Last week I was at a Economics Bloggers Forum in Kansas City sponsored by the Kauffman foundation.
Paul Kedrosky at Infectious Greed, Mark Thoma at Economist View, Former President of the Dallas Fed Bob McTeer , Michael Mandel, former chief economist for BusinessWeek, Bryan Caplan at the Library of Economics and Liberty Blog and a group of about 20 others were at the conference.
I gave my views on the unemployment rate and most thought I was too pessimistic. Bryan Caplan proposed a bet and you can find it here: Unemployment Bet: Mish vs. Bryan Caplan.
On the fiscal crisis panel, Mish predicted high unemployment for the next ten years. This provoked a lot of heat but little light. Over dinner, though, Mish and I hammered out the following bet:
If the official initially reported U.S. monthly unemployment rate falls below 8.0% for any month between now and June, 2015, I win $100. Otherwise, Mish wins $100.
Mish based his pessimism on the implausibility of rapid job growth in construction and other key sectors. I saw this as misleading “near” reasoning – and took the “far” road instead. My position: During the last big recession in the Eighties, the unemployment rate fell about 1 percentage-point per year after the peak. So while full recovery is indeed about five years away, it would be very surprising if unemployment stayed at 8% or more for three years, much less five. Where will the new jobs appear? If I knew that, I’d probably be investing in them instead of blogging about my bets!
I highly doubt the employment growth in the 80’s is the correct model, nor is the recovery following the 2001 recession.
The latter had the benefit of a housing boom followed by a commercial real estate boom, neither of which is coming. In the 80’s there was still a transition from one parent working households to two parent working households and that transition enormously increased the credit buying power of households. Given that the consumer is 70% of the economy and given the 90’s had an internet boom creating amazing numbers of jobs, such comparisons are prone to huge errors.
Let’s not forget that interest rates fell from 18% to zero and that the Fed is zero-bound constrained now.
It is also crucial to take into consideration attitude changes and demographics. The pendulum swung as far as it could go to risk taking and consumption. The pendulum has now just started to swing back towards saving.
Look at the rampant overcapacity. Do we need more Wal-Marts, Pizza Huts, nail salons, Home Depots, Lowes, etc., etc.? I suggest not. While firing pressure may abate, beyond inventory rebuilding and a flattening economy, there is little room for hiring unless some technological revolution occurs.
Finally, I think a double dip recession is highly likely, and the redistribution efforts of the Obama administration will damper job creation for years to come. Small businesses, have extra incentive to not hire, and banks are lending responsibly for the first time in decades.
What Can Go Wrong and Right?
There is always a chance that some new technological revolution will happen to undermine my pessimistic scenario. Certainly a development in clean energy could create a massive number of jobs. There is also a chance of an advancement in the medical field that would do the same.
I am sure something good will eventually happen, it always does, but I doubt it will be that soon or even if it does happen soon, that it will create huge jobs in the United States as opposed to elsewhere.
Finally, there is a chance that Congress goes completely ape with jobs programs. However, fiscal conservatives like Chris Christie are taking governorships. Christie’s efforts are long term beneficial of course, but short term it will take jobs out of the public sector.
Moreover, there is little appetite now for more stimulus programs, and it is a near certainty that the next Congress will be more conservative, with an outside chance Republicans re-take the House. Again, this is long-term beneficial, but the short-term pain for a couple of years could be immense.
One wild card in this mess is free trade. If free trade advocates win the day, that would create jobs. However, it is far more likely an all out trade war with China develops in light of increasing calls to label China a currency manipulator. Please see Pressure Increasing on China to Revalue Yuan; What Can Go Wrong? for details.
An actual war as opposed to a trade war is certainly another wild-card. War in the Mid-east could easily disrupt the supply of oil and have lasting negative effects. Then again, peace could break out. That would help create jobs.
Simplistically, Europe has had high structural unemployment for decades, Obama’s socialistic policies are taking us down the same path, there is rampant overcapacity everywhere, and government interference and higher taxes will not create lasting jobs.
Barring the wild cards of technological breakthroughs, global peace, and expanded free trade, there is no reason to believe unemployment will follow models nearly every economist expects.
Implications being what they are, this is not a bet I really care to win.
In case you missed it I have a spreadsheet you can download and graph your own projections.
Please see …
The top link contains my base assumptions about demographics etc., as well as the spreadsheet. The second link contains some “what if” by John Mauldin and I.
I will revise that sheet and make it on a quarter by quarter basis because I have some Fed and Moody’s projections on that basis.
Mike “Mish” Shedlock
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