ranch homes and big yards, and it sold out like hotcakes. the 1913 families would have **killed** for one. i've read the average levittown house was roughly 1150 sq. ft. big. for a family usually consisting of 6 members. living conditions that we today would call "ridiculously, unbearably small".)

    i still agree with you: yeah, we're screwed. but it's not all black & white, and not *entirely* all the fed's fault. yes, the seeds of our (possible) destruction were sown in 1913. but a plant/weed that takes 100 years to produce its poisonous bloom can't be blamed for ALL the ruination: we had 100 years to kill the damn thing, and didn't do it.

  17. Noumenon:

    If your predictions don't take into account that our hyperactivist government is gonna jump in and do all the wrong things, you're not a very good predictor (it's kind of like saying "I think this whole 9/11 thing will blow over, the guys will go underground, we'll rebuild the building, it's no big deal.")

    BUT, if we think of you as a *pundit* rather than a prophet, that prediction was the best one you could have made. There's plenty of research that says pundits don't get held accountable for whether their predictions come true. What's important is that they argue for, and help people imagine, a scenario where the government acts differently. Thus leading more people to ask for that scenario and influence the government. Your prediction did great at that and was very welcome to me at the time.

  18. Methinks:

    I guess Coyote will be forced to cut staff AND compensation or close down.

    I've halted all plans to expand my business in the United States. What's the point? Already regulatory changes have negatively impacted my business and the new proposals will simply throttle it. Even without regulatory changes, the impending tax hikes make the risk and effort not worth it. Every company in my business has laid off a significant amount of its work force and thousands more have shut down.

  19. Michael Miller:

    You nailed it, Coyote.

    Furthermore, demographic trends here in the US virtually guarantee more of the same. Time to pull up stakes and move all significant assets abroad.

  20. Methinks:

    credit at the moment is frozen out by government policy. banks borrow at 25bp, buy govvies at 3.5%, lever 10:1, and make a killing while keeping tier 1 ratios looking good.

    Isn't this what Japanese banks did after the bubble burst in Japan two decades ago?

  21. David Zetland:

    It's well-known (or should be) that economists know little about business. Unfortunately, many of them are advising the government... on business.

  22. JWT:

    Hey, wait a minute here. The whole fantasy of world wide financial collapse was the work of Hank Paulson, George Bush's Secretary of the Treasury. It was also Paulson's reponse to the threat he imagined to create TARP and funnel enormous amounts of our dollars directly to Goldman Sachs. Now Robert Rubin is Obama's godfather of finance and he, like Paulson, is a former chairman of Goldman Sachs.

    If you are worried about the profits of your business, the direction is clear. Go to work for Goldman Sachs. They have no problem being incredibly profitable and they don't have to worry about politicians nagging at them since they have looted the treasury under Republican and Democrat administrations.

    You can find a clear explanation of what caused the recession and what to do about it at http://www.scribd.com/doc/16864582/The-Great-Recession-Conspiracy. It is also available as a Kindle book. Not a single wild fantasy, not s single foolish theory, just facts so you can make up your own mind.

  23. Mesa Econoguy:

    In brief:

    Businesses are reluctant to invest when the returns on their investment are wildly unpredictable

    Regime uncertainty

    Stimulus = unemployment = Philips Curve

    Silly economics. Partially relevant.

    See also Rational Expectations (also somewhat silly).

    Which proves, as an economic libertarian, that Republicans (coke) destroy things slightly slower than Democrats (Pepsi, or Obamalini’s obnoxiously obvious ripoff logo).

    Note: Apparently, Coke is smarter than Pepsi. Who'da thunk?

  24. Mesa Econoguy:

    And JWT is correct, Goldman, and their cephalopodian brethren, will eventually rule the world, right after they get New Jersey back.

  25. Thomas Barton, JD:

    I hope that you will travel with your hero, David Farr, to India to find him a suitable home to enjoy all the maddening mix of bounty and mind-boggling suffering in that country. Maybe he can take that pathetic football organization with him and the title of VP of Planning for the Mumbai Rams can be yours, you scrawny North American jackal.

  26. epobirs:

    I strongly recommend that everybody read 'The Forgotten Man' by Amity Schlaes. This is easily the most important history book of this decade.

    In the early 30s a lot of people thought the worst was over and recovery would be rapid. But the FDR gang had only begun to screw with things and made the Depression into the Great Depression.

    It's all happening again, except this time the culprit know what they're doing and want things broken so badly that people will accept any new regime that offers stability.

  27. JWT:

    Two more thoughts.
    1) In the third quarter of 2008, Goldman Sachs was teetering on bankruptcy. In the third quarter of 2009, Goldman Sachs had profits of $3.03 BILLION! I like the descriptive phrase that seems to be making the rounds, i.e., we have Crony Capitalism. Sounds about right to me.
    2) Since it seems many readers here are managing small businesses, you should know that Section Three of our new book, The Great Recession Conspiracy, is devoted entirely to how SMEs and individuals can survive and prosper in the Business Cycle, actions you can take to benefit yourself regardless of what the government does, or does not do. All hard edged stuff. It costs $4.95 and you supply the paper and ink. The address is in my earlier post.

  28. Some US Citizen:

    Companies will create jobs in India and China, “places where people want the products and where the governments welcome you to actually do something,” Farr said.


    “What do you think I am going to do?” Farr asked. “I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.


    Correction. Farr is doing everything possible to destroy jobs in the US with his spite. I would only hope that his departure is a result of some criminal charge a la the NSA-objecting Qwest executive.

    He just wants pliable yes-men, for which the Third World produces readily and maintains by government suppression of deviations in opinion. That is, he goes to slave labor for which does not know or fears to make objections towards their government. Any willingness in the matter of those people is academic at best.

    Farr would do well to humble himself, for his actions might attract the US government by his support of hostile regimes in the Third World. Otherwise, if he wishes to act as if he were the Almighty, he may not like the long-term consequences. Or perhaps a US government that can pursue any enemy it wishes to choose in any part of the world - whether it be the Middle East(excluding Israel), China, Vietnam, India, Pakistan, or people like Farr - towards the security of individuals who reside in the United States.

    If you don't like it, fine. Just don't talk like you are for this nation and not act to undermine it by strategic withdrawal to the Third World.