[FloareTraurne]

Obama's burning challenge

The latest US jobs data, showing 533,000 payroll jobs lost in November, after 320,000 jobs lost in October and 403,000 in September, illustrate a situation that is much worse than was expected and represents wholesale capitulation. The threat of a widespread depression is now real and present.

The full weight of the banking crisis, the trade deficit with China and burdens imposed by high-priced imported oil are now bearing down on manufacturing, construction and the broader economy with unrelenting pressure.

Unemployment increased to 6.7% in November; however, factoring in discouraged workers, unemployment is closer to 8.7%. Add workers in part-time positions that cannot find full-time employment and the hidden unemployment rate is nearly 13% .

The economy has been slowing since December 2007. The real question is whether the economy is in a recession or depression?
Recessions are like stock market corrections - after a time, equity prices rebound without government intervention. Federal Reserve interest rate cuts and stimulus tax rebates and spending have shortened the lives and eased the impact of post-World War II recessions, but those policies did not end them. The economy self-corrected.

A depression is not self-correcting. Franklin D Roosevelt administration stimulus packages in the early 1930s - huge deficit spending - eased the pain but failed to end the Great Depression. Roosevelt's policies did not put the US economy on a sustainable growth path, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks.

The challenges facing president-elect Barack Obama could not be clearer. The current economic slowdown has two structural causes - bad management practices at the large money center banks and the huge foreign trade deficit.

To accomplish lasting prosperity, Obama will have to fix the banks and the trade deficit. He must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses.

Obama must make certain that banks do not continue to squander federal largesse by padding executive bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives. Industry leaders like Citigroup have announced plans to move in those directions. Many of these bankers enjoyed influence in and contributed generously to the Obama campaign. Now it remains to be seen if he can stand up to these same bankers and persuade or compel them to act responsibly.

In addition, Obama must address the huge cost of imported oil and the trade deficit with China, or any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.

Ultimately, reducing the oil import bill will require higher mileage standards for automobiles and assistance to automakers to accelerate the build-out of alternative, high-mileage vehicles. Fixing trade with China will require a tax on dollar-yuan transactions if China continues to refuse to stop subsidizing dollar purchases of yuan to prop up its exports and shift Chinese unemployment to the US manufacturing sector.

Near term, a stimulus package focused on infrastructure is critical for resuscitating growth. The recent round of tax rebate checks ended up in savings accounts or were spent at the Wal-Mart on Chinese goods and did little to create jobs or accelerate growth, whereas projects to repair roads, rehabilitate schools and refurbish public buildings would create high-paying jobs at home and provide a legacy in capital improvements that assist growth now and in the future.

However, stimulus spending alone won't fix what's broke. It didn't end the Great Depression. Japan has had a succession of stimulus spending plans over the past two decades and they have failed to restore its economic dynamism. Similarly, Obama's proposed massive stimulus package alone won't fix the US economy. He must also reach into the management of the banks, and dramatically reduce US dependence on imported oil and the trade deficit with China. The alternative is economic stagnation or worse, a depression.

Wages and unemployment
In November, wages rose 7 cents per hour, or 0.4%. With labor markets weakening, pay raises will be more modest in the months ahead.

The unemployment rate was 6.7% in November, up from 6.5% in October. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George W Bush took the helm. Factoring in discouraged workers who have left the workforce and those forced into part-time employment owing to the lack of full-time work, the unemployment rate is about 12.8%.

During the presidential campaign, declining real wages and fewer adults working gave Obama's proposals to redistribute income through the tax system a lot of traction. However, those policies will do little to correct the fundamental systemic problems that are destroying good jobs and squeezing middle-class families, even if they would make them feel better for a little while.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost domestic manufacturing, solving the problems of the large money center banks to get mortgage money flowing and housing construction going again, and energy policies that more aggressively develop alternative fuel sources, conserve oil, and open up new domestic fields for conventional oil and gas production. Reducing dependence on foreign oil requires doing all things environmentalists want us to do and all things environmentalists don't want us to do.

Politically correct promises to create millions of new jobs producing alternative fuels make effective presidential campaign slogans, but realistic policies for governing require aggressive development of more conventional oil and gas, as well as non-conventional energy sources, and efforts to improve the energy efficiency of personal transportation.

If the Democrats are not willing to drill for more oil offshore and take on the automobile industry's resistance to significantly higher mileage vehicles, the US economy will be even more indentured to Persian Gulf oil exporters at the end of Obama's first term than it is today.

Finally, diplomacy has failed to redress the currency issue with China. If Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China's sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.