Obama's Economy: Less Work, Less Reward
Under Barack Obama, unemployment has declined due to a drop in labor participation, not because of actual economic growth
Mort Zuckerman, US News & World Report
May 19, 2012
The political season has begun in earnest, with each side putting forth facts and figures hoping that the persuasive power of statistics will bolster the weaker argument. It was Mark Twain who popularized the comment attributed to Disraeli, to wit, that there are three kinds of lies: lies, damned lies, and statistics. So don't be impressed by the fact that the most popular unemployment rate being bandied about dropped to 8.1 percent in April from 8.2 percent in March.
Progress? Not so. Paradoxically, the reason for the drop is negative, not positive. It is due solely to the fact that 342,000 discouraged workers who were seeking employment dropped out of the labor force and are no longer counted as unemployed. Without that withdrawal, the unemployment rate would have risen to 8.4 percent in April. In fact, if the labor force participation rate had remained where it was in June 2009, when the recession officially ended, the headline jobless rate would be north of 11 percent.
Every basis point decline in the unemployment rate, which peaked at 10 percent in October 2009, has been due to the drop in the labor force participation rate and not in the growth of real employment. A steady stream of men and women and young people got tired of looking for work that isn't there.
The 8.1 percent unemployment rate seized upon by the government and the media accounts only for those people who have actively looked for a job in the previous four weeks and haven't found one. It's called the U-3 rate. But there's a nastier categorization—the U-6 rate. It's the more relevant measure. Why? Because it covers those people who have actively applied for a job in the last six months and also accounts for not just full-time unemployment but for involuntary, part-time employment as well. That number is still at 14.5 percent, the highest it has ever been so far into a so-called economic recovery.
Not to mention that warm weather boosted winter employment in the first three months of the year—Goldman Sachs, for example, estimated at least 100,000 jobs—and much of that will wash out eventually. David Rosenberg, chief economist at the Gluskin Sheff wealth management firm, points out that if you strip out the sectors that should have benefited most from the balmy winter (the warmest since 1895), real GDP actually contracted at a 0.2 percent annual rate and final sales shrank by nearly 1 percent.
That's not all. There is a little-known category of job creation called the birth/death model, a seasonal adjustment in which the Bureau of Labor Statistics (BLS) arbitrarily adds jobs for net new companies it thinks are starting up and creating positions. Last month, the BLS made the assumption that 206,000 jobs were created in this category based on the companies that it thinks, but really can't prove, have just started up and essentially are invisible to government labor surveys. This is an imprecise, controversial guesstimate based on historical extrapolation. One must be skeptical, since this figure of 206,000 rose from 172,000 in April 2011 despite the obvious decline in economic activity this spring and the general lack of financing for start-up companies.
Right now, it looks as if the only people getting jobs are in the 55 and older cohort. According to the BLS household survey, employment for those age 55 and up has risen 3.8 million since the recession began in December 2007, whereas the ranks of the employed in the under-55 age cohort have shrunk by 8.2 million. But as aging baby boomers remain in their jobs, youth employment shrinks; the unemployment rate for teenagers is now at 25 percent.
According to the BLS, job increases have been virtually cut in half this year alone, from 277,000 in January to 130,000 in April. But we need 150,000 new jobs each month just to keep up with new people trying to enter the labor force. Much of the job "growth" has been in sectors such as healthcare and tourism, low-wage work that hasn't been exposed to global competition. And perhaps as many as half of all new jobs have been part time. The result is some good jobs at the top and plenty at the bottom but not enough in the middle.
Needless to say, slack in the labor market is a drag on personal income growth. Americans' after-tax income in the first three months rose just 0.6 percent from a year earlier, the skimpiest increase in over two years. Average weekly earnings are up roughly 2 percent over the last 12 months, but inflation has climbed by 3 percent, which means real incomes have dropped and forced workers to save less in order to keep up their spending. No wonder many of the big retailers such as Costco and Target were reporting sales below expectations, and April chain store sales slowed to a plus 2.2 percent on a year-over-year basis. Quite simply, income inevitably drives the trend in spending.
There is one area of growth in the government's statistics: the number applying for disability benefits. Last month there were 225,000. As Rosenberg points out, this is a new stealth stimulus program. Last year, about 1 million Americans applied for disability, and since President Obama took office more than three years ago, more than 5 million people have been added to the nation's disability coverage, costing the government billions upon billions of dollars every year. Rosenberg caustically comments that either the safety standards at work have eroded dramatically or many working people have found a creative way to game the system and turn it into a quasi-welfare state.
Income decline is not the only aspect of the misery. A majority of middle- and lower-income Americans are seeing their net worth fall because their largest asset is typically the value of their home equity—and home prices have declined in value by at least a third. Given mortgage levels, on average this has wiped out perhaps two thirds of home equity. No wonder people are feeling the pinch, not to mention that many buyers and home­owners are spooked when so many homes are underwater with mortgage debt exceeding the value of the property. There is still almost $3.7 trillion in excess mortgage debt that Americans need to pay off just to return to normal loan-to-value ratios on housing, according to St. Louis Federal Reserve Bank President James Bullard.
In addition to declining home prices, we face a "fiscal cliff" as 2012 turns into 2013. That means fiscal tightening if we do not extend the income tax cuts from the Bush administration and the temporary payroll tax cuts from the Obama administration—and we must adjust the mandatory spending cuts of $1.2 trillion over the next decade that come from last year's budget deal legislation. And this is all at a time when the downsizing of state and local governments continues. Our economy seems hardly strong enough to absorb a fiscal tightening of as much as 4 percent of GDP in the context of a recession unlike no other since the end of World War II.
The political community has so far been unable to revive an economy operating so far below capacity. One critical question is how to disaggregate the forces for decline into those that are cyclical and those which are structural. The latter cannot be easily cured; they reflect such forces as globalization and dramatic technological change enabling companies to employ fewer workers and an educational system that simply is not doing enough to train workers for the higher standards of a modern economy.
The irony is that the Obama administration expended its political capital on healthcare and its social welfare agenda in lieu of a range of policies to nurture strong, durable economic growth. We have instead what might be called the "Less Economy." Unemployment and under­employment mean that as many as a stunning 30 million Americans are now facing less work and less reward for the work they can get.
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