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Things to Come 2 - Business Closures

With no hope in sight, businesses are throwing in the towel.

By Petrarch  |  November 30, 2012

During Bill Clinton's 1992 campaign for the presidency, his legendary adviser James Carville had one primary piece of advice regarding the best strategy: "It's the economy, stupid!"

Throughout the 1992 election season, unemployment was in the mid-7% range.  It peaked at 7.8% in June before dropping steadily to and beyond Election Day.  Unfortunately for George H.W. Bush, the American people didn't really feel the recovery that was in progress; they voted for Mr. Clinton who promised to make it better, and by the time he took office in January, it already was.

Throughout the 2012 election season, in contrast, the unemployment rate has never been lower than 1992's peak of 7.8%.  Indeed, it's been 7.8% or above for Mr. Obama's entire presidency, whereas President Bush I's recession lasted barely a year.  Yet Mr. Bush lost, while Mr. Obama was returned to office.

We'll explore the reasons for that later on in this series, but right now we're talking about the future of employment.  A good starting principle is this: if nothing changes, existing trends will probably continue, though with diminishing force.

So what are we seeing in the employment market?  We aren't seeing Great Depression levels of 30% unemployment, nor are we seeing widespread mass layoffs.  Most people who still have jobs are keeping them.

Alas, most people who don't have jobs aren't finding them because jobs are simply not being created.  Current high unemployment has been stable for four years now.  Mr. Obama has strongly proclaimed his intention to keep to his same policies, so why would we expect unemployment to change in the next four years?

The End of the Rope

Recall the beginning of our principle: "If nothing changes."  No, Mr. Obama isn't likely to change anything.  Nevertheless, something very important has changed:  there is now no hope.

Economies go through bad patches; every well-run company maintains cash reserves to tide it over bad patches.  Companies can borrow money, run up credit lines, and keep their people onboard for a few months.

But these resources eventually run out: as a recession lengthens, companies do layoffs, then more layoffs, then asset sales, then shut down peripheral operations.  Eventually the company reaches a point where it's profitable, barely, with a skeleton crew; those folks' jobs are probably safe.

Alas, we're seeing all too many companies who have done all the usual cutbacks and still aren't profitable.  CEOs have bought time as long as they can, hoping for a turnaround.  No doubt many small businessmen hoped and prayed for a Romney victory and a return to economic growth.

Now that they know that's not happening, though, there's a hard decision to be made: Can the company survive another four years of this economy, or worse?  For a great many, the answer is "no" - and that means it's time to shut down and salvage whatever can be turned into cash.

The legendary manufacturers of Twinkies decided that it's just not worth trying to negotiate with their unions any more; they've shut down, laid off all 18,000 employees, and are liquidating the assets to whoever will buy them.  No doubt there will still be Twinkies around but they'll be made in Mexico, or possibly in the Deep South with nonunion labor paid far less on highly-efficient modern machines that require only a skeleton crew.

The Internet is full of reports of companies large and small who've made the same calculation: they can't survive as is, more workers must go, or it's time to lower the drapes and lock the doors.

This creates a vicious cycle: the people who still have jobs know they'll never find another if they lose what they've got.  In those circumstances, who will dare take a chance on founding a new company or striking out on their own?  The companies not founded and the jobs not created can never be counted or known, but they're real nonetheless.  In every modern American recovery, most of the new jobs have come from small businesses; if nobody dares to start a small business, there can be no recovery and thus no hope of new jobs.

Instead, for the forseeable future America and the Western world will experience, in the words of the Telegraph:

The eurozone has officially joined us in a newly emerging international organisation: we are all now members of the Permanent No-growth Club. And the United States has just re-elected a president who seems determined to sign up too... This is the future: the long, meandering “zig-zag” recovery to which the politicians and heads of central banks allude is just a euphemism for the end of economic life as we have known it.   Instead of a dynamic, growing pot of wealth and ever-increasing resources, which can enable larger and larger proportions of the population to become prosperous without taking anything away from any other group, there will indeed be an absolute limit on the amount of capital circulating within the society.

But past recoveries, by definition, started at the peak (well, trough) of recessions; the world didn't end in 1935, 1979, or 1992.  There were people willing to take a chance then, many of whom reaped the rewards of their daring.  Why aren't there any willing gamblers now?

In the next articles in this series, we'll examine the key factor that has changed between past recessions and this one: regulation and the goal of government.