US Loses 663k Jobs in March; Unemployment 8.5%

I'm afraid that the month of March brought more bad economic news: the US economy suffered a net loss of 663,000 jobs. The 663,000-job loss is a net loss, meaning that employers cut 663,000 more jobs than they created, and that actually more than 663,000 people lost their jobs. The new net job loss brought the US unemployment rate up to 8.5%, the highest since 1983, during the last great recession.

While 8.5% unemployed means 91.5% still or newly employed, the increased rate and the net job losses--5.1 million since December of 2007--gives the 91.5% reason to fear, even though most of them will never lose their jobs. Militating against the fear I see only three small pieces of good news at the moment. Consumer spending has risen now for two months in a row; US factory orders rose for the first time after six months of steady declines; construction and housing sales beat the forecasts of most economists, as housing prices have finally started to fall substantially (encouraging more sales and thus more construction), as they need to after the bursting of the Fed's horrible real estate bubble. I can't say though that the economy won't shed more jobs on net and that the unemployment rate won't rise further before the economy hits bottom and starts to improve again.

I can say what caused the recession--at least primarily what caused it. Earlier in the decade, Alan Greenspan, then Chairman of the Federal Reserve Board, caused the Fed to inflate the money supply at a rate well in excess of the growth rate of the real economy. Thanks to the massive and political loan guarantees by Fannie Mae and Freddie Mac to buy votes from poor people who couldn't afford to pay back the loans, much of the money went into the real estate market, driving up home prices, and making homeowners feel wealthier.

Since most of the money went in to real estate purchases, most of it did not go into buying consumer goods, and thus the inflation caused by the Fed's excessive expansion of the money supply did not show up in the Consumer Price Index (CPI), so most people did not realize at first that we were experiencing covert inflation. Since most of the money went into purchasing existing homes, the sales of which do not go into computing Gross Domestic Product (GDP), the most common measure of goods and services produced by the economy, the covert inflation did not show up even in a broader measure of inflation like the GDP Implicit Price Deflator.

A few people tried to warn about the inflation, but most of us did not listen. I freely confess that I fall into the category of those who looked at the CPI and the GDP Deflator and saw no inflation. The major news media publish the CPI regularly, and I didn't take the time to look at the growth rate of M1 or M2, the most common measures of the money supply. The people yelling about inflation were right, and I was wrong back in 2006. I will say that I did tell my economics students about the warnings I heard, and that by 2007 I had started to heed the warnings. The real estate bubble had clearly started to burst by 2007, which in turn started to drag down or at least slow down other parts of the economy, especially home construction and related industries.

By 2007 Greenspan had finished his second term as Fed Chairman, and President W. Bush had appointed Bernanke to replace Greenspan. People were saying of Bernanke--like they had of Greenspan--that he was a monetarist (meaning that supposedly he understood that growth of the money supply at a rate in excess of the rate of growth of the real economy produces inflation). I looked at Bernanke's textbook, which you can read free online, and found out that it has an even stronger Keynesian bias than the textbook I'm required to use for the economics classes I teach. I don't know where anyone ever got the idea that Bernanke is a monetarist, but as the real estate bubble continued imploding before our very eyes in 2007, Bernanke began to run the worst sort of Keynesian inflationary policy, buying tens and even hundreds of billions of new dollars worth of US Treasury bills (short term debt) and US treasury bonds (long term debt) to try to drive down nominal interest rates, injecting tens and eventually hundreds of billions of dollars of excess money into the economy. (I also started to read Greenspan's autobiography at the time, and discovered within the first two chapters that contrary to common belief, Greenspan is a Keynesian expansionist too, despite once having been in the anti-Keynesian inner circle of Ayn Rand many decades ago.)

In case you're not familiar, Keynesian economic theory believes that government can cure a recession through inflating the money supply with deficit spending--that is, by government spending more than it collects in taxes. Government, according to Keynesian theory, can wave a magic wand and create out of thin air new "aggregate demand" to push up GDP. Keynesians do not understand that everything government spends, it must take from someone else, either through taxation or borrowing. Borrowing from the Fed (meaning that the Fed buys Treasury debt) just means more dollars chasing the same volume of goods and services, driving up the average level of prices--in other words, causing inflation. Inflation, which drives down the value of your dollar, is just a covert tax on every dollar you own.

