20 October 2009 
The President’s advisors are devoting a lot of communications effort to framing the employment picture. The “jobs battle” is likely to continue as a first-tier economic and political issue through 2010. Here is some context on the intersection among the economics, the policy, and the politics. I have written much of this before but thought it might be useful to summarize it in one place.
- U.S. employment continues to decline, albeit much more slowly than at the beginning of 2009.
- Declining more slowly is not the same as increasing. The President’s team wanted to trumpet good news as early as possible and they jumped the gun. A few weeks ago they had to adjust their message (again) to a less optimistic one. This was a communications mistake, not a policy one.
- Employment growth will return. We just don’t know when, and the when is critical economically and politically.
- Most forecasters expect a strong Q3 GDP number, to be released Thursday, October 29th. The two big questions are: (1) will that GDP growth be sustained through 2010, and (2) will it translate into job growth? The fiscal stimulus is temporary, and needs to translate into job growth and consumption growth to be sustainable.
- It is normal for employment not to grow at the beginning of a recovery. As demand for their products begins to increase, employers typically make their employees work longer hours before hiring new workers. Once the increased demand looks stable and predictable, and once the current workforce is working as much as they can, then employers start hiring. First you increase hours per worker, then you increase the number of workers.
- I recommend watching two numbers:
- the unemployment rate - It was 9.8% in September. Most economists consider about 5% to be “full employment.” When will it begin to decline, and how long will it take to regain full employment?
- the net change in payroll employment - This was -263,000 in September. First this needs to turn positive. Second, since the labor force grows with population, this number needs to reach +100K to +150K per month to keep up with population growth and keep the unemployment rate constant. Finally, it needs to exceed this range for the unemployment rate to decline toward 5%.
- The press is paying a lot of attention to a third statistic, the U-6 measure of unemployment + underemployment. It’s an interesting and politically significant statistic, because it’s so much bigger than the traditional unemployment rate metric. But so far I don’t think it tells us a lot more about the trends than the above two metrics.
- I will begin to feel good about the employment picture when we have had two consecutive months of payroll numbers >100K. At the same time you would expect the unemployment rate to start declining. I think the most important question you can ask an economic forecaster right now is, “When do you think the unemployment rate will begin to decline?”
- Job growth was slow to start in the 2003-2004 recovery. You may remember the political attacks from the left about the “jobless recovery” in the 2004 campaign. The recent severe recession was cause by a financial shock. Economists have widely dispersed views on two questions:
- Did the jobless recovery of 2003-2004 signal a fundamental change in the pace of job growth in a “normal” recovery?
- Will the somewhat unusual cause of this recession affect the pace of job growth in the recovery?
- There is even more uncertainty than normal in projecting near-term job growth. I generally treat economic forecasts more than 12 months out as wild guesses. This year I have shortened that window to 6 months. I don’t think anyone has a clue what the employment picture will look like 9 or 12 months from now.
- This uncertainty makes it hard for businesses to plan. Consumer spending is about 70% of GDP, and the most important determinants of consumption are (1) how many people are working and (2) are their paychecks going up?
- Some on the right argue the fiscal stimulus is not helping increase economic growth. That’s silly. The government is pushing hundreds of billions of dollars out the door. At least in the short run, that’s going to increase GDP growth. We should see some of that effect in the Q3 GDP numbers nine days from now. The fiscal stimulus should continue to help increase GDP growth above what it otherwise would have been into and through most of 2010, especially in the first half.
- I believe the stimulus is helping boost GDP growth now above what it otherwise would have been, but that it is too late, poorly designed, and horribly inefficient and wasteful. They are getting some bang, but their bang-for-the-buck and effectiveness are terrible.
- At the same time, the Administration irresponsibly overstates and overspecifies the employment impact of the fiscal stimulus.
- Their “jobs created or saved” numbers are claims, not measures. Since we can’t know how many jobs would have been lost without policy changes, we can’t measure the change that policies have caused.
