John Mauldin’s letter this week was detail, thought-provoking and important for anyone who is planning their business strategy for the next several years.
Maudlin built on an argument that he introduced a couple of months ago. Drawing on the work of several colleagues, Maudlin empirically demonstrated that the economy was unlikely to replace the volume of lost jobs created by this economic disruption for many years.
In this weeks letter he probes this argument more deeply, leveraging the work of Mike Shedlock to play out the impact of three different economic recovery scenarios on employment. The charts to the right show the outcomes of Scenario 1, which assumes that this recovery generates jobs at roughly the rate of past recoveries, and Scenario 3, which assumes that we have a double-dip recession and generate new jobs more slowly than in past recoveries.
Maudlin concludes with this summary:
We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.
The letter is getting long and it’s getting late, so let me close with a few thoughts.
First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.
Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.
Third, the only way out of this morass is to create an environment where small business can thrive. As I’ve noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity.
Why share this perspective? Because I think that it is critically important and very easy to lose sight of. We are entering into a period of relief because a bottom of sorts has been reached. Energy and optimism are shifting at the local level. But these emotions are just by-products of short-term change. Longer term, we will be managing our businesses in a climate unlike any other we’ve experienced in the last 25 years.
The by-product of sustained high unemployment is to increase the burden on public services, reduce consumer demand, shift long-term trends in production and create intense pressure on the monetary system and, as a result, tax receipts.
As Maudlin points out, this tax policy generally punishes small business. Successful small businesses generally are significant cash generators — entrepreneurs figure out how to build products and services that require minimal capital investment, and as a result, when their business is successful, they generate significant amounts of cash.
Simple tax policy says to take a larger portion of that cash to fund the public burden. The simple counter is that if the entrepreneur is allowed to retain their cash, they will create more jobs.
It’s not as simple as that: many small businesses are built with the goal of supporting a lifestyle, and once a certain level of earnings is reached, the energy to build the business subsides.
Tax policies that create incentives for job growth, that give a small business a direct financial incentive to look for growth and to hire more people, are the kind of policies that would most directly benefit the economy today.
I’m looking forward to Maudlin’s thoughts on how to achieve these outcomes, and what the risks are if we don’t.
To see Shedlock’s detailed analysis of the composition of the emerging employment market, click here.
