05 Oct 2012 Jobs and the Presidency
As we race toward November 6th, politics will increasingly overshadow economic data as the driver of markets. That said, if the presidential election is about the economy and the key to improving the economy is jobs, then Mr. Obama just got some good news to salve his less-than-stellar debate performance. The unemployment rate in the US unexpectedly fell to 7.8% for September, the lowest rate since he took office in January 2009, and the change has less to do with people leaving the job force (becoming uncounted), as in previous releases.
The jobs reports will be a major part of the debate between the president and Mr. Romney, as to who’s job plan is best for the country. Two more jobs reports will be released before the election. The household survey showed an 873,000 increase in employment, the biggest since June 1983, excluding the annual Census population adjustments. Mr. Romney will point out that most of the job increases, some 582,000 of them, were part-time positions due to slack business conditions or that they were the only work they could find. He would add that the underemployment rate, which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking, held steady at 14.7%.
The Federal Reserve is also doing all it can to boost jobs. The Central Bank is supposed to be politically neutral, but their QE3 announcement of buying back massive amounts of mortgage bonds so close to the election was questioned and criticized by many. Mr. Bernanke and his board have as their mandate to maintain satisfactory levels of employment as well as price stability (to control inflation). That they would make such a major open-ended move just before the election suggests their frustration over the void of direction and action by the executive and legislative branches, but it also risks the appearance of political tampering.
Mr. Romney is on record saying he does not approve of the Fed’s excessive use of Quantitative Easing and that he will not reappoint Mr. Bernanke if elected president. On a recent ABC News interview Mr. Romney said that “printing more money, at this point, comes at a higher cost than the benefit it’s going to create.” Investment writer, John Maulden points out that the balance sheet of the Federal Reserve is now at a “mind-numbing $1.5 trillion. Bernanke proposes to raise that by a half trillion dollars every year until we reach whatever is deemed an acceptable rate of unemployment, as long as it is ‘achieved in a context of price stability.’”
This presidential race provides a stark contrast of ideologies, particularly how to put America back to work. Mr. Obama despairingly describes his opponent’s approach as ‘trickle-down economics’ while Mr. Romney describes Mr. Obama’s as ‘trickle-down government.’ In the midst of the debate is a fog of uncertainty for job seekers and job creators.
Whatever the ideology driving Washington during the next four years, jobs will continue to be created by ‘trickle-up’ ideas and opportunities. When someone becomes inspired by an idea and has sufficient confidence in the idea, him or herself, as well as sufficient confidence in the availability of capital and resources, as well as the environment; economic and regulatory, in which they will operate . When these effectively converge, businesses are started, and jobs are created. Today’s weak economy and policy fog are killing job formation in this country.
John Mauldin quotes a study by Stanford University economists Scott Baker and Nicholas Bloom along with Steven Davisin from the University of Chicago who used a variety of measures including news stories and the number of federal tax code provisions set to expire, to construct an index of policy uncertainty levels. “The results show entrepreneurs have more doubts today about where policy is headed than they did just a few years ago” says John.
“The economists estimated the rise in uncertainty from 2006 to 2011 resulted in a 16% plummet in private-sector investment and an employment drop of 2.3 million jobs. Their findings are consistent with earlier studies, such as the one by Harvard’s Dani Rodrik, which showed uncertainty acts like a tax on investment. In fact, the literature on the depressing effects of uncertainty is vast. No less an authority than now-Federal Reserve Chairman Ben S. Bernanke argued as far back as 1983 that higher uncertainty encourages firms to postpone high-expense investment.”
John quoted a just-released study by San Francisco Federal Reserve economists Sylvan Luc and Zheng Liu that demonstrated that “when people don’t know what government will do next, they’re less willing to invest and spend. They found higher uncertainty levels during the Great Recession increased the unemployment rate by 1 to 2%. That is, if uncertainty levels had remained stable, they say, ‘the unemployment rate would be closer to 6 or 7 percent rather than to the 8 or 9 percent it actually registered.’ Each percentage point difference means 1.5 million wind up in the unemployment lines.”
Mr. Romney and Mr. Obama sparred briefly over regulations, but this tidbit didn’t’ come out. According to a September 17th op-ed piece in the WSJ by five PhD’s of economics, George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor “in 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It’s up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.” If you have time, you should read this fact filled (virtually void of opinion) piece to get a sense of the magnitude of the problems we face as a nation.
Both candidates rightly address their message and their policy toward the middle class. The middle class elects presidents and it powers our economy. Nearly three quarters of our gross domestic production is consumption, and the middle class represents the largest share of that consumption. It’s why our economy is stuck in the sub-par growth. Businesses are not going to hire more workers until they see demand pick up from consumers and consumers are not going to increase spending until they see improvement in their own job and pay prospects.
The government-down approach tried for four years is not working. The payroll tax cut has not resulted in increased jobs. The federal bailout of the auto industry saved jobs that would have been lost to bankruptcy, but they did it with a seriously flawed short-sighted approach that destroying the trust of bondholders – capital providers. As pointed out in the WSJ piece earlier references, they transferred money that belonged to debt holders such as pension funds and paid it to friendly labor unions. This unprecedented reach into the private sector greatly increased uncertainty about creditor rights under bankruptcy law. The Administration also invested billions in green programs that were not economically viable. Government continues to prove itself unfit to manage business and job-creation.
The five PhD’s say “the fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.”