All things good and bad come to an end, and that is true of the long recession, which, according to the economic statisticians, we are in no longer. When the jobs numbers for last month came in President Obama was quick to proclaim that the recovery is on track, and let us hope he is correct. But the story can’t end there if the country is truly to be restored to economic health.
There are lessons to be learned about government policy actions, which have been adversely affecting the private sector where jobs are created. While employers are beginning to hire again, real and sustained growth historically has been stimulated by new business start-ups, especially among small businesses. While there has been an encouraging uptick in job creation, net of jobs lost, the level of new business start-ups still lags well behind pre-recession levels. And while, as we stated in our last essay, the job creation numbers for the last couple of months have certainly been encouraging, we cannot lose sight of the reality that the share of working-age people in the labor force (the so-called participation rate) has declined to the lowest level in 29 years.
Fed Chairman Bernanke correctly stated last week that the technical improvement in the unemployment rate obscures the vulnerabilities in the job market. “It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said in response to a lawmaker’s question during testimony last week, “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or who have taken part-time jobs.
As the headline for this essay opines, government needs to get out of the way of the recovery that, while still feeble, has the potential for quickened momentum. Those who invest in the establishment of new businesses need clarification and a higher degree of certainty regarding their healthcare costs, healthcare penalties, tax rates on returns on investment, new regulatory hurdles, etc. The current climate in Washington exudes uncertainty, which in turn creates a vacuum that sucks the willingness to take entrepreneurial risks out of the economy. Either Steve Jobs was right when he lectured President Obama about why he took all of his manufacturing out of the country, or the President and his statist advisors know best. Both political parties need to learn from the lessons our lackluster recovery is teaching us, and stop their efforts at short-term, politically motivated fixes. That almost seems impossible in Washington, D.C
The Federal Reserve issued a report that the 2007-2009 recession, the affects of which still burden the recovery, was the longest one in the postwar period. Most important was the magnitude of the decline in economic activity. During the recession, employment fell by 6.3 percent and output fell by 5.1 percent.
The U.S. economy experienced 10 recessions from 1946 through 2006. The 2007-2009 recession began in December 2007 and ended in June of 2009. The 10 previous postwar recessions ranged in length from 6 months to 16 months, averaging about 10½ months. The 2007‑09 recession was the longest recession in the postwar period having lasted, as we noted above, for 18 months. In addition, the federal debt has increased by about $5 trillion--more than the total national debt of about $4.2 trillion accumulated by all 41 U.S. presidents from George Washington through George H.W. Bush combined.
This increase in the national debt means that during Obama’s term the federal government has already borrowed about an additional $40,000 for every American household--or about $45,000 for every full-time private-sector worker. When Obama was inaugurated on Jan. 20, 2009, according to the Treasury Department, the total national debt stood at $10.6 trillion.
At the end of January 1993, the month that President George H. W. Bush left office, the total national debt was $4.2 trillion, according to the Treasury Department. Thus, the total national debt accumulated by the first 41 presidents combined was about $44.8 billion less than the approximately $5.0 trillion in new debt added during President Obama’s term. This is all borrowed money, which will have to be paid back by future generations; generations of primarily private sector wage earners whose wages and benefits are substantially lower than those of government employees whose salaries they pay.
According to Adam Summers a policy analyst at the Reason Foundation:
"Average wages and benefits in the public and private sectors reveal that state and local government workers earn more than private sector workers. According to the most recent Employer Costs for Employee Compensation survey from the U.S. Bureau of Labor Statistics, as of December 2009, state and local government employees earned total compensation of $39.60 an hour, compared to $27.42 an hour for private industry workers - a difference of over 44 percent. This includes 35 percent higher wages and nearly 69 percent greater benefits.
Data from the U.S. Census Bureau similarly show that in 2007 the average annual salary of a California state government employee was $53,958, nearly 32 percent greater than the average private sector worker ($40,991)".
The public debt of the U.S. now exceeds $15 trillion and will soon climb to $16.4 trillion as a result of the President’s latest request to raise the debt ceiling by another $1.2 trillion. The increases in our national debt, during the Obama Administration have been staggering, and, by any rational assessment, have accomplished little. Specifically, the debt was increased by $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010. As of January 31, 2012 the gross debt was $15.356 trillion. The annual gross domestic product (GDP) at the end of 2011 was $15.087 trillion, with total public debt outstanding at a ratio of 101.8% of GDP. Public debt at 90% of GDP is widely accepted as a danger point beyond which economies begin to contract. On top of all the policy issues we have enumerated, the economy faces other major pitfalls. Among them are,
- Unemployed who have given up returning to the labor market thereby technically lowering the unemployment rate. ;
- A huge rise in oil prices;
- Government risking inflation (“accommodating” Fed monetary policy);
- Small businesses bracing for tax increases;
- Higher income families bracing for tax increases;
- Business expecting new and restrictive regulations;
- Potential collapse of the Euro, setting up severe recession in Europe;
- Stronger dollar driving down U.S. exports;
- People who are living on dividends from stocks accumulated over a lifetime of sound retirement planning facing a tripling of their federal tax rate; and
10. Lack of serious entitlement reform creating strong headwinds as baby boomers begin to retire.
The recession, put this nation in such a deep hole that our present rate of growth simply will not get us back to where we need to be. At this point, our economy, consistent with all prior postwar recoveries should be growing by four to five percent on a sustained basis. Given the hazards enumerated above, we fear a serious downturn is still something about which we need to worry.
As stated at the top of our essay, all recessions end. That is the very essence of economic cycles. Sooner or later they commence, and sooner or later they conclude. Whoever is in the oval office when they commence will take the heat, and whoever is in the oval office when they end will take the credit. We understand that. But when a recession lasts so much longer than all prior postwar recessions, there are lessons to be learned. And when government spends and borrows at unprecedented levels to tame a downturn with no discernible affect, then, too, there are lessons to be learned. The current economic malaise is a product of Minsky’s Law; that is, prolonged infusion of easy money into the economy will always produce a bubble. Years of terribly misguided public policy and a private sector all too willing to accommodate the government’s imperative to push home ownership at any cost got us where we are today. The slow depletion of inventories throughout the economy as consumers zipped their wallets and spent very sparingly, and the current replenishment of those inventories has, at last, begun to stimulate positive economic activity.
The Obama Administration should (but won’t) immediately adopt the simplified tax proposals recommended by Simpson‑Bowles, and issue an executive order that new regulations on the private sector be halted except on an absolutely as needed basis. That would provide the positive jolt the economy needs if it is to avoid being sandbagged by the substantial perils that still encumber the path to recovery.
By Hal Gershowitz and Stephen Porter