Lots of Crosscurrents

Overall, this was a very solid report. Good but not great. The internals of the report were OK. The unemployment rate coming down was a positive surprise, and it is happening the right way — with the employment rate increasing, not the participation rate falling.

While the 0.1% drops in each of the last two months are not as dramatic as the 0.4% drops in both December and January, the fact that they are still dropping means that those declines were for real. The job creation pace was a bit higher than expected, particularly on the private sector side. The cuts in government employment were about what the consensus was looking for. However, that was offset by a big upward revision in the number of Government jobs that were cut last month.

Pace of Job Creation

The pace of job creation is starting to put a dent in the huge numbers of people who are without work and want it. Yes, the pace of job creation in this recovery is much better than it was coming out of the last recession, but that is pretty cold comfort for those who are being forced into abject poverty because they can’t find work despite months and months of pounding the pavement (or the keyboard, as is more likely these days).

Officially we are now 21 months into an economic recovery, and the economy has added a total of 636,000 private sector jobs since then. At the same point after the 2001 recession was over, the economy had actually lost an additional 1.309 million jobs. Twenty one months after the 1990-91 recession ended, we had only added 490,000 private jobs. Most of those people are really not going to be all that interested in how the pace of this recovery compares to the pace of the recovery following the 2001 downturn, they just want a job that can support their family.

However, the point is that it is not unusual for the pace of job creation to be slow even after the recession has been over for awhile. The damage done by this downturn was far deeper and more extensive than in those downturns. The next graph below, also from (http://www.calculatedriskblog.com/) shows just how deep and nasty this downturn was relative to all the post-war recessions that came before it.

By this long after the previous peak in employment, in every case but one (2001) the economy had fully recovered and had more total jobs than when the recession started. While clearly we have started the upturn, with or without census hiring, it is going to take a very long, long time before we surpass the total number of jobs the economy (both private and government) had back in January of 2008 (137.996 million). We are still 7.258 million lower than that level, so at the March pace, it would take 34 more months to get back there, in other words, not until January 2014.

Stimulus Wearing Off

The fiscal stimulus, as helpful as it has been in preventing a much deeper downturn and giving us the start of a recovery, is starting to wear off. While high unemployment seems to be a great political talking point, it really seems like no one in Washington really cares anymore. There certainly seems to be no appetite to actually do anything about it.

The GOP got the House based on misguided demands that we immediately try to balance the budget. In the process we are likely to repeat the mistake that FDR did in 1937 when he prematurely cut back on the New Deal stimulus. This pushed the economy back down, and it only revived when a much bigger stimulus, known as WWII, came along.

We will not get much progress on the deficit, either. The cuts, in slowing the economy, will result in lower tax collections than we would have gotten. The sincerity of those who pushed for a continuation of the top-end of the Bush tax cuts in actually wanting to reduce the deficit has to be in question. That “stimulus” going to the top 2% is not likely to be very effective in creating many jobs.

Also, the composition of the $61 billion in spending cuts recently passed by the House for the second half of the 2011 fiscal year also raise questions about the sincerity of the desire to actually cut the deficit. Included in the cuts is a $603 million drop in funding for the IRS (5% of full-year 2010 levels). The GOP often says that government should be run the way corporations are. But if a company is having cash-flow problems, is the first place you go to cut spending your accounts receivable department? 

The stimulus spending at the Federal level was substantially offset by anti-stimulus for the state and local levels. That anti-stimulus is continuing. This can clearly be seen in the reduction in State and especially Local government employment.

Over the last year, government employment is down by 356,000 or 1.58%, while private sector employment is up by 1.656 million, or 1.55%. Local government employment is down by 1.79% over the last year. It is positively Orwellian to suggest that you want to reduce unemployment by laying people off.

As those people are laid off, they have less money to spend, and that slows overall demand and results in job losses (or slower job gains) in the private sector as well. Most localities really don’t have a choice but to lay people off as salaries are usually the biggest part of their budgets, and they can not run operating deficits. A big part of the ARRA was actually aid to states and localities to prevent these sorts of lay offs from happening, but now that funding is running out.

