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History May Repeat Itself, But Never Exactly

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Although the jobless rate in America surprisingly soared to 10.2% with the broader measure of underemployment reaching 17.5%, heights not witnessed since the Great Depression, economists and government maintain economic recovery has commenced and enhanced employment will follow its historic lag.

In order to predict the future, one must always study the past and understand well the present circumstances evaluated. The foretelling of economic events and discharge of policy to assuage recessionary consequences relies heavily upon the study of history and the winding path to the present. And so as economists and government struggle to explain away our jobless economic recovery, they continue to grasp at historic data which demonstrate employment has always lagged as an indicator of economic revival.

The analysis of history in order to understand today or as predictor of what comes requires, above all, extrapolation.  If any one variable in the equation, or if circumstance or environment has been modified, then the resulting analysis will be altered and distinct.  I am troubled by the comparison of today’s economic data to recessions of mid-70s, early-80s and the Great Depression, absent the adjustment for changes in credit markets, interest rates, housing prices, health of banks, size of industrial base and government stimulus.  In order to contrast economic downturns, past and present, multiple variables must be compared simultaneously to discern changeability and predict behaviors.  It is shocking that we so rarely hear or read the grim reports of continued job losses explained within the context of economic elements necessary to understand well or predict accurately the timing of shift from job loss to job creation.

Main Street Americans have been battered by the perfect storm of falling employment, plummeting home prices and inability to access credit. And the storm has left so many homeless, jobless and hopeless.  But we are called upon to be patient and to forbear as history foreshadows that GDP growth leads to job creation and therefore help is near. In support of that request for patience, President Obama signed into law Friday temporary measures to alleviate the pain for Main Street unemployed in form of extensions of benefits and tax credits for home buyers.  It frightens me that we treat the symptoms of joblessness with provisional programs while the epidemic left unaddressed may rapidly create a populace of the permanently unemployed.

In recession, job losses, while painful, are anticipated.  Economic downturns cull weak companies, creating room for the strongest and most innovative to thrive.  The process of creative destruction is perceived as integral to free market economies.  However, this economic collapse is by no means similar to past recessions.  Too many job losses spring from changes in bank lending strategies and too many are casualties of small business liquidations.  The massacre of small business is best manifested in the broad variance in job loss numbers reported by the establishment survey, in contrast to the household survey that seeks to determine whether or not people are working by asking individuals their job status, rather than querying the larger companies that employ them.  During September and October, reported job losses were 263,000 and 785,000 and 190,000 and 585,000 for establishment and household surveys, respectively.  Over the course of 60 days, the differential exceeds 900,000 incremental job losses reflecting, in large part, destruction of very small businesses and the self-employed who are excluded from establishment census. The economy is not in a process of cyclical creative destruction, but rather in the deadly grasp of secular, irreparable economic devastation

As financially impaired banks retrenched from traditional secured lending to small and middle-market enterprises (SMEs) to preserve capital and repair balance sheets, a gaping hole in our financing economy was shaped. The sudden dearth of capital has forced companies that might otherwise rationalize and survive the current economic downturn to radically reduce workforce -- layoffs that are permanent as, without capital, companies have no choice but to liquidate. 

As we forecast employment, we cannot embrace history without adjustment for the unique economic character of this Great Recession that began in December 2007.  Not since the Great Depression have Americans endured this damaging confluence of events — dearth of credit and bank failures, mass liquidations of businesses, plunging real estate values and high unemployment.  The recessions of mid-70s and early-80s were not equally marred by so many threats. Most troubling to me, however, is that exit from this Great Recession will be the first in history where Americans could not turn to a broad industrial base or to small businesses for the requisite foundation for economic renaissance and job creation.  Manufacturing job losses accelerated in October with 61,000 compared to 45,000 in September. Since 2000, the U.S. has lost over 8 million manufacturing jobs, and since the start of the recession nearly 40% of all job losses have been casualties of a frail and dwindling industrial base. Adding insult to injury, in all previous post-war recoveries, it has been small businesses that fueled job recovery. In this recession, credit remains woefully unavailable to SMEs, impairing not only growth potential but interim survival.  I fear we have ignored the permanence that defines the recent contraction of American jobs and that if rebuilding America’s industrial base and providing capital to SMEs is not quickly addressed, more and more Americans will fill the rank and file of permanently unemployed.  Every great empire in recent times has been built upon a manufacturing economy. The fall of those great empires has been the failure to remember that one fundamental fact.