I warned my economics students in 2007 that if Bernanke tried a Keynesian inflation of the money supply, he would just cause inflation, and not stop the bursting of the real estate bubble--and that's just what happened. While the news media were quick to blame cartels and "oligopolies" for the surge in food and gasoline prices that followed the Fed's inflation of the money supply, the growth in money supply caused the surge in prices as predicted. For a long while the Bernanke inflation also pushed up stock prices, which do not go into either the CPI or the GDP Deflator, so while both indexes rose, they still understated the true amount of inflation Bernanke was causing. You might recall, however, that the rising food and gas prices caused a great deal of pain to consumers and producers alike. Airlines and auto manufacturers suffered greatly, as people cut back drastically on both traveling by air and buying gas-guzzling SUVs.

Just as Greenspan's inflationary real estate bubble eventually had to burst, so too did Bernanke's inflationary food, gas and stock bubbles. The food and gas bubbles burst first, and gas prices fell by half in a very short period--in a shorter time than it had taken them to rise that amount in the first place. By the time the gas bubble burst though it was too late for the airlines and auto companies to avoid severe contraction, as they'd already had a recessionary year. When the stock market finally caught on, it too collapsed virtually overnight. By "collapsed" I mean that the Dow Jones Industrial Average fell back at first to 2003 levels. Not until 2009 did it fall all the way back to 1997 levels. In 2008 the stock market reached artificially inflated levels, but most people didn't realize it, and felt wealthier, so that when the bubble burst, they felt poorer, even though the value of their stocks, on average, still equaled what it had reached been back in 2003, when people felt wealthy because their stocks had climbed so much since, say, 1997.

Late in 2008 President Bush and the Democratic majority in Congress responded to the stock market crash by trying yet more Keynesian deficit spending. The Fed under Bernanke, without any legal authority, assisted by bailing out AIG directly itself, and then indirectly (and legally) by buying all the Treasury debt needed to allow the Bush-Democrat trillion-dollar bailout for the financial industry and the smaller auto bailout, both done in 2008. In 2009 President Obama and an even larger Democratic majority in Congress have continued and expanded the Bush-Democrat Keynesian policies with first a $410 billion Keynesian "stimulus" bill passed a few weeks ago, and now with a budget that calls for a $2 trillion dollar federal budget deficit for 2010 alone, and $10 trillion dollars of deficits in the near future.

Obviously the Obama-Bush-Democrat Keynesian policies are not stopping the recession. By taking income out of productive hands and putting it into the hands of politicians and politically-connected executives and labor unions, the fatally-flawed Keynesian inflationary policies actual worsen the recession. So as the Keynesian policies remove the incentives for productive people to save, invest, work and create jobs, I expect the economy to get worse before it gets better. I am just hoping that the Keynesian polices aren't bad enough to prolong this recession for years. Even a deep recession like the one in the early 1980s didn't last for years. Real (inflation-adjusted) GDP fell from 1981 to 1982, but by 1983 had already risen above its 1981 level. Because of large cuts in our marginal income tax rates that President Reagan got Congress to pass starting in 1981, disposable income, perhaps the best measure of economic well-being (and certainly better than GDP), actually rose in 1982 over 1981, so that for those who had jobs, economic conditions actually improved during 1982, deep recession notwithstanding. Unlike Reagan, however, Obama and many congressional Democrats would like to raise tax rates, sadly, so I would expect disposable income to decline along with GDP during the Bush-Obama recession.

Currently the unemployment rate stands at 8.5%, the highest since 1983, when it averaged 9.4% for the year as a whole. In 1982 the unemployment rate averaged 9.7%, and for a time in 1982 even exceeded 10%. In fairness to the earlier recession, however, I have to note that unemployment stood at 7.6% already in 1981 before the 1982-1983 recession even started, but had fallen to nearly 4% prior to the current Bush-Obama recession. So while the unemployment rate hasn't risen as high this time (yet), it has risen much more than it did during the 1982-1983 recession. There is no doubt that we're currently suffering through a bad recession.

Government could really help the economy if government would stop increasing spending and regulations, and cut marginal tax rates, which would increase the incentive to work, save, invest and create new jobs. Restraining the growth of government spending and regulations, combined with large cuts in marginal tax rates, allowed the worst recession since the Great Depression, 1982-1983, to turn into what became the longest peacetime expansion in US history, 1983-1990 (and is still the second-longest peacetime expansion in US history). With the anti-growth policies of Greenspan, Bernanke, Bush, Obama and the Democratic Congress, however, I think we're more likely to see the longest downturn since the Great Depression instead.

You can read more about the bad news at http://www.foxnews.com/politics/2009/04/03/jobless-rate-jumps-percent-k-jobs-lost/.