If not for the ARRA, the cuts we are seeing now would have happened earlier. Given the extremely high duration of unemployment numbers, it is likely that many if most of those folks would still be out of work.

Austerity Hasn’t Worked Elsewhere

Lower aggregate demand is going to hurt, not help, business confidence. However, increased confidence is the key part of the reasoning of these people for cutting jobs to increase employment. It sure has not worked out that way in the U.K., which has adopted this “stimulus by austerity approach” where business confidence recently fell to a two-year low, and the economy shrank in the fourth quarter.

The final graph shows the year-over-year percentage change in Private and Government employment over the last 30 years. The big spike in government employment almost a year ago and in 2000 is due to temporary census hiring. Note that there has been no secular trend towards government employment growing more quickly than that of private employment.

One of the arguments about the relative level of private versus public sector pay has been that public sector employees should be paid less because they have greater job security. While it is true that government employment does not fall as much during recessions, given the experience over the last year, one has to ask: what job security for public sector employees?

Note that in the 2001 recession, the overall drop in employment was much more greatly cushioned by increasing government employment than has been the case in the Great Recession. Also keep in mind that the population has been growing about 1.0% per year over the last 30 years.

Don’t Cut Taxes, but Don’t Cut Gov’t Spending

While it is true that you don’t want to cut taxes in a recession or in an incipient recovery, it is equally true that you don’t want to cut government spending. Tax increases and spending cuts are both forms of fiscal contraction. Not all tax cuts or spending are equal in terms of stimulating the economy and creating jobs.

The cut in the payroll tax is likely to be quite effective in stimulating the economy since it will result in higher take home pay to people who are likely to spend it quickly. Cuts in spending on overseas adventures in Iraq and Afghanistan would not do much damage to domestic employment but the spending there is not primarily about domestic employment. Cuts in social safety net spending, which is apparently high on the agenda of those pushing to cut spending right away, is likely to be a major drag on the economy and job creation.

Recently, Mark Zandi, of Moody’s Economics, and a top economic advisor to the McCain Campaign, estimated that the House Budget cuts, if enacted, would result in 700,000 fewer jobs created in 2011 and 2012 (total). While that might be a bit on the high side, it is without a doubt well in the six figures. While clearly we need to address the long-term structural deficit, slashing away right now on spending is deeply misguided. It will not bring in anything near the advertised reduction in the deficit.

It will cause enormous pain amongst the most vulnerable people in our society. Then again, nothing would make the GOP’s job of defeating Obama in 2012 easier than for the unemployment rate to start going back up again.

We still have 13.542 million unemployed. Getting them back to work should be our first priority. As they get jobs, they will have income, and thus start to pay income taxes again. That in itself would help bring the deficit back down. After all, a big part of the deficit problem, particularly in the short term, is that tax revenues are depressed by the weak economy.

Federal tax collections are, as a share of GDP, near their lowest point in 60 years. That is also true of State and Local tax collections, and if anything more so. If anything, we should be increasing domestic spending right now to help bring down the unemployment rate more quickly, not cutting spending.

That’s not to say that every penny currently being spent is sacred. There is plenty of overlap in many government programs. Cutting the duplication is fine, but that money should be channeled into the most effective programs, not simply cut. While shutting down the Government would not be a good thing, neither is going half way and splitting the difference on damaging spending cuts. Eating a little bit of arsenic is not good for you, even if it is not enough to kill you.

Huge spending cuts to domestic programs will slow the economy, but it seems to have gathered enough momentum that we are not likely to fall into a double dip recession. Still the cuts are likely to keep us in the purgatory of a pseudo-recovery, one where the economy is growing but not producing a lot of jobs, much longer than needs to be the case. But hey, the 2012 elections are coming up, so from the GOP perspective, perhaps that is a feature, not a bug.
 
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