Sunday, February 1, 2009

Job Losses and Protectionism

I just invested nearly 5 hours in watching the Australian Open final. I don't think many would argue if we just had these guys battle it out in every final. No need to go through the routine of the first 6 rounds. Great stuff. (side note: what would possibly compel GE Money to shell out for a title sponsorship at a sporting event?)

Other than watching tennis, I spent the week tracking some other big stories. Namely the numerous mass layoffs, crumbling corporate earnings and some ill-timed protectionist rhetoric out of the Obama administration.

The week started off with what was termed "Black Monday." Not to be confused with any of the black mondays from last autumn. No, this one was about jobs. Caterpillar cut over 20,000, Pfizer cut 8,300, Sprint Nextel 8,000, Home Depot 7,000, and Texas Instruments 3,400. ING and Phillips cut thousands also in Europe. In total over 85,000 jobs were lost from major corporations; over 70,000 of them in the US alone. Now these aren't just any jobs. These aren't people that ask, "would you like fries with that" 100's of times daily. These are high-paying jobs. And there is very likely a mortgage and family behind every one of them.

But how many people really lost their jobs last Monday? We know that only a limited percentage of workers are employed by such large corporations. How many small or medium sized businesses cut their payrolls as well? How many self-employed real estate agents finally threw in the towel? We have no way of knowing that, but on Friday the 6th, we'll get a poorly calculated estimate.

However poorly calculated that estimate might be, it is one that I've had my eye on for some time. The nonfarm payroll data for January is the report when we get all of the poorly collected data for 2008 restated into a semi-useful number that serves as a representation of the previous year's jobs picture. All year, the Bureau of Lies and Shenanigans (BLS) uses what they call the "birth/death model" to attribute for new business creation. As their logic goes, when one business disappears (Lehman Brothers for example), another one opens it's doors to take its place. Therefore, when Lehman Brothers went bust, most of the ensuing layoffs did not get tabulated as job losses in the September report because the BLS assumed others were hired. The result of this was job loss numbers created in fantasy land.

On Friday, the BLS will look at how many businesses were actually created and will therefore restate it's numbers to reflect a more realistic picture of the economy. As it stands, 2.6 million jobs were lost in the US throughout 2008 (worst since 1945). Expect that number to be revised up substantially, and the rate of unemployment along with it.

However, even if this number is revised upward and the headlines talk about unemployment levels close to 9%, we still know that the numbers are far worse than that. If unemployment was counted like it was prior to the Clinton administration, we would be seeing numbers already up around 13.5%. That would include people who have simply given up on trying to find a job, those who are marginally employed and part-timers who want full-time work. See the chart below from Econompicdata:

And from what I've heard (reliable sources, but can't confirm), those numbers still overestimate the numbers compared to how they were measured during the Great Depression. We're closer to 17% according to them. Peak unemployment was 25% during the Depression. I'm expecting 10% U3 and 18% U6 numbers by the end of 2009. That could easily be optimistic.

Do note, that for anyone thinking about "playing" the Friday number that the BLS has a few little tricks up their sleeve. In the last report they promised to do some more tinkering with the numbers to reflect population changes. How this affects the numbers is anyone's guess.

And why are so many people being laid off? Look no further than plummeting corporate earnings. John Xenakis over at Generational Dynamics does a good job of following these numbers on a weekly basis. He keeps track of the weekly earnings estimate revisions once they disappear from cyberspace. Here is an updated version copied and pasted from his website:

Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%
Jan 16: -20.2%
Jan 23: -28.1%
Jan 30: -35.2%

The previous 4 quarters look similar, but this quarter has been by far the worst. These clowns were still expecting gains in corporate earnings in December, something I called them out on at the time.

Folks, these are depression level numbers. There's no other way to explain them. A few months ago, readers were taking exception to my using of the "D" word. My response was that "depression" is what it felt like. It's how people were talking, acting, and the numbers were starting to show it.

How else can we tell this is a depression, rather than a simple recession? Protectionism is on the rise. Anyone who has studied economic history can tell you that depression and protectionism go together like beer and nuts. As Ambrose Evans-Pritchard reports from Davos,

The House has voted for a bill that prohibits the use of foreign steel in most infrastructure projects funded by Barack Obama's $820bn (£563bn) rescue package. The Senate is drawing up plans to widen that to all manufactured goods.

