One Big Hole

The impending state budget crisis is something that has been covered in depth here. Just to remind everyone just how bad it's going to get, a picture that says a couple hundred billion dollars.

The WSJ has a story up (HT to Calculated Risk) about the impending bankruptcy at CIT.

The company plans to file for bankruptcy in New York as soon as Sunday night or early Monday, said people familiar with the matter. CIT is poised to enter bankruptcy with enough creditor support to approve its reorganization plan and shorten its stay in Chapter 11 ...

... CIT asked bondholders to vote on a prepackaged bankruptcy plan, which would give most bondholders new debt it values at 70 cents on the dollar, and all the equity in a restructured company.

On the up side, it great that this thing is going into a prepackaged bankruptcy. We've seen this at GM and Chrysler. It allows them to emerge stronger. So in the long term the economy will be better off for this, but.....

As Keynes said, in the long term we are all dead.

This last spring, I posted on how I thought that there were basically two recessions going on. That is that there were two sectors that made up a disproportionate share of the employment losses. From that post:

About a week ago, Econompic posted some nice charts about recent shrinkage in the labor force. As they noted, without labor force shrinkage, the unemployment situation would look a lot more dire, rising above 10% for the nation as a whole.

In the period between March and August of this year, 837,200 persons left the labor force. This has had the ironic effect of driving down the unemployment rate in many states. Basically, unemployment is still up, but not up as much as it would be if people hadn't exited the labor force. The "economic recovery" at hand is thus largely a function of people who have lost all hope and stopped even looking for work.

I really admire Paul Krugman. He's honest to a fault, and during his appearance on ABC's This Week that came out again. As he put it:

A little noticed report issued by the National Employment Law Project last Friday dropped something of a bombshell. By the end of this year 1.5 million Americans currently receiving unemployment benefits will have exhausted them.

A sobering analysis released today by the National Employment Law Project estimates that 540,000 Americans will exhaust their unemployment insurance benefits by the end of September, and a whopping 1.5 million will run out of coverage by the end of the year. NELP’s state-by-state analysis comes on the same day as the states announce their latest unemployment figures, and together they demonstrate the pressing need for more extensions.

Earlier this week, Bondad, Daily Kos's resident economic analyst suggested that there is a Black Swan myth. That's to say that the economy is starting to get better, and that there aren't any potentially catastrophic combinations of economic events on the horizon.

$10.9 Billion.

That's the amount of money currently lent by Federal Department of Labor (DOL) to a group of 15 states whose unemployment insurance (UI) trust funds have run dry. And it's about to get a whole hell of a lot worse. By the end of the year that number will likely have have grown to 35 states. Total DOL emergency loans to states at that time? Nearly $50 billion dollars. The situation will be far worse for some states than others. The states appearing in red on the map below are those that will need DOL loans to keep unemployment benefits rolling.

A picture is worth a thousands words, and this map shows the loss of a couple of hundreds of thousands of jobs. This map shows the current unemployment in each of the 50 states, and in 13 of them, that rate is above 10%.

At least in part, this map shows the immediate impact of the shutdown of much of the US auto industry. With most GM and Chrysler plants idled beginning in early may, a large number of parts suppliers have followed suit. As a consequence, the industrial region around the Great Lakes has seen unemployment jump to heights not seen since the late 1970s.

At this point, many people here are aware that a number of states have deep budget deficits that threaten to bring shutdowns as early as August. I think that throwing some numbers in really shows the depth of the problem as well.

This map shows the gap between expected 2009 state revenues and the budget for the year in percentage terms. California has a real problem, as do several other states.

Unemployment is a malleable thing. The official unemployment rate released by the BLS (Bureau of Labor Statistics) excludes those individuals who have not looked for work in the last month and those forced to work part time for economic reasons. In short the official rate (U-3) tends to vastly understate the unemployment rate, creating the impression that things are better than they actually are. For many, years the BLS has released what it calls alternative measures of labor underutilization that provide details of the percentage of workers who would like to work (but haven't actively sought it in the last month) and those working part time for economic reasons at the national level.

For those of us here, I imagine that this will come as no great surprise:

At a time when it's more competitive than ever to get into the University of Illinois, some students with subpar academic records are being admitted after interference from state lawmakers and university trustees, a Tribune investigation has revealed.

Hundreds of applicants received special consideration in the last five years, according to documents obtained by the Tribune under the state's Freedom of Information Act. The records chronicle a shadow admissions system in which some students won spots at the state's most prestigious public university over the protests of admissions officers, while others had their rejections reversed during an unadvertised appeal process.

Often times, non-economists attribute much more confusion to the ideas of Keynesian economics than is really the case. Take for example the idea of smoothing out business cycles. Anyone who's ever tried to keep to an exercise regime understands the concept intuitively. The fancy graph way of making the case looks like this:

The idea here is simple. The black line is the boom and bust cycle that characterizes un-managed markets. The red line is what happens when the government or private actors step in to manage the economy to smooth out these business cycles. Note that while at any one point, the black line may show a much higher rate of growth than the red over the long run, it ends higher.

Dead–cat bounce (n): a brief and insignificant recovery (as of stock prices) after a steep decline, etymology, from the facetious notion that even a dead cat would bounce slightly if dropped from a sufficient height. First used 1985.

Source: Merriam Webster Dictionary

I just has a truly frightening experience. During a conversation about the auto industry one of my colleagues who researches the auto industry told me that according to his calculations, the GM shutdown is going to send 250,000 off the job in Ohio.

This includes only the multiplier effect at auto suppliers, not any macro economic effect. For example, job losses at retail stores resulting from drops in spending are not included, nor are any further drops from other problems.

As it stands now Ohio unemployment stands at 9.7%.

Overall, the Ohio labor force stands at 5.95 million.

Currently, 578,000 are out of work, up from 409,000 in October of 2008.

Adding another 250,000 to those out of work, bumps the total number of unemployed to 838,000.

Divide this number by the labor force, and you get an unemployment rate of 13.9%, a 44% increase over the present rate.