Unemployment -- not a lagging indicator of economy

It is conventional wisdom pontificated ad nauseam on business channels like CNBC and Bloomberg that employment figures are “lagging indicators” of the state of a country’s economy.

Their argument is that as recessions begin businesses start to contract the labor force in order to “hedge” against expected declines in revenues and profits, even if they are not at that time losing money. This “streamlining” and “cost-effective” measure is designed to keep businesses profitable even as the economy as a whole slides into crisis. The result is that those employers who take proactive measures by dismissing their workers in advance of a deepening economic crisis will be the healthiest coming out of it. They will have surplus capital available to capture market share and swallow their competition. Such activity is a sign of economic health, so the argument runs, an indication that the “natural functioning” of the business cycle is working and the markets are “correcting themselves.” The result is that healthy businesses that continue to lay off workers as the economy bottoms will invest in new technology, improve efficiency in production, and prepare the ground for the next stage in the economic recovery. That means unemployment is likely to continue increasing even as businesses’ balance sheets get healthy, the stock market rises in value, and productivity rates improve. Those workers still employed are likely to receive better wages through working longer hours (not necessarily wage increases), which improves their purchasing power, thus contributing to the overall expansion of the economy – even as millions continue to languish on unemployment lines and more join them month after month.

The argument outlined above is flawed and reflects the perverted standards used by capitalist economists to measure economic vitality. As is obvious, the perspective outlined above to determine whether an economy is expanding or contracting is taken entirely from the standpoint of corporate balance sheets. A business is deemed “healthy,” i.e. profitable, even as those workers it lays off have seen their lives disrupted if not destroyed through loss of income along with health care and pensions attached to their place of employment.

The balance sheet of the unemployed worker is far from healthy, though. Since the current economic crisis began over 5.1 million jobs in the U.S. have officially been destroyed. This masks a bigger picture of many more millions who have lost their jobs then found part-time or lower wage work. In other words, the official tally is a net of total jobs lost in the economy, not a running tally of the number of workers displaced in the crisis.

According to the Bureau of Labor Statistics, the U.S. economy must create at least 100,000 jobs a month to account for new entrants into the labor force. In the last year, the economy has lost an average of 400,000 jobs a month, a total shortfall of 500,000 jobs a month for a year. That means as of March 2009 the U.S. economy has failed to generate the 6 million jobs necessary just to keep the employment level even with the earliest period of the current economic crisis, much greater than the total jobs lost figure would indicate.

Moreover, such figures do not take into account those workers who have retained their jobs by taking unpaid leaves, pay cuts, steep benefit reductions, and contraction of their hours worked. The carnage among the working class in the U.S. as a result of this crisis is much greater than the official 8.5 percent unemployment rate (as of March 2009) or the total unemployment rate of 15.6 percent, which includes discouraged workers and those working part-time who sought full-time employment. This amounts to 24.3 million people unemployed in the U.S., the highest since records have been kept.

Many leading economists have also pointed to the jobs picture as particularly worrisome in the current crisis. Roger Altman, former deputy Treasury secretary in the Clinton administration, warned in an essay published by the Financial Times on April 5 that this economic contraction should not be measured against previous post-World War II downturns. The difference this time is the extent to which U.S. households have become leveraged in order to maintain their standards of living even as real wages declined.

As Nobel Prize winning-economist Paul Krugman argues in his book, “The Return of Depression Economics and the Crisis of 2008”, the post- 9-11 Greenspan Bubble of artificially inflating housing prices, maintaining excessively low interest rates to provide easy credit to banks and brokerage firms, and promotion of shady refinancing programs in order to expand the balance sheets of mortgage companies set the stage for the current global meltdown, bringing many of the fundamental contradictions of capitalism to a crisis level. More importantly, it led to a catastrophic debt burden on average working people who now find themselves in homes with mortgages worth far more than the market price for their houses, buried under mountains of credit card debt accumulated to buy necessities when wages were insufficient for a minimum standard of living, and facing joblessness or contracting income as corporations try to save themselves by throwing the people overboard.

Altman argues that the average household saw its net worth plunge by 20 percent in the past two years even as real wages fell, compounding the crisis. He states that as a result, “household debt reached 130 percent of income in 2008,” and likely has worsened since then. This situation has forced working people to radically curtail spending even as banks have also reigned in credit. Those two factors have produced a rapidly contracting economy plunging the country (and much of the world) perilously close to a deflationary spiral for which no capitalist economist or politician has ever found an answer. A rapidly rising unemployment rate, therefore, indicates a sick and declining economy. It does not lag; it reveals the state of economic health in a society.