This is what happens when a country loses half a million jobs a month, and when the state becomes spender-of-last-resort. Taxpayers are tribal. They do not want precious stimulus to feed the foreigner.

Even so, this Dutch auction has the disorderly feel of the Smoot-Hawley Tariff debacle in 1930, though this time the collapse of commerce – if allowed to happen – will have very different consequences for the global balance of power.

Steel tariffs. How original. And what if American steel is twice as expensive? Heck, why don't the US steel producers all agree to charge 5x too much?

To be sure, like all tariffs, this one will result in more lost jobs than it protects. The US taxpayer will get a raw deal for it's production, which would otherwise have been used to consume, save or invest in something that would produce jobs elsewhere. This is such elementary economics, that only a politician (or a Keynesian) would propose it as possibly beneficial. Expect more to come. More from the article:

The penny is starting to drop that the US is not going to be the greatest victim of this slump. Other parts of the world are starting to suffer more. Those countries – China, Japan, and the Asian tigers – that have staked their fortunes on exports to the West risk being slaughtered. So too does the whole nexus of commodity states that lived off the boom. They are all leveraged to America.

Nor is the US about to suffer its condign punishment for years of hedonism. It is not facing the predicted dollar collapse or the mass dumping of US Treasury bonds – yet. The dollar has surged against sterling, Aussie, rouble, rupee, and real.

This is a theme that I have unintentionally arrived at as well. The US got so carried away with its consumption, that most other nations were falling over themselves to sell them stuff. Now that the party is over, the suppliers have less to fall back on than the consumers - who can simply choose to consume less.

In hindsight, it is astonishing that the "decoupling doctrine" still passed for orthodoxy in Davos a year ago. It was a given that the Brics (Brazil, Russia, India, and China) were strong enough to power ahead under their own steam. "What were they smoking?" asked Nouriel Roubini, the prophet of the crisis.

The evidence is in. Exports fell 42pc in Taiwan's last month of data. Japan's industrial output crashed 9.6pc. Korea's economy shrank at 21pc annualised in the fourth quarter. China is contracting on a month-to-month basis. "The decoupling dream has been shattered. China has hit a wall," said Stephen Roach, head of Morgan Stanley Asia.

Indeed. Asia is coming unglued.

The other penny starting to drop is that trade wars have asymmetric effects. The Great Depression taught us that they hit surplus states harder than deficit states. Britain avoided the worst of the 1930s, although – or should that be because? – it retreated into an Empire trade bloc. America has the strategic depth to do the same, should it wish to do so. It may conclude that this is the best way to rebuild the US industrial base (as Germany did from 1933 to 1938, with success).

So, as the world's leaders awaken to the danger that the sole superpower may turn its back on the open system that keeps us all afloat, they line up to plead for free trade.

China, India, and Russia were among the loudest in Davos, though all three have already taken steps to protect their own steel mills. Germany's Angela Merkel spoke darkly of "command economy experiments", and slammed US car-bail as a trade "distortion", even as she crafts a clever version for German cars.

Gordon Brown says we all face ruin if we "let the protectionists take over", yet UK banks under the state's thumb are being told to cut foreign lending. France's Christine Lagarde says – with refreshing candour – that protectionism has become a "necessary evil".

We are all mercantilists now.

Based on the ideology of the people mentioned above, I don't think many are surprised to see the "say one thing, do another" in action. Unfortunately, for us regular people, we know something else from studying economic history. And it is that just as sure as protectionism follows depression, military conflict follows protectionism.


EconStudent said...

What do you about the innovation that might occur in this depression/recession? Would innovation be able to lead the global economy out of a long depression/recession?

There are still trade barriers despite the progress that we have seen before this downturn.

I heard stories that Brazil charges 100% tariffs on electronic goods. I think that must be the case for many other countries too. Could it be possible that some of these trade barriers can be brought down further through international negotiations instead of further protectionism? If trade barriers can be further brought down, would the global economy recover a bit faster?

mannfm11 said...