- This means they cannot prove their statements about the number of jobs saved or created by policy, and critics cannot prove those statements are incorrect. This lack of verifiability, and the vulnerability of these statistics to political bias, allow the Administration flexibility to adjust their claimed success to meet political demands. It is irresponsible for an Administration to use these numbers as definitive, and irresponsible for the press to report them without heavy caveats.
- Every time I hear “[number] jobs saved or created,” I ignore the number and assume I am being spun. This is particularly true when the numbers are specific, e.g., “250,000 education jobs saved or created.” I think this is irresponsible and misleading. It feels like they’re just making these numbers up. Reading the methodology behind the numbers only reaffirms this view.
- The fiscal stimulus is one of several policy moves contributing to stronger (or less weak) economic growth. The Fed’s and Treasury’s actions (begun last September) to stabilize large financial institutions and financial markets helped a lot. The Fed is also keeping interest rates extremely low. Administration officials routinely attribute all of the unmeasurable economic benefit to one of three major policy changes. This is invalid.
- Given the above caveats about unpredictability, the Administration’s forecast for 2010 is gloomy. The Administration forecasts an unemployment rate hovering in the high 9s throughout 2010. If they’re right, there will be a period where net job growth will be slightly positive (say, 100K-150K jobs per month) and the unemployment rate will be inching downward. This could create a dangerous political dynamic, in which the Administration and Congressional Democrats will be tempted to argue that things are getting better, but where it won’t feel like they’re getting better because the unemployment rate is still so high.
- If this economic forecast plays out, it will pose an interesting question for the 2010 Congressional elections. Which is a more important determinant of how Americans vote: the level of unemployment, or the direction and rate of change? It’s possible that next November things will still be bad, but getting slowly better. Will voters punish the party in power for the level, or reward them for the change underway?
- Elected officials in both parties correctly think their rhetorical efforts can affect how voters view the economy. Expect the political jobs battle to continue for another year.
(photo credit: JThomasShaw)
In an otherwise astute posting, you have one great silliness. It is silly to think the government can take a dollar out of the economy by borrowing, put the dollar back into the economy by spending, and conclude there’s a new dollar in the economy. Even in new math, plus one, subtract one, leaves a big zero.
It is a thought I have said many a time, but suddenly it occurs to me that they are taking that dollar from China and spending it here. Not knowing international economics I do not know if it makes a difference. Since it is a dollar would it have come here anyway as a private investment?
But much of the money is borrowed from foreigners, right? If you borrow a dollar from someone in China and spend it in America, doesn't that put a "new" dollar into the American economy? 'Course, the Chinaman might otherwise have spent it to buy an American product, anyway, but then again maybe he'd have spent it to buy something from a third country or held onto it till next year or the year after that. The U.S. govt will eventually have to take that dollar plus interest out of the U.S. economy to pay back the debt, but that's not to say that nothing will have changed.
Borrowing from foreigners doesn't change the results for the simple reason that there's another flow of funds that have to balance — the balance of payments. If we import more savings from abroad, on net, then we have to import more goods from abroad, on net, so the trade deficit rises by the amount of the deficit spending financed by selling debt to foreigners.
jd In the long term you may be correct. In the short term there is actually more wealth. Where does that wealth come from. It comes from the confidence that people have that their dollars will be returned with interest. Yes borrowing and spending does increase the short term dollars in play and so increases the current wealth. It does not matter whether the borrowing and spending is private ( as in leveraged capital ) or public as in the U.S. government printing money. Both increase the amount of wealth. You need to get the idea out of your head that there is a difference between "perceived wealth" and "real wealth". All wealth is only "perceived".
Now if the government, as it can do, by fiat borrows money and spends it on investments with no return, as it often does, then you are not right. You don't just get a big zero, you get a negative result. This is what I think is happening in the country right now. Its not whether you spend or not, its how you spend. If the government forces the citizens to invest in a porkfest of unneeded airports, roads, bridges, and subsidies to unsupportable industries full of workers who produce below the amount they are paid, then we all become poorer. And when we all become poorer, the poor suffer.
All wealth is only "perceived". No. In precise terms, Wealth or Capital is hard goods and services which may be purchased on the open market or stored in one's possession. You are talking money, which is a medium of exchange for wealth.
