Get Ready for Another Jobs Initiative

 | May 30, 2013 | 5:00 PM EDT
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Fiscal and monetary policy have been used both simultaneously and in alternating levels of importance since the 2008 financial crisis. The ultimate goal of both, when used in response to a crisis, is to provide public-sector support for the economy until the private sector has had a chance to mend and begins to grow again. 

Private-sector growth is measured principally in two ways: assets and cash flow. The general trajectory is that assets stabilize and begin to appreciate, followed by an increase in confidence, which results in an increase in consumption. Consumption drives production, which causes bank lending and job creation to increase. The increase in jobs causes confidence to increase further, and that begins the virtuous cycle of consumption and production.

Once jobs are being created and the virtuous cycle appears imminent, the public-sector fiscal and monetary support is removed, and the growing tax revenue can service the sovereign debt that was incurred during the lull.

This process is not yet completed, although it has been almost five years since Lehman Brothers collapsed.

As have said previously, the transmission mechanism for the public-sector intervention appears to be broken, because the private sector is still not creating new jobs. Without job creation that at a minimum equals the expansion in the number of entry-level workers entering the workforce monthly, about 250,000, the virtuous cycle cannot happen, and public-sector support cannot be removed.

The problem is that perpetual growth of spending that is funded by public-sector debt eventually leads to sovereign insolvency.

In the last five years, asset markets have stabilized and confidence levels have risen. Stock market indices have more than doubled since March 2009. And most importantly right now, home-price appreciation is again outstripping personal income growth. That means that home affordability is in the nascent stages of declining again, even as mortgage rates are near 50-year lows.

That this is occurring while unemployment remains elevated and at levels consistent with recessions is not only alarming but unsustainable. The rise in home prices is largely attributable to a dearth of supply, because banks have been refusing to foreclose on their nonperforming loans. This is another indication of a broken transmission system for monetary policy.

Not only can the Fed not force its member banks to make loans with the monetary infusions, it can't even make them use the public support to clean their own balance sheets. Without loans being made, there won't be jobs created to allow for private-sector recovery.

The Fed, however, also does not have the authority to simply bypass the banks and make loans directly, so it can't create jobs. As a result, it is likely that the baton of responsibility for doing so is about to be passed back to fiscal authorities.

In the fall of 2008, President Obama attempted to create jobs directly with the introduction of the American Jobs Act. This was the first attempt at a federal budget proposal offered a month after the passage of the Budget Control Act of 2011, which required the sequestration that is occurring now.

The American Jobs Act failed to pass Congress, because more people were concerned about the U.S. sovereign debt situation and were also convinced that the private sector would create jobs if left to its own devices.

Since then, job production has continued to be stagnant, although budget deficits have declined because of reductions in expenditures in Afghanistan and Iraq.

The recent discovery of errors in the conclusions by the economists Reinhart and Rogoff on the negative impact on economic activity when sovereign debt levels rise also supports the increased possibility of a new jobs program being introduced.

If it does happen, there will probably be a greater reliance upon direct government job creation through infrastructure investment than was the case in 2011.

I wrote about this issue in 2011 in the column "Playing Obama's Jobs Plan," and I suggest watching the same stocks that I discussed then:

  • JPMorgan (JPM)
  • Caterpillar (CAT)
  • 3M (MMM)
  • General Electric (GE)
  • Lockheed Martin (LMT)
  • General Dynamics (GD)
  • American Express (AXP)
  • Wal-Mart (WMT)
  • Home Depot (HD)
  • Ford (F)

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