Stock markets were hammered on Friday following a disappointing jobs report in the U.S. on the heels of other lackluster economic data and continued jitters over European debt. Investors, then, might be surprised by the sudden change in tone about additional demand-boosting stimulus measures by world leaders assembled for the G20 meeting in South Korea.
Reducing ballooning deficits and debt loads -- instead of spending to provide additional stimulus for growth -- now seems to be the priority for the world's largest economies. The move marks an about-face for the G20, which had issued a communiqué as recently as April about its intent to shore up demand. It also flies in the face of pleas for additional spending measures by U.S. Treasury Secretary Tim Geithner and is already being heralded as a disaster by high-profile American economists.
But despite the knee-jerk cries of imminent demise, investors should take a more measured look. Massive liquidity injections in the form of monetary and fiscal stimulus seem to be the cure-all these days for any economic malady. And indeed, in the wake of the economic crisis two years ago, such moves may have been warranted as emergency measures to shore up confidence.
Under the Hood of Unemployment
Now, though, much more surgical responses are needed for what has clearly turned out to be the Achilles heel of the fragile American recovery taking shape. That weak spot is the continuing staggering rates of unemployment and underemployment for the most vulnerable workers at the lower end of the socioeconomic spectrum.
Headline numbers of whether hiring exceeded or fell short of economists' expectations along with aggregate unemployment rates get all the attention. But looking under the hood paints a much more varied picture.
While the overall unemployment rate may have dipped to 9.7% in April from 9.9% in May, it climbed to a stark 15% from 14.7% for workers without a high school diploma. Those with a college degree, on the other hand, saw a dip from 4.9% to a relatively comfortable 4.7%. (Of course, unemployment has shot up across the board since the housing-driven economic bust: Unemployment rates were 6.7% and 1.8%, respectively, for those educational demographics in 2006, according to the Bureau of Labor Statistics.)
The ranks of the long-term unemployed -- those without work for six months of more -- is now 46%, the highest since 1948. And these workers face the additional risk of seeing existing skills become obsolete as they remain excluded from the labor force.
"A New Version of the Trickle-Down Theory"
Rather than carpet-bomb the financial markets with liquidity, then, governmental efforts should concentrate resources on assisting those who are feeling the most pain and improving their chances for employment. But the bulk of the policy response to date has been exactly the opposite.
"The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices," prominent hedge fund manager David Einhorn argued recently.
Rock-bottom interest rates push investors into equity markets to seek returns and thereby boost share prices. Banks, meanwhile, can borrow at ultra-low rates and simply park the money in longer-dated Treasury bills, thereby playing the difference in yields without incurring any risks. Such easy profits actually remove incentives to extend loans to riskier ventures like small businesses.
Apply Aid Where It's Needed Most
The result is supposed to be "a 'wealth effect' when the lucky speculators spend some of their gains on goods and services," thereby boosting aggregate demand and leading to job creation, Einhorn writes. Banks and big companies, of course, are sitting on mounds of cash. Stock prices have indeed recovered nicely. But the jobs have yet to come.
With signs of an economic slowdown materializing and elections looming, many American policymakers no doubt will pound the table to redouble current stimulus measures. But instead of once again pouring money on powerful interests in the hopes that the largess trickles down the food chain, it's time to find ways new ways to funnel it to the pockets that need it the most.
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