The reason all this money is not producing wealth is that it is not being used to produce anything. And, before the moderator accuses me of being "silly", I do not, of course, mean "anything" literally, I mean "anything of significance", and from domestic sources. The reason for this is the business unfriendly policies of this administration, the inefficient dispersal of the funds to the administration's cronies and supporters, and the certitude of heavy taxation to come to pay for the administration's pet policies and all the borrowing, all of which are either dampening economic activity or fueling most significantly imported consumption. To illustrate the latter point, note the top sellers in the "cash-for-clunkers" program – all foreign makes.
Heavy borrowing is justified when it allows investment in the production of wealth, and promises a higher payoff than the funds borrowed in the long term. Borrowing for consumption, especially when much of that consumption is of goods imported from abroad, is the path to ruin, upon which we are firmly embarked.
In the days when most of our purchases came from domestic sources, it could be semi-plausibly argued that borrowing for consumption would stoke domestic production. If that ever were true, it is no longer. We are like the kid who blows his college fund on personal electronics or drugs (something I have seen happen). When the money is gone, we will have nothing to show for it, except a long term debt for which we will have no capacity for repayment.
And, pardon me John if, in fact, I appear to be disagreeing with you when you and I are actually mostly in agreement. It is only the part about the perception of wealth which launched me into essentially expanding on what you had already stated.
Even if borrowed domestically (which half of it isn't) or if we taxed to fund the spending, I assume a shift from savings toward consumption generally boosts short-term GDP to some degree (the exception would be in an extreme condition of "crowding out" that I don't suppose would occur during a deep recession), and how much would depend on the size of the multiplier.
Another important factor politically , is that you can have decent growth in 2010 but people see the storm clouds on the horizon, ie inflation, interest rates and govt debt. This was not the case in 1984, 1996 or 2004. Also there certainly will be tax increases. Finally, you have a left of left of center President pushing change on a right of center country. The economy could grow at 10% and still a good portion of the electorate is going to resist
another thing, the period we are in now look similar to the run up to the Iraq War . Uncertainty before the war stalled economic growth and employment. This is much worse and longer lasting. Who would want to hire anyone when you have a 1500 health insurance that noone knows its lasting effect. Couple that with cap ntrade and you can have 3% growth for multiple years and businesses will be reluctant to hire
I've gotten the impression that the U6 number has assumed greater importance in recent times. From reading, it appears that the U3 number has been tweaked (to make U/E look less severe). Also, many companies have loaded up on contractors in order to avoid paying benefits to fulltime employees. And also to provide a cushion when layoffs are needed. If I understand correctly, no money is paid by companies into the U/E funds for contractors and they don't show up in the U3 number.
Would appreciate confirmation or correction on these points….
What happens after 2010, or for that matters, in the runnup to the end of 2010, when the Bush Tax Cuts automatically expire and when Speaker Pelosi thinks such is a Good Thing ™?
The rhetoric is that the tax cuts were for “the rich”, and indeed wealthy people saw much lower tax rates, but the grand bargain behind the Bush Tax Cuts is that everyone saw their taxes reduced. Ergo, when the tax cuts expire, everyone is going to see their taxes go up, including a lot of people who were paying payroll tax but were not paying any income tax. And I am not even talking about “trickle down effects” of reduced tax rates on the rich or, what should we call it, trickle back up effects of the rich seeing tax increases.
When these tax cuts get closer to expiring, I expect to see all manners of trickle down, trickle up, and trickle over the whole yard effects as “the rich” are forward looking in terms of tax effects. Maybe there will be a short-term boost in 2010 tax collections and reduction in deficit as wealthier people sell assets into capital gains before the rates go up. The effect on “the little people” won’t be felt until after the 2010 midterm elections, and it will be in the form of sharp hikes in witholding.
