More Stimulus Equals More Unemployment

Story Stream
recent articles

"Stimulus" is in the process of turning a nasty recession into a genuine depression. The evidence is in the "Employment Situation" report released by the Bureau of Labor Statistics (BLS) on November 6th. The "headline" unemployment rate shot up to 10.2%, the highest in more than 26 years. But the report was much worse than most people realize.

The "household survey data" showed that 589,000 jobs vanished during October. This is bad enough, but the three-month moving average of changes in total employment (current month and prior two months) shows that job losses are actually accelerating.

The three-month moving average (TMMA) of changes in total employment began a serious decline in February 2007. It went into negative territory two months later. This indicator has now been negative for the past 21 months. During this time, total employment has declined by more than 8 million jobs.

As the financial crisis gathered momentum in late 2008, the TMMA fell continuously, reaching a bottom of 853,000 jobs lost per month in January 2009. Then this indicator began improving. By June 2009, when stories about "green shoots" were common in the financial press, the TMMA was "only" 230,000. However, it then began falling again. The October BLS numbers pushed the TMMA down to 589,000 jobs lost per month.

Economic growth is supposed to create jobs. However, the U.S. economy shed twice as many jobs (1,332,000) in the third quarter of 2009, when GDP grew at a robust 3.5% annual rate, than it did in the second quarter (691,000), when the economy contracted at a 0.7% rate.

How can this be? To paraphrase the 1992 Clinton campaign, "It's the bonds, stupid!"

The massive sales of U.S. Treasury bonds to finance "stimulus", bailouts, and other government spending is sucking capital out of the private sector and destroying jobs. Once again, the October 6th BLS report tells the tale.

The BLS "household survey" showed job losses of 589,000, while their "establishment survey" showed a reduction of payrolls of only 190,000. This shows that most of the damage is being done in small business, "under the radar screen" of the BLS.

Small businesses-especially new small businesses-account for essentially all net job growth. However, business creation and expansion requires capital, and more and more of the nation's capital is being commandeered by the U.S. Treasury in the name of "stimulus".

The FY2009 Federal deficit was $1.4 trillion. This was almost a trillion dollars higher than FY2008. The capital to buy this additional debt had to come from somewhere, and much of it was squeezed out of business. Here are some indicators, both statistical and anecdotal:

• During FY2009, "Gross Domestic Private Investment" fell by 25% (almost $500 billion/year). It would have needed to grow by 5% to keep the unemployment rate from rising from an already-too-high 6.2%.

• Many venture capital firms are informing entrepreneurs that there is no money available for new startups. The firms say that they must husband their capital to meet the needs of their existing portfolio companies.

• The 500 largest U.S. non-financial companies now hold more than $1 trillion in Treasury bills, amounting to more than 10% of their total assets. Corporate cash flows are rising, but the money is being invested in government bonds, rather than growth.

• Banks have cut credit card credit lines by 25%, or $1.25 trillion. Because small businesses are often financed with personal credit cards, this has a direct impact on small business survival and growth.

If you divide the total real capital employed in the U.S. ("produced assets") by total employment, you get about $313,000. That is, for $313,000 in capital, the private economy can create one real, permanent, self-supporting job. In contrast, there are estimates that each of the jobs that the administration claims that "stimulus" has "created or saved" is costing about $1.2 million.

If so, this means that selling the bonds required to fund one temporary "stimulus" job will take enough capital out of the private sector to destroy four "real" jobs. This explains why, as the "stimulus" spending has ramped up, job losses have accelerated.

Unfortunately, the Administration, the mainstream media, and much of the economics profession are responding to the worsening unemployment with calls for even more "stimulus". This would compound the tragedy. Each $313,000 of bonds sold to fund the additional spending could be expected to extinguish one private sector job. In addition, we can expect that the next increment of stimulus would be even more wasteful than the first $787 billion. The "best" projects would have been included in the first stimulus bill.

The "headline" (U-3) unemployment rate of 10.2% vastly understates the magnitude of the jobs crisis in America. John Williams' "Shadow Government Statistics" unemployment number for October is 22.1%. Williams estimates that we would have to create 22.6 million new jobs in order to get to "true" full employment. At $313,000 each, the private sector would have to invest an incremental $7.1 trillion to accomplish this.

Every year for the past 58 years, real GDP has been very close to 30% of total capital employed (real "produced assets"). Accordingly, an additional $7.1 trillion in private business investment could be expected in increase GDP by about $2.1 trillion/year. Most of this income would go to the 22.6 million new job holders and their families, but about a quarter of it would be captured by governments at all levels.

Canceling the job-destroying "stimulus" program would be a good first step toward providing the private sector with the additional capital required to achieve full employment. However, this would provide only about 10% of the money required. The rest would have to be mobilized by increasing incentives for real savings and investment.

The two most effective measures toward this end would be to stabilize the dollar and to repeal the corporate income tax. The corporate income tax brought in only $138billion in FY2009. This amounts to less than 1% of GDP, and less than a fifth of the cost of the "stimulus" bill. Repealing it now would produce higher employment and higher Federal revenues within months.


Louis Woodhill (, an engineer and software entrepreneur, and a RealClearMarkets contributor.  


Show commentsHide Comments

Related Articles