Karl Marx long ago recognized the fundamental importance of employment levels and wages as a measure of the relative strength or weakness of an economy. Writing in The Theories of Surplus Value, Marx notes that “[The] relative diminution in the reproduction of variable capital, however, is not the reason for the relative decrease in the demand for labor, but on the contrary, its effect.” In other words, falling profits does not cause rising unemployment, rather declining employment causes a reduction in socially available capital since it is labor power that generates capital. As fewer people are working shorter hours, the amount of “wealth” generated in society declines forcing a contraction in consumption, availability of goods, and shrinking balance sheets. To save themselves, businesses throw more people out of work, compounding the problem, leading to another cycle of economic retrenchment.

This is the process identified by Altman in the piece discussed above and by Sam Webb, National Chair of the Communist Party USA, in an address to the Party’s National Committee on March 21. (see for the full speech.)

The dimensions of the current crisis, though, are far beyond those of earlier periods in capitalism’s history because real wages for working people have declined steadily and sharply for better than 35 years. This gap between purchasing capacity and real wages was compensated for by an explosive expansion of credit to all sectors of society (by some accounts even to family pets!). Marx warned of this process as early as 1849 when he described the escalating crises of capitalism. Noting the insatiable appetite of capitalists to expand their capacity to accumulate wealth, Marx recognized that eventually they “set in motion all the mainsprings of credit to this end, [as a result] there is a corresponding increase in industrial earthquakes, in which the trading world can only maintain itself by sacrificing a part of wealth, of products, and even of productive forces to the gods of the nether world.” That is the process outlined above and cheered by capitalist ideologues on U.S. business channels as a marker of economic “recovery.”

Those propagandists for capital assert that “money makes money,” or that businesses with access to credit and surplus capital invest those resources in the economy creating jobs. This is the basis for their claims that the key to economic salvation is massive tax cuts for the rich and for businesses in general. It is an assertion that wealth in society is generated by “putting money to work.”

Yet, as Marx noted, this fetishizes money and obscures the production process that created that money in the first place. In the Grundrisse, Marx outlined the source of wealth in society and the processes whereby labor power (workers making things) becomes transformed into exchange value (money) that is then circulated back to the worker in the form of alienated labor (commodities).

“Production,” he writes, “thus appears as the starting-point; consumption as the final end; and distribution and exchange as the middle; the latter has a double aspect, distribution being defined as a process carried on by society, exchange as one proceeding from the individual.”

Without workers making things – transforming raw materials into finished goods by adding their labor power to the product – there is no wealth generated in society. The fact that under capitalist relations of production surplus labor value is seized by the private corporate owner and sold for individual profit on the open market does not negate the fundamentally social nature of production or the source of society’s wealth.

The fact that Western capitalist economies embraced the global and massive expansion of credit as the mechanism to compensate for their seizing ever larger shares of the surplus value generated by workers around the world only delayed the day of reckoning for the contradictions inherent in capitalism while exacerbating them at the same time. Thus, when credit could no longer be absorbed by the productive classes of the world and their debt burden forced a retrenchment in spending – or default on their mortgages, credit cards, auto loans, student loans, etc. – this caused a decline in consumption. It was the beginning of an accounting of the decline of real purchasing power by workers that had been accumulating for more than three decades. As consumption slowed, businesses began to lay off workers outright, accelerating the decline in consumption, which led to further layoffs as capitalists sought to protect their profit margins. Simultaneously, we began to witness immense pressure on workers to work shorter hours, take pay cuts, work for free, eliminate benefits, take early retirement (even as their retirement accounts evaporated in the stock market crash), and their credit lines were cut from underneath them as their income dried up.

The result has been mounting unemployment and a corresponding massive contraction in the wealth-generating capacity of the U.S. and global economy even as banks like Wells Fargo announce record profits (thanks to money at 0 percent interest from the Federal Reserve).

Rising unemployment does not tell us what is in the rearview mirror of the economy, it tells us what the current state of the economy is and its trajectory tells us of what things are likely to be in the future for the people of a given society. In each of the last several months the U.S. unemployment rate has jumped by half-a-percent, suggesting a rapid deceleration of the job market and, hence, of socially-available wealth generation capacity. This portends a further contraction of consumption as those without work drop out of the economy and those with work gird for troubles ahead. Such a contraction will furnish the justification for additional employment cutbacks and the rationale for battering workers into deeper concessions. This is not an indication of a “healthy” economy returning to normal activity.

Rising joblessness and mounting public debt are symptoms of a decrepit system that is in the throws of crisis, one which the working people are being made to pay for even as corporations shore up their balance sheets through tapping the public treasury, and at the expense of destroying the lives of hundreds of millions of working class households around the world. This is a system collapsing from its own internal contradictions. It is a process that is being fought vigorously by workers around the world, whether through strikes (as in France, Guadeloupe, Italy, the U.K.), factory occupations (as in the U.S., France, Belgium), mass street protests (everywhere and growing larger), and building grassroots coalitions to force their governments to provide real economic stimulus and reign in the financial sector and greedy corporations who are feeding at the public trough.

This is the working out of the materialist dialectic so brilliantly elucidated by Marx 150 years ago. The result of this struggle will shape the society of the future. It is a struggle and a future that we shape through our own collective actions.