In all of this, the President had promised that people “making under 250,000 a year” or whatever that means would not see their taxes go up, only wealthy people will. Well then, simply letting the Bush Tax Cuts expire will not fulfil that pre and post campaign promise, there will have to be some explicit legislation to stick it to the rich and let the poor making less than 250 K keep their money. Early in 2009 there was some kind of talk out of Mr. Rangel about legislation to make this so, but since then, it seems like the tax can is being kicked down the road. And explicit legislation, even if it is populist in only sticking it to the rich, will have an explicit political effect, if from nothing else, from the effect on the stock market, upon which even poor folk depend for their retirement to some degree these days.
So, is this tax elephant even being notices by anyone these days?
The recklessness, waste and fraud of the stimulus process (along with the various and sundry examples of gross incompetence and the effort to ram health care and climate disasters down our throats) has badly frightened small businesses around the country. When assessing the impact of the stimulus bill (or rather Obama's fiscal policy — passed and proposed), an accurate accounting should also factor in the devastation caused by the fear produced thereby. FDR's demonization of business in the 1936 campaign resulted in negative net investment and caused the Depression to relapse. Just as FDR's rhetoric had investors heading for the hills, Obama's policy efforts are causing prudent entrepreneurs to hunker down for the coming storm.
Obama has caused millions of people to anticipate massive problems in the future. These expectations are the biggest issue in the economy today.
Agreed. Obama is a leftist who was trained by Saul Alinsky and other radicals. He despises business. Expecting business to respond is like the old adage "the beatings will stop when morale improves".
Maybe some "press" is covering U-6, but a casual news listener has no idea (based on the reports) that "real" unemployment is probably around 16%.
The casual news listener is told that slowing job LOSSES is an improvement…I shudder to think how orgasmic the media will be if Obama can ever claim actual job gains.
Is the Obama making changes to our welfare laws that will push up the full employment number? In the early 1990s, if memory served, many economists pegged the US full employment number closer to seven. They did not anticipate unemployment dropping below 5%. One explanation, for at least part of that drop, is welfare reform. It made unemployment more costly (and changed the cultural perception of welfare) and thereby raised the incentives for poor people to get jobs.
Hello,
1) Bush didn't cut taxes for the rich – at least not most of them. Bush never cut the tax rates in the alternative minimum tax, so by cutting the tax rates in the regular tax system, people just got pushed into the AMT tax brackets, and ended up paying pretty much the same amount. Capital gains and dividends would be one exception to this rule, but its not like people are declaring a lot of gains and dividends now days.
2) The Democrats will probably try to leave the Bush tax cuts in place for the lower brackets. They will then let the Bush tax cuts expire on the upper brackets, which means nothing. Then they will try to greatly increase taxes on the rich far higher than they were under Clinton. They may or may not succeed, but if they just let the Bush tax cuts expire, they won't get any more revenue, and they know it.
3) Small Business usually starts hiring first. In this case they will hold back as long as possible to avoid the various Obama tax and regulatory initiatives. I would predict that the base level of unemployment which doesn't cause inflation will be much higher if Obama gets his wishes – probably closer to 8%. In Europe, where the private sector is heavily regulated, like Obama wants here, the base unemployment rate is somewhere around 9%. Laying off workers in Europe is nearly illegal short of bankruptcy, so companies avoid hiring at all costs.
James
What about the big bills: health care, cap-and-trade and card-check?
By itself, each bill could have a big effect on business’ bottom line. Put all three together, and business owners have a strong incentive not to do any hiring.
You seem unwilling to admit that Obama has single-handedly saved nearly 140 million jobs — if it weren't for Him, no one would have a job at all!
The only conceivable rationale for your anti-Obama stance is racism. You should be ashamed of yourself.
Amen Brother
My husband and I are each small business owners. No way, no how, are we hiring any new people now or anytime soon (and yes, we're presently busy, knock on wood). Given the expected higher taxes and escalating health care costs, plus costs of inflation, plus expectation that eventually, our workload risks slow down, it makes ever-more sense for us to continue downsizing as much as possible. Doesn't anyone remember the law of diminishing returns? If I can work freelance with no employees and clear 100K after taxes, why on earth would I work harder to expand the business and hire more people, take on more intangible risk (litigation, insurance, disability, etc), to clear an additional 10-20K per worker if everything works out ok, possibly have a loss if it does not? Why buy new equipment when the depreciation offset value to business income will be lost to inflation? Etc. Unless a rash of libertarians get elected in 2010, we're hunkering down, and staying there.
