Building the Labor Force with Forced Labor

By: Michael Pento | Mon, Oct 12, 2009
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Government Jobs, a road to bigger economic woes

The number of people eligible for work is known as the Labor Force. It should not now, nor should it ever be, thought of as the number of people government can force into labor. I would hope Robert Reich (former Labor Secretary under Bill Clinton) would understand that by now.

Mr. Reich is a gentleman I respect and like. However, in a commentary a published October 2nd 2009 "The Truth About Jobs That No One Wants to Tell You", the now Public Policy professor at University of California, Berkeley makes it clear that he doesn't know where viable labor growth must emanate from, or how it must be achieved. To be sure, he does get a few things right in his article. For example, he points out that the real rate of unemployment and underemployment is closer to 20%, rather than the current 9.8% unemployment rate reported by the Bureau of Labor Statistics.

I would add to that, not only is the unemployment rate very high by historic standards, and rising, but the duration of time the unemployed have been out of work is soaring. Among the jobless, those out of work for more than 27 weeks have reached an all-time high of 35.6% or 5.4 million. The average workweek has shrunk back to an all-time low of 33 hours, even as the workforce is shrinking. It's bad news all around and on that we agree.

Mr. Reich is also correct in his assertion that "people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don't have customers aren't going do a lot of new investing....And without customers, companies won't hire. They'll cut payrolls instead."

But this is where his reasoning powers end and his thought process becomes a bit soggy. The former labor secretary states that because the private sector is dead in the water, government must step in as the buyer of last resort. He then heads further into the deep end by stating that government should increase its spending and that it's no time to be worrying about our nation's debt. Finally, he submerges himself completely by stating, "The Federal Government [PLEASE PUT THIS IN ITALICS OR BOLD FOLLOWED BY (my emphasis)] should be spending more money than it already is on roads and bridges and schools and parks and everything else we need [AGAIN BOLD OR ITALISCS FOLLOWED BY (again my emphasis)].

I have some questions for the professor. How is it, Mr. Reich, that a group of people located in Washington, D.C. can know what "we need" as consumers? Do we really need more parks? Does "forcing" people to build roads to nowhere increase the country's ability to produce goods, which can help balance our trade deficit?

Mr. Reich seems to be equating public sector growth, even on the Federal level, with the same benefits that we derive from growth in the private sector. What he fails to realize is that only the private sector creates jobs that are economically viable, can be sustained by the free market and are accretive to growth.

When a centralized power creates jobs or redistributes the country's wealth, it does so by fiat and without the normal vetting process individuals risking their own capital go through. If there is no demand from the free market for a government job or program, it may still not be purged from the system via creative destruction. Instead, it may be continue to exist merely to appease some constituency or political group.

To believe any central planning authority can supplant the free market for any length of time without seriously damaging the economy is ludicrous. All a government can do is borrow from capital available currently, or in the future, and redirect this savings according to its whims. Alternatively, it can borrow from foreign sources or deploy the furtive tax known as inflation.

By all accounts and measures our borrowing days should be over. The nation's debt now stands at nearly $12 trillion and is projected to nearly double over the next decade. Total debt as a percentage of GDP is already at a record high. Meanwhile, we are wearing down foreigners' patience for holding our debt through our willingness to allow the nation's currency to crumble. We have guaranteed our prodigy a lower standard of living that will be accompanied by higher inflation, taxes, interest rates and below-trend GDP growth.

The truth, Mr. Reich, is that consumers aren't spending because they're spent out. Household debt currently stands at 96.5% of GDP. That's just barely below its all-time high and well above the 46% it stood in 1983. That, by the way, is the last year in which the unemployment rate reached 9.8%.

The policies that Mr. Reich endorsed will bring us further away from an economy based on production and savings. What is needed is deleveraging on a national level -- not more government directed consumption and debt.

A necessary period of pain must take place to reconcile the decades of imbalances caused by debt and artificially low interest rates. But those in Mr. Reich's camp are encouraging the government to step in where the market has demanded that the private sector bow out. However, since the nation's debt is our debt, such a course would only temporarily hold in abeyance the eventual deleveraging process.

If we pursue such a path, the next economic crisis will be much worse than the last one because we would enter it with increased leverage and a diminished private sector. The next time it will be government that needs the bailout. The only one around to "help" will be Banana Ben Bernanke and his printing press.

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Michael Pento

Author: Michael Pento

Michael Pento
Chief Economist
Delta Global Advisors, Inc.

Michael Pento

With more than 16 years of industry experience, Michael Pento acts as chief economist for Delta Global Advisors and is a contributing writer for He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

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