The Corner

Some Not-So-Horrid News in the Jobs Report . . .

. . . and it only took two and a half days to find it.

The American economy, on the eve of the recession, needed a massive readjustment from making bad investments to good. We needed to stop borrowing so much money and using it to build houses that we couldn’t afford.

And our state and local governments needed to stop spending bubble-era tax revenues as if the credit-and-property bubble would last forever.

The good news is, we are making this readjustment. 

Between January 2001 and January 2008, the private economy saw total employment increase by 4 percent (not enough, but, that’s a different story). But certain parts of the economy created jobs at a way faster rate. Construction added 13 percent to its job tally between January 2001 and August 2006. Finance added 8 percent between January 2001 and September 2006. Local governments added 10 percent new jobs between January 2001 and September 2008. And finally, state governments added 8 percent new workers between January 2001 and August 2008 (both state and local governments came late to the bust).

It was a sign of our skewed economic decisions that, during the bubble years, construction, finance, and state and local governments grew much faster than the rest of the economy did. Washington relentlessly supported housing and finance, and housing and finance (debt, really) is exactly what we got — far more of both than we needed. 

So, it’s a good thing that construction, finance, and — finally — state and local government payrolls are shrinking.

Construction has probably overshot the mark — construction lost another 9,000 jobs last month, and is actually 19 percent below what it was more than a decade ago, in January 2001.

Finance is 2 percent below what it was in January 2001. But remember, in January 2001, we were coming off an earlier financial bubble, so we still have some finance jobs to shed. Local and state government still have more employees than they did back in January 2001, 7 percent and 6 percent higher respectively. 

It’s terrible for anyone to lose a job. But this is how the economy fixes itself.

The fact that 18,000 local government workers, 7,000 state workers, and 15,000 financial workers lost their jobs last month isn’t good news — but it’s not a surprise, nor is it avoidable. 

And this is also what the social safety net is for. People who lose their jobs can take unemployment, and, if necessary, other benefits until they can apply their skills somewhere else in the economy. And the parts of the economy that should  be growing, are, albeit far too slowly — manufacturing gained 6,000 jobs last month. 

The bad news is that it doesn’t have to take this long, and the promising parts of the economy don’t have to grow so slowly.

As I note in today’s City Journal web piece, Washington policy, not only since TARP but well before, has long been used to protect the financial industry from the full consequences of its bad decisions, at great cost to the economy.

Remember how TARP was supposed to buy up the toxic assets from banks and get the economy moving again? Well, Treasury abandoned that idea in the fall of 2008, because it quickly figured out that valuing the toxic mortgage-related securities was hard

But many of those toxic assets are still there — and they’re poisoning the recovery. How? Treasury, the Fed, and the Obama White House continue to pretend that much of the bubble’s toxic mortgage debt is still good — when it’s not.

For as long as we continue to throw good money after bad debt, we cannot invest new money in the new ventures that will power the economy into a real recovery.

No wonder the financial sector hasn’t shed its extra jobs quickly. The rest of the economy is pretending that bad property-related debt that should be written down — that is, largely erased — isn’t suffocating growth.

In that sense, Mitt Romney is right — Obama has made things worse.

And by opting for a torturously slow bleed rather than a get-it-over-with approach, Obama has made us more vulnerable than we need to be to events beyond our control. For instance, if China’s economy slows significantly, we won’t have recovered sufficiently enough from our own mistakes to deal with it. 

Romney and his presidential-candidate colleagues should come up with some constructive ideas about how to introduce market discipline into the financial industry, so that it can take the losses on its bad mortgage debt. They can start by reading this Joe Nocera profile of outgoing (I guess out-went as of last week) FDIC chief Sheila Bair. 

— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal

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