Monday, September 28, 2009

In the meantime 

I have been greatly enjoying lately reading John Maudlin's Thoughts from the Frontline (who I believe I first heard on a Dennis Prager podcast).  I found this paragraph in his latest letter particularly interesting, in which he quotes one of our great forecasters, David Rosenberg:

What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month. They won't have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense.

I think this is a very important and misunderstood point about this recession.  The pace of this recovery is going to be very slow.  Maudlin continues:

And that is before this administration makes the economically suicidal move to raise the top tax rate by 10%. The popular image is that those who pay the highest tax rate are Wall Street execs, bankers, and corporate moguls. The reality is that 75% of them are small business owners, and they are responsible for the large majority of new jobs that are going to be needed, not to mention a large part of consumer spending. If you tax them more you are going to get fewer jobs (as they will have less to invest) and less consumer spending.

A tax increase of the size being contemplated, with unemployment at today's level, will guarantee a double-dip recession, which of course means that unemployment will rise, not fall. Go back and look at that chart on unemployment. Notice the very steep rise in the second recession of the early '80s.  That's what we could be facing.

Yikes.  Read through Maudlin's analysis to see how his numbers work; they seem persuasive.