I really believe this whole protectionism game misses the boat and is more something to attempt to shame the US into keeping its pants down permanently so the international banking game can dig its nails in deeper. I don't believe Smoot caused the Great Depression. I believe the inability to finance business as usual and socialist policies caused it. The idea of US steel isn't so much US steel as it is United Steel workers. The 3rd Reich was organized around a bunch of trade unions, to the detriment of the rest of the country.

The entire world is structured to sell to the US and the US multinationals are a cog in this wheel to the detriment of the US people in general. The typical American was able to finance purchases that the rest of the world couldn't, due to the status of the dollar and the need of other countries to hold dollar denominated assets to back their own money. In the Book that Xenakis mentions on the GD site, you find that Wall Street was financing US exports to Europe and that capacity collapsed when the depression started. Can anyone make the connection today that the CDO game is over, that millions of Americans that could merely call up the mortgage broker and erase their credit card balances one more time is over and that the financing to sell imported goods is a thing of the past again?


mannfm11 said...

Sorry, the book that John mentions is the Bubble that Broke the world,which is posted on the site. Literally everything about depressions in the modern world have to do with monetary finance and the influence of politicians I believe are generally overstated.

Matt Stiles said...


Will innovation lead us out of the depression? Absolutely! Out of necessity. If our generation wants a higher quality of living, we'll have to start getting creative. Gradually, there will be fewer Boomers around to tell us that it is impossible. That may sound spiteful, but it is the truth.

However, the days of building a brand and selling it all over the world Microsoft style is probably dormant for at least a few decades (it will be the exception rather than the rule). Economies will become more localized. Entrepreneurs who can figure out ways to make products or provide services that were normally done 1000's of kms away, will be the big winners. They'll be able to do it cheaper and with higher quality.

I don't think globalization will be something that leads us out. It was structured on assumptions that are no long with us (cheap energy for one). When it returns, it will look far different.

Matt Stiles said...


I agree that protectionism is a strawman. However, I get a kick out of bashing economists who propose such ideas based on some cost/savings formula. If they were to tell the truth and say, "we're doing it because our steel unions are strong and we're worried that if they get angry, we'll be overthrown," I'd have no problems with that.

And no, Smoot-Hawley didn't cause the depression. Global trade was already dead by the time it came along. What it did do was aggravate foreigners who were looking for an enemy as their economies were tanking (think: Japan). I'm worried that this round will do the same.

As that article mentioned, America is no innovator in steel tariffs. Most others are doing it too. But you wouldn't know it listening to the rhetoric from foreign leaders.

I'll have a look at that book. Is it the one by Garet Garrett? If so, I think I've read excerpts.

Anonymous said...

As an IT worker who spent $ on an education only to see good jobs exported to India & China at a fraction of the salary - what do you think about globalization, exporting jobs overseas and how does it relate to this current mess? Because on the surface, it seems to me (I like to think I'm just an ordinary person), that protecting jobs at home can't be a bad thing, and if you export all your middle class jobs, then who will be left to buy your items no matter how cheap they can now be produced? This is something I've wondered about for a long time. Thanks.

ps - I like to think your blog is wrong about most things but I am really scared that you're not.

Matt Stiles said...


I'm of the opinion that if a job can be done cheaper without giving up on quality, it should be done overseas. Our economy would benefit from this by saving money that would otherwise be wasted.

However, it is important that the saved money be used in a responsible manner. If it is used for consumption purposes, there is no added benefit to the economy (it is temporary). However, if it is used to finance development, higher education, research, etc, the overall impact on the economy would be a positive.

It sounds cruel, but your education was probably not very good if it could be replaced by a chinese grad. However, if we spent more energy investing in education and less in buying flatscreens, that may not have been the case.

Ultimately, it comes down to the effect our central bank has on time preferences of investors. Because of the inflationary policies of our central banks, people don't think they will get an adequate return on their capital if it is invested for the future; so they choose to buy a new TV instead.

This needs to change.

Recruiting Specialist Salaries said...

Finding jobs this year is going to be tough but they're definitely out there. Just recently my friend found a great job with burger king.

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