The term “jobless recovery” is being used to explain what is supposedly happening in the United Sates right now. Many people assume that the government is some kind of spectator, watching what is happening, and pumping some money into the system to turn things around.
In fact, the current state of the economy can be expected when the government is acting the way it does now.
The downturn started on a government lie. Both the Democrats in Congress and the Bush Administration worked for years to expand home ownership. It was done by relying on government promises to stand behind loans issued by Fannie Mae and Freddie Mac. As the loans became increasingly suspect, financial firms used derivatives, in part, to protect themselves against any harm from mortgage foreclosures.
At their peak, Fannie and Freddie were buying all kinds of marginal loans and giving government insiders a way to pick up a quick 8-figure (10 million dollar) annual salary. When the house of cards collapsed the politicians pulled their normal “Who, me?”routine and starting pointing fingers in every direction.
In a time of sudden changes, uncertainty is the only certainty. Corporate Bonds were long known as the “widows and orphans” investment. The bondholders had first claim on the assets of the corporation and got a smaller, but less risky, rate of return.
With the Chrysler and GM bailouts, President Obama changed the rules. Bondholders lost two-thirds of their money while more politically favored groups lost less. Now, if you think about bonds, the question becomes, “Why bother?” If companies wanted to issue bonds to create jobs, they would find fewer buyers.
Many jobs are created when factories are built. Factories use a lot of energy. With the “cap and trade” legislation in Congress, anyone who wants to invest in a factory is forced into a waiting game to see what happens. If energy costs go up, it is harder to make money. Why would anyone bother to start a factory if the energy costs are not reasonably predictable?
The health care bill is another source of uncertainty. No one knows the cost of the program for either individuals or companies. When the bill first passed, several companies issued stockholder advisories about the impact. They were threatened by Congress with subpoenas to come to a hearing. Once Congress had a chance to understand the validity of the warnings the hearings were, mysteriously, never held.
An investor or businessman thinking about hiring people has to wonder what the health care costs will be. This uncertainty leaves them thinking, at least for now, “Why bother?”
The impact of the gulf oil spill makes it all worse. Supporting BP at all is politically unpopular but it is useful to understand the impact of our decision-making on other companies. Although it was ridiculously low, there was a legal “cap” on damages designed to let companies know their risk. That cap has been discarded. Instead of owning millions, BP is spending billions.
To make things worse, President Obama had legal authority from day one to take over the cleanup operation and use any resources he could find. It took the administration seventy days to accept help from countries with the most experience. It is reasonable to argue that a more efficient intervention by the administration could have reduced the amount of harm.
For an investor, there is no certainty about the risk and no reason to have confidence the Administration can help clean up the mess. Worse, the experience of the Governors in the region shows a federal government so wrapped up in its rules and procedures it can’t even get out of the way to let other people solve the problem.
Oil companies are moving their rigs out of the gulf because of the administration’s moratorium. Even more jobs are being lost in Louisiana because of that decision. Eventually, we may want the oil companies to put new rigs in the gulf to restore the jobs. Could their answer be, “Why bother?”
Management schools describe the task of management as “Decision making in the face of uncertainty.” Investors and managers understand this and are willing to accept a certain amount of uncertainty. But inconsistent, or even incompetent, government policies along with economic uncertainty are a bad combination. Someone whose effort or money can help provide jobs is left with the question, “Why bother?”