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The Wright Perspective℠

Social Commentary from the C-Suite to Main Street℠

A Blog by Gary Wright II

Employment, unemployment, capitalism, and our economic crisis

Thursday, October 7th, 2010

Our country is going through the toughest period in our nation's history, and this economic crisis is like no other. Unfortunately, there aren't many options left for our government and neither Democrats nor Republicans can do anything to change it. To recognize the full scope of our current problems, we have to examine the past century of our economic history.

The starting point is the crisis known as The Great Depression and a World War. The United States industrial machinery was kick-started by the production of goods for the World War. We not only had to supply our own troops with weapons, but also Europe and our allies. Churchill was desperate for replacement ships for the British Navy, and he was forced to sink the French Navy to keep the ships from falling into the hands of the German forces.

Fast forward to the end of the war, and you find the United States becomes the world leader for two primary reasons: The US was the only nation with it's manufacturing infrastructure still intact and the destruction from the war had eliminated the capability for any other country to compete with us. We gained a huge economic advantage since we were producing goods while the other countries were rebuilding. Had it not been for the war, we would never have emerged so quickly from the 1929 Depression.

While we were in the lead, Americans saw improving wealth, but our growth slowed as other countries caught up with us. By the 1970's, the wages in America had stopped growing at a time when our appetite for consumer goods was just getting started. There were new cars, affordable houses, and plenty of electronic goods to keep our spending growing at a rate that outpaced our earnings growth. With new technologies, our productivity rose at an incredible rate. Computers eliminated many jobs, but also allowed jobs to be exported to other countries. A wave of immigration took hold of the manual labor jobs, while keeping the wages low for jobs that many Americans found undesirable. The combination of these factors allowed corporations to realize huge profits without having to pass on more money to the workforce. This was the beginning of the greed that eventually led to the failure of our system of capitalism.

In order to make ends meet at home, our nation saw women enter the workforce. Even with two incomes per household, there still was not enough wages to keep up. For women to go to work, there were new clothes needed, a second car, and many other unplanned expenses. Though we were all working harder, it was still not enough. To keep our economic machine in motion, our consumption was then funded through credit. The profits of the companies were sitting in the bank, so banks starting lending workers the money that should have been their money in the first place. Mortgages, car loans, and credit cards allowed us to develop a culture of buy now and pay later.

When you look at our economy from a historical perspective, you quickly realize that there is no fast or easy solutions to our current financial problems. The fed was able to manipulate conditions to keep us afloat for a while, but eventually it caught up with us. Although the recession may be officially over, the crisis has spread far beyond just the financial sector. Since the world markets have been so dependent upon the US, the crisis has also spread far beyond the borders of our country. For example, the recession in Japan started in 1989 and they still haven't completely emerged from it.

Right now, companies are carrying huge amounts of cash on their books (over $2 trillion), yet they are not creating jobs because of the economic uncertainty. They are spending some on technology as they try to maintain productivity levels, but yet no raises for the workers. There is still a big disconnect between CEOs and the average worker. In 1980, the ratio of CEO pay to worker pay was 44 to 1. By 2009, the ratio had grown to 344 to 1.

In the .com crash, we lost 2.7 million jobs. Since 2008, we have lost 7.7 million jobs. Before this recession, unemployment was around 4%. In August, the rate was reported to be 9.6%, but it is actually closer to 20%. The monthly figures don't account for those who have ran out of benefits or have given up looking for jobs. For unemployed and underemployed it is 16.5%. With an advanced degree, the rate is only 4%. Government workers have less than 6%. Construction workers is around 17%. The rate for teens and college graduates is over 25%. They face the classic issue of "How do you get a job without experience, and how do you get experience without a job?"

So what will it take to fix the unemployment rate? Our economy must grow fast enough to grow the job market, which means our rate of growth must be faster than rate of job loss. Last quarter growth was less than 2% and slowing, so there will be no improvement in the unemployment rate for the next several years.

What will it take for new jobs to be created? Business won't create jobs until their sales increase and conditions are stable enough to start hiring again. It is all about uncertainty, so until the uncertainty is eliminated - there won't be any new jobs created. They will never see a sales increase until the unemployment issue is solved, yet they won't create jobs until the sales increase. Employee expenses are way too high and the business leaders are worried about higher taxes and growing expenses in the near future. Health care benefits are a big concern because in 2014, companies with more than 50 workers will be required to provide health insurance. Until they can nail down the cost of those benefits, they won't create jobs and companies just below the 50 worker threshold are not going to cross it. A worker earning $50,000 costs the employer over $90,000, yet after taxes the employee only brings home around $35,000. Assuming that we fix unemployment with a magic wand, there is still going to be a huge lag in new spending. Those returning to work will first have to play catch up on their existing bills before they can go on a spending spree.

What can the government do to help? Not many options are left in their bag of tricks. It won't matter who is President or who is in control of Congress. The interest rates are near zero, so nothing left to manipulate in that area. There are a few things they haven't tried yet, but none of those options will be able to make any significant changes to the current situation. There are two options that are probably inevitable: Investment in infrastructure projects because our infrastructure is crumbling, and at some point we will have to bail out the state governments who are all broke and burdened by huge budget deficits. Less people working mean less income taxes collected. Raising taxes will crush those families who are barely scraping by. We could increase "sin taxes" (tobacco, alcohol, and gambling) but those taxes would raise an insignificant amount of revenue. To balance the budget, you have to either increase revenue or cut expenses. There aren't any more ways to increase revenue, and the expenses have been cut down to basic services. There is still a lot of waste and inefficiencies in government, but little attention is being paid to those issues.

Any discussion about the economy wouldn't be complete without addressing the housing market. Without jobs and pay increases, people can't afford their mortgage. The flood of foreclosures has dropped the home value for those still able to make the mortgage payments. Those who still have homes now owe more than their home is worth. Millions are still in the process of foreclosure proceedings, and millions of others are on the verge of losing their home. The mortgage companies got a bailout, but they didn't use the money to stop foreclosures. Most people facing foreclosure, don't qualify for loan modifications. Families are buckling under the pressure from their debts, and over 1/4 of Americans now have credit scores rated as poor. That means that once the economy improves, it will take years to fix their credit and they won't be able to get home loans until their ratings are fixed.

The over-supply of homes is staggering. Banks currently have a four year supply of homes already on the market. The banks also own millions of homes that haven't been put on the market yet. This "shadow supply" of homes would take over 40 months to sell at the current rate. This doesn't include all of the homes entering foreclosure, or that will enter foreclosure before this crisis is over.

For at least the next decade, we all will have to make some very difficult choices. There is not a single family that won't be affected by this crisis and as a society we will be forced to examine our financial system, as well as our system of government. It is imperative that our leaders work together to bring our nation through this crisis.

For capitalism to work, it requires good government. We don't need to throw away our economic system, but we must reform it. When the system is driven by greed, only those at the top succeed. While people say they want less government interaction, they also are asking the government to do something about the situation. We have to be careful while regulating, to not over-regulate. Competition is growing so we must prepare to compete and to win.

Best regards,

-- Gary Wright II

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