I still count as employed, but furlough days have reduced my pay. I've commensurately cut my spending. Anyone looking for a pickup in a count of the employed needs to wait for this slack to be taken up as well. I work for a largish IT organization, servicing a larger conglomerate. This is no small factor.
You do not mention the Thursday initial claims report. Is the BLS using the Birth/Death model to paint this number falsely "better"? What about the 824K plug figure that is coming in March? Are even the "measurements" meaningful anymore? Remember Lily Tomlin! "I try to be cynical but its hard to keep up".
Three points to be made, time after time, in reply to anything put out by The Won & Co. next year:
1) "Jobs saved and/or created" is total bulls**t, just another attempt at Advanced Lying With Statistics – remember, if you can't prove it (and they so-obviously can't), it's a lie. Government doesn't "create" or "save" jobs, anyway – except for making and filling more bureaucrat-drone slots, and failing to get rid of bureaucratic do-nothing deadwood.
2) Relatively short-term "trends" in unemployment (2 – 3 months), particularly those minor moves that may SEEM to signal a turn-around, have no useful, real-world meaning; pointing at such "trends" as supposedly-meaningful indications that "things are getting better, and our Gubmint did it" is wholesale bulls**t, too. When average unemployment, nationwide, goes down 2, 3 or 4 whole percentage points, THAT's a useful "trend."
3) Raw totals of "jobs gained last week/month/quarter" don't really mean much, either – if the people who go back to work are UNDERemployed (pay/benefits/relative job-security is/are substantially less than previously), then increased employment does NOT mean that the overall economy has improved substantially. An addition of 100,000 burger-flippers, car-washers and coffee-dispensers is NOT equal to adding the same number of accountants, technicians and engineers.
When the Obamacolytes and their Congresscritter helpmates start to mouth their spin in the runup to 2010 election time, keep hammering this, right in their faces.
Great explaination of a complicated topic. I posted the entire thing on my blog:
http://thevailspot.blogspot.com
It's literally the best explaination I've heard to date. Thanks Keith.
Rich Vail
The strongest reason for the people to retain the right to bear arms is, as a last resort, to protect themselves against tyranny in government.–Thomas Jefferson (the founder of the Democrativ Party–too bad they've lost their way)
That jobless recovery had an unemployment rate of 6% in 2003 and 5.5% in 2004.
I know there is alot of speculation to where the job market is headed, but in all reality the only thing we can do is pray for the best and prepare for the worst. Changes in the economy must bring changes in the way we search for jobs and thats why many people are flocking to a jobsearch site i started, http://www.vlitzo.com which allows you not only to search jobs and post resumes but you can also upload video interviews to set yourself apart
I'm on a slightly different wavelength from Keith–I think the month-to-month forecasts and figures are pretty useless. Revisions to past data, shocks of all kinds, and other inhomogeneities meant that guessing about 9.4 versus 9.5 next month is useless. The only meaningful forecasts are one-significant-digit estimates from six months to two years out.
I agree that it gets harder to predict as we go farther out, but we do have better economic explanations of what's going to happen given policy and conditions over that time frame than we do for small changes over short time frames. The problem, of course, is forecasting the policy and conditions as the horizon moves out. Wars and elections and weather and all kinds of exogenous stuff come out and screw up the "givens" in the estimate.
One other point–you have to look at actual compensation, not just employment status. Lots of people are taking huge pay cuts and those may start to reverse before the employment numbers do. Then some of the temps and contractors may get permanent spots. Then discouraged workers are likely to reenter the workforce and further suppress improvement in the reported unemployment number. So the headline number will probably look pretty crappy even during an actual recovery.
kbh, what do you think of using the Fed's EMRATIO to track unemployment?
http://research.stlouisfed.org/fred2/graph/?chart…
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