Jon Taplin's Blog

Recession Coming

The stock market woke up yesterday to an ugly unemployment report that seemed to confirm the recession fears I have been voicing for a while. The Times quoted one analyst,

“There’s no mystery as to why the unemployment rate went up,” said Robert A. Barbera, chief economist at the research firm ITG. “The mystery is why it took so long.”

Actually, it’s not such a mystery. A large amount of the construction labor in the U.S. is undocumented workers and so when they started getting laid off six months ago, the government statistics acted as if it wasn’t happening. Now their reduced buying power is pinching at the retail and services level which reported a 19.6% drop from one year ago. Much as Mitt Romney and other republicans would like to make political hay on the immigration issue, the contribution of undocumented workers to the economy is huge and we are all going to be feeling their pain in the coming months.

The biggest problem is that the Fed cannot aggressively cut rates as they did in the 2001 downturn.

As this chart from yesterday’s Wall Street Journal shows, the reason we are having so much pain at the gas pump is that the buying power of the dollar is crashing. Anyone who has tried to buy breakfast in London knows this, but the average American congressman is clueless. The more we push the Fed to open the monetary spigot and flood the economy with cheap dollars, the lower the dollar will fall and the more expensive oil will get. Bush and Treasury Secretary Paulson have pursued a weak dollar policy ostensibly to help the American manufacturer to sell his goods abroad to aid our huge trade deficit. If it was working, manufacturing employment would be climbing, but yesterday’s labor figures showed that manufacturing employment fell almost 2% year over year. 27 years of neoconservative economic policy have hollowed out our manufacturing base, so we don’t make “things” that other countries want. We don’t ship Dodge trucks from Detroit to Beijing and our great multinationals like Coca Cola or P &G make their product in the country they sell it in.

What we do make is software:movies, music, video games, computer programs and applications, drug molecule patents. The irony is that the Bush Administration has created such contempt for “Brand America” around the world, that many people in China or Brazil are just as happy to buy the cheap pirated versions of our software, which returns no capital to the U.S. or to the creators who put their blood, sweat and tears into the song or the movie. What’s worse is that their governments are willing to turn a blind eye to the piracy problem. You don’t think the 50 million pirated DVD’s in China are manufactured on some guys computer one by one do you? Of course not. The huge pressing plants are probably owned by well connected party members.