Employment will decide the election. Really?

Apparently American voters won’t re-elect a President when unemployment is above 8%. At least the debate is about a substantive issue.

The impact of the jobs figures on the stock markets is an indication of how much relevance employment has. But it needs to be put into perspective.

The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. (The Economist Dec 10, 2011)

Unemployment rates in 1933, four years after the 1929 crash and before the economy started to recover, topped 25% . Presently, unemployment in the U.S. is at 8.3%, down from the peak of 10%.

Monetary policy, which failed in 1929, provided most of the relief needed after 2008. The Federal Reserve, which is beyond political control, has the responsibility for monetary policy.

Deciding who should be President, based on something that’s not part of the President’s mandate is crazy. Not only that, the 2008 crash is not over. What happens in the next few weeks in Europe will have a big impact on the world economy, and that’s also out of the President’s hands.

Europe’s problem is much bigger. The European Central Bank, the body that should have control of monetary policy in Europe, doesn’t have the same level of mandate that the Fed has. The politicians from the 17 countries that make up the Eurozone, led by Angela Merkel, need to provide that mandate. They are not even talking about trying, let alone working out how it should be done.

This will be a big decision, and would require relinquishing autonomy that many of the members indicate they have no desire to give up. Voters in the union are increasingly feeling that membership is not beneficial. The chances of getting consensus are low.

What follows next is looking bad.

And in the U.S., the debate is about whether unemployment figures will be above or below 8%.

Nero fiddled while Rome burned. What else could he do?

More at:
Lessons of the 1930s There could be trouble ahead
Business cycles Lessons of the 1930s
Lost economic time The Proust index
The euro crisis The growth problem

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5 thoughts on “Employment will decide the election. Really?

  1. Interesting. I met someone walking this morning who had lived in Germany (not sure when). She thinks the EU might not survive this crisis. What’s your guessing on that?

    • The politicians everywhere have not been honest with the voters about the severity of the situation. Partially that might be to avoid a self fulfilling prophecy. To give you an indication of how bad it is, there are some really smart people who are taking German bonds with a 0% return at the moment. The risks are so bad, no return is a good return.

      To fix the situation in Europe requires them to create a fiscal federation, at least in the Euro area, and at the moment the voters will not understand why that’s necessary – not having been informed of the severity of the situation, and not having been educated as to why that’s the solution. Yes, the coming crises will show them very quickly, but by then, it may be too late to implement a solution that is very complex, and would require Machiavellian planning to have it in place when it will be required.

      It will be apparent when there is a run on the banks, possibly either in Greece or worse – Spain. For Greece, the solution will be to cut them off. The Greeks have been portrayed as having evaded taxes and not having been honest from the outset. The fear with a run on Greek banks is the possibility that it will precipitate a run on the banks somewhere else, and the impact of the losses on banks in France and Germany. The press is already being briefed about what is likely to occur, so the contagion could be contained. There is already an expectation that Greece will be forced out of the Euro and that its economy will collapse.

      A run on the banks in Spain will not be easy to contain, and then it will probably spread to Portugal, and then possibly to France.

      To avoid this scenario will require leadership, the kind Bismarck might have provided. Hollande has already surprised, and he might do so again.

      The EU cannot survive with the kind of muddling through that they have been doing, that’s for sure. As George Soros predicted, they have less than 3 months to sort it out properly.

      Some of the leading economists have been predicting for months what would happen. So far they’ve pretty much got it right. Now they’re saying that we’re at the edge of the cliff. They’re not really saying what will happen if we go over – that’s not just Europe, it’s all of us. Europe represent 20% of the world’s GDP, the same as the U.S. The U.S. economy is not healthy enough to sustain that kind of impact, let alone the kind of panic it might precipitate.

      Let’s hope someone has a plan up their sleeve. A little magic would be really welcome right now.

  2. This union issue is a big deal, being raised in Wisconsin was seen to be really healthy as we had a well informed electorate and we had some really progressive politicians (LaFollette etc.) but the state has really become polarized and moved to the right. I think that the majority of people vote from the right side of their brain, i.e the emotional side, but think they are voting from the intellectual side. We have people who are really uninformed on the issues. I liked your blog on this

    • It might not be a fair reflection to say that people have moved to the right. The superPACs put a lot of money into the recall vote. One of Walker’s ads tried to tie his opponent to the death of a two year old child. When Walker won, his deputy said “This is what democracy looks like”. That’s an indictment.

      The other issue is that the states that are making the best recovery at the moment are mostly run by Republicans. Turning around the finances of an entity is not easy, but it’s easy to make it look like it’s happened – just cut the expenses with long term benefits – in a company that’s marketing, R&D, training, and maintenance. In the long term the company will go broke – of course. With a State, cut education, maintenance, policing – and you turn it around – in the short term. In the long term you have an unemployable population, poor services, high crime rate, so you chase business and people away, and that’s your tax base, and you’re in deep trouble.

      It’s unlikely that the people who created this mess will be able to fix it.

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