The Economy:  Where Do We Go From Here?

Right From the Start

The weekend edition of The Wall Street Journal dutifully reported that new employment figures showed an additional 227,000 jobs created during January – a healthy but not spectacular level of growth that stands in marked contrast with the final three months of President Barack Obama’s administration where jobs created averaged only 180,000 per month again failing to keep pace with population growth.

The Board of Labor Statistics also reported that Labor Force Participation Rate rose 0.5 percent to 62.9 – still low but an improvement on the historic (38 year) low reached during the second term of Mr. Obama’s administration.
WSJ also noted that, despite the job growth, the unemployment rate rose to 4.8 percent from 4.7 percent the previous month.  The average workweek remained at 34.4 hours per week reflecting that nearly 6 million Americans are stuck in part time employment because they cannot find full time employment. (The current workweek languishes near historic lows.)  Hourly wages rose by a mere $0.03 per hour.

And finally, economic growth for 2016 remained at an anemic 1.9% for the year – Mr. Obama became the first sitting president since the Great Depression to never achieve economic growth in excess of 3.0 percent during any year of his presidency and in fact averaged only about 1.5% growth for his eight years in office despite the fact that the Bush/Obama recession ended a mere four months into his first term thus giving him a relatively low base from which to recover.

So what do these seemingly contradictory statistics mean?  How can you have increasing job growth and increasing unemployment at the same time?  How can the Labor Force Participation Rate increase while unemployment also increases?  And what does this mean for the immediate future economic improvement?

Well, let’s deal with the “unemployment rate” first.  The unemployment rate is not a measure of how many people are unemployed; rather it is a measure of how many people are receiving welfare payments in the form of unemployment benefits. The unemployment rate does not include those who have exhausted their benefits or who have simply given up on seeking a job.  In a period of prolonged economic stagnation the unemployment figures are extremely misleading.  Mr. Obama oversaw the weakest recovery from an economic downturn in modern times. Because the recovery was so weak the length of time during which jobs were unavailable exceeded the period of time for unemployment benefits. (Unemployment benefits generally last for twenty-six weeks although during Mr. Obama’s tenure they were stretched to almost two years.)  When benefits ran out, when people became discouraged and when welfare benefits approximated minimum wage, the number of those seeking work declined and thus the “unemployment” figures fell (were no longer included).  That is precisely what occurred during Mr. Obama’s tenure.  Yes, Mr. Obama has a prolonged period of job growth but job growth did not keep up with population growth – more people entered the job eligibility category than jobs that were created.

The only time when the “unemployment” numbers are instructive are during periods of time of relative “full employment.”  And then only to reinforce the fact of “full employment” or to measure the beginning and breadth of an economic downturn.

Let’s turn to the Labor Force Participation Rate.  The rate is an accumulation of all people working and seeking work (i.e. those drawing unemployment compensation) divided by the total available workforce (those of working age, less those that are disabled and those choosing to work in the home) creates the participation rate.  It is the best measure of employment available despite the fact that it includes those who are not employed but seeking employment.  During Mr. Obama’s tenure the rate fell to a thirty-eight year low and idled near that figure for most of his second term.  That drop and the lack of progress from that drop are far more telling about the economic stagnation under Mr. Obama than the “unemployment” figures cited above.  And it further reinforces the anemic recovery engineered by Mr. Obama.

It is entirely consistent that following a period of prolonged job scarcity that both the unemployment rate and the Labor Force Participation Rate rise with job increases.  As the economy improves and jobs are created, previously discouraged workers who had given up under Mr. Obama and now see opportunity will again seek employment and add to improvement in that rate while simultaneously raising the “unemployment rate.”

And now part time employment and wage rates.  As the number of available jobs increases those who have been working part time will find full time employment thus increasing the average workweek.  And as employment ranks swell and the economy reaches “full employment” wages will increase as employers compete for workers.  (Given how distorted the current “unemployment” figures are, it is foolish to suggest that we are nearing full employment when so many have abandoned hope and are no longer counted among the unemployed.  (The most surprising fact is that the Board of Governors of the Federal Reserve System continue to cite the unemployment numbers as a critical part of their decision making on monetary policy, including the federal funds rate.)

So what does all of this mean for future economic growth?  Basically it means that Mr. Obama stood on the air hose of the economy for eight long years through