Bush Administration Dithers While Rome Burns


The Deepening Recession -

By PETER MORICI /

The Labor Department will report employment data for March on Friday.
This is a key indicator of the depth and duration of the recession,
which began in December. If the payroll jobs decline for a third
straight month, it will be hard to deny that the economy has entered a
recession of unknown depth and duration.

Unlike past post-World War II recessions, the current meltdown is
caused by a crisis of confidence among fixed income investors, such as
insurance companies and pension funds, in the integrity and solvency
of the major Wall Street banks. The rapid decline in the market value
of mortgage-back bonds issued by these banks, and erosion in the
balance sheets of the major banks caused by the declining value of
unsold bonds on the books of these banks, represents a modern day run
on the banks, which has required the Fed to loan the banks sums
totaling about 4 percent of GDP.

Further job losses will indicate problems in the financial sector are
damaging the real economy in lasting ways that will take many months,
even years, to repair. The Administration, predictably, counsels calm,
but oorpor in repairing damage caused by the shut down in bank access
to the fixed income market to raise funds has caused credit to
contract for sound businesses. Even as the Fed cuts interest rates and
pumps up the balance sheets of banks, business loans contract and
layoffs escalate throughout the economy.

Further, structural problems, like the growing trade deficit with
China and runaway price of oil, are further hampering prospects for
employment growth. Unfortunately, the Administration's responses to
these problems have been tepid and encourage pessimism among business
in the economic outlook. Predictably these businesses cut hiring and
layoff workers adding to the prospects of an employment death spiral.

In tomorrow's jobs report the key variables to watch are:

Jobs Creation.

March 7, the Labor Department reported the economy lost 63,000 payroll
jobs in February, after losing 22,000 jobs in January. In addition,
retail sales and industrial production have been falling, indicating
the housing and credit crisis are causing a general contraction of
economic activity. First quarter GDP growth will likely be negative.

If payroll jobs fell again in March that would be the strongest
indicator yet that the economy has entered a long recession-one of
unpredictable length and depth. The consensus forecast is that the
economy lost 50,000 jobs in March. My published forecast is for a
35,000 decline.

Unemployment.

In February, unemployment fell to 4.8 percent, as statistically
estimated by the Labor Department, even as the number of people
holding jobs fell, because of revisions in measures of the adult
populations, and labor force participation among adults.

Since President Bush took office, adult participation in the labor
force has been declining owing to worsening labor market conditions.
If labor force participation today was at the same level as when
President Bush took the helm, the unemployment rate would now exceed
6.5 percent. The difference comes from the fact that the Labor
Department does not count as "unemployed" those discouraged workers
that have quit looking for work.

Private Sector Payrolls.

In February, government employment expanded by 38,000 even as overall
payroll jobs contracted 63,000. This indicates the private business
economy shed 101,000 jobs. It is difficult for the public sector to
continuing expanding if the tax base-the private sector economy-is
contracting. Further contraction in private sector employment in March
indicates that job losses for the entire economy will accelerate as we
move through 2008, and the economy may be headed for a death spiral.

Construction.

Historically, manufacturing and construction offer workers with only a
high school education the best pay, benefits and opportunities for
skill attainment and advancement. Troubles in these industries push
ordinary workers into retailing, hospitality and other industries
where pay often lags. These phenomena at are the heart of middle class
and blue collar discontent that color the economic debate in the
presidential primaries.

Manufacturing Employment.

In February, manufacturing lost 52,000 jobs, and over the last 91
months manufacturing has shed more than 3.6 million jobs.

The growing trade deficit with China and other Asian exporters is a
key factor. If the trade deficit was cut in half, manufacturing would
recoup at least 2 million of those jobs, U.S. growth would exceed 3.5
per cent a year, household savings performance would improve, and
borrowing from foreigners and the federal budget deficit would
decline.

The dollar remains too strong against the Chinese yuan, Japanese yen
and other Asian currencies. The Chinese government artificially
suppresses the value of the yuan to gain competitive advantage, and
the yuan sets the pattern for other Asian currencies. These currencies
are critical to reducing the non-oil U.S. trade deficit, and
instigating a recovery in U.S. employment in manufacturing and
technology-intensive services that compete in trade.

To affect this policy, China intervenes in currency markets, selling
yuan for dollars and other western currencies at a discount from a
market-determined price. In 2007, this intervention reached $461
billion or 44 per cent of China's exports. Ben Bernanke has correctly
characterized these as an effective subsidy on exports.

Sadly, Treasury Secretary Henry Paulson, in a recent speech to the
Economics Club of Chicago, expressed the view that the employment
situation in manufacturing is healthy and characterized as
"protectionist" substantive efforts to redress exchange rate problems
with China, proposed by Administration critics in Congress. With such
apathy from the Administration and contempt expressed by Paulson for
those who differ with him on appropriate tactics, it is small wonder
that blue collar workers and their unions question the efficacy of
U.S. trade policy.

A crisis of confidence has emerged regarding the conduct of U.S. trade
policy, and the Republican Administration and Democratic majority in
Congress ignore it at peril of the nation.

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Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.

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