Profits, Unemployment and Recovery

30 Aug

The Dallas Fed reported serious bad news, with only 2 of its 15 economic indicators in the positive column. Unemployment numbers continue to hover around 9%. A graph up at Brad Delong’s website gives a sense of how persistent the  unemployment problem is:

From the BLS, one can look at the wider trend in employment recovery after recessions, and one can see that this recession has had the slowest recovery time for employment of any of the post-war recessions.

Over time, unemployment graphs have started to look like fishing hooks rather than spikes. It took five years to move from the peak unemployment to pre-recession unemployment in the 1980s. At current rates we are nowhere close. A Brookings Institute calculation shows different recovery scenarios, with the most wildly improbable (and already missed) employment growth rates just barely matching the five year recovery horizon. More likely scenarios have recoveries of employment stretching ten, twenty years into the horizon. And Brookings has only bothered to plot different employment growth scenarios – one might want mentally to include simply the possibility of a) prolonged stagnation and b) double-dip.

Yet last week we learned that corporate profits are at record level! The Bureau of Economic Analysis reported that profits were way up, in fact reaching record levels. Real corporate profits jumped from the 2008 low of $770 billion to a new high of $1,540 billion. A graph (taken from this website) shows that this is record level profits:

This, by the way, even as GDP growth for the second quarter was revised down from 1.3% to 1%.

So unemployment has record low of recovery rates, GDP growth is stalled, yet corporate profits are at record highs.

How do profits go way up without job growth or much GDP growth? A first cut guess would be wage/compensation suppression and government support. But more broadly, in relation to the noise coming out of the Obama administration (nevermind his future competitors) that the key is to create a favorable business climate, such a climate clearly already exists! If anything, the problem may very well be that the opportunities for profit are too dependent upon favorable structuring of markets by the state. Monetary efforts, like QE1, QE2, and ‘private’-QE3 (a must read on private-QE3 by Perry Mehrling), and fiscal efforts like tax breaks seem mainly to be ways of artificially inflating profits, indeed, even just redistributing stale pieces of the pie, rather than ways of creating productive investment.

We have argued before that a major feature of post-credit crunch policy-making is/will be about picking winners and losers. The rather consistent choice of policy instruments by the Obama administration, along with regulatory and law enforcement decisions, has been to ‘address’ economic problems in ways that do not disturb the class structure. Recent evidence is consistent with that description.


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