Is the Jobs Panic Justified?

BusinessWeek asked economists from Wall Street to academia. Their job forecasts all depend on when they think the credit markets will start working again

By Peter Coy

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It was bad enough when Iceland got into financial trouble and practically sank into the frigid North Atlantic. It was worse when your next-door neighbor lost his home to foreclosure. But now things are really getting scary: Your own job may be at risk.

Unease turned to incipient panic on Dec. 5 after the government reported that the U.S. economy lost 533,000 jobs in November, making it the worst month for employment since the grim days of December 1974. The holiday party chatter is all about layoffs. Everyone wants to know how long the jobs hemorrhage will last and how bad it will get.

Forecasting job losses is incredibly difficult because a lot depends on when banks finally get back to the business of providing credit. The recent news on that score is not good. On Dec. 9 the Treasury Dept. auctioned one-month bills at 0.00%—evidence that risk aversion among potential financiers is more extreme than ever. "We've got so far to climb out of this [financial] hole that if we start today, then on any reasonable time path we might still be climbing out a year from now," says Robert V. DiClemente, chief U.S. economist of Citigroup (C) in New York. Predicts the AFL-CIO's chief economist, Ron Blackwell: "Things will get worse, perhaps much worse, before they get better."

That said, this job bust won't last forever. There are forces at play that will eventually pull the economy out of its free fall. The key is smart government policy that sets politics aside. It must provide a combination of short-term consumer stimulus and long-term investments without stepping over the line into wasteful and innovation-stifling industrial policy.

BusinessWeek asked top economists from Wall Street, academia, labor, and business, and got a wide range of predictions for what lies ahead. The optimists see job growth as soon as spring, with the economy losing only about 750,000 more jobs between now and then. The pessimists predict the economy will keep losing jobs until late next year or 2010, with additional losses of well over 2 million jobs, bringing the peak-to-trough decline to more than 4 million. All of the forecasts take into account President-elect Barack Obama's pledge to "save or create" 2.5 million jobs—implying that these predictions would be even more dire if no additional stimulus were planned.

The quick-snapback scenario assumes a reasonably healthy financial sector. If the financial system keeps struggling, though, the spiral will continue: Cash-strapped companies will be forced to step up layoffs, causing cutbacks in consumer spending that will push employers to cut even more jobs. "I've been cautioning everybody that as long as financial conditions are as impaired as they are, questions about when the job market will hit bottom are premature," says Citigroup's DiClemente.

Much depends on Washington's effectiveness in sustaining demand as the credit crunch unwinds. Keynesian economics is back in fashion for the first time since the Kennedy Administration. Republicans as well as Democrats have glommed onto the idea that massive government outlays during a recession is a good thing because it props up spending for goods and services while the private sector catches its breath. Many economists believe the President-elect's plan for $500 billion or more in stimulus could dramatically shorten the recession and reduce job losses.

But the Obama Administration has to balance the short term with the long term. It needs a plan that will produce a robust rebound in private-sector employment once the recession ends. Propping up zombie companies and household borrowers won't do it.

Remember, the recession isn't all bad: Unsupportable debts are being erased. Consumers are rebuilding their savings and lowering their living standards to match reality. Workers are exiting dying industries. And through distress sales, foreclosures, and bankruptcies, assets are being taken away from weak hands and given to strong ones, creating the conditions for future growth.

The smart play for Obama's team is to use public works, bailouts, and such to break the feedback loop of falling employment to give the economy's natural stabilizing forces time to work. Yes, public investment is good. But restoring confidence to businesses about future prospects will trigger private investments in plant and equipment that are far larger than the government itself is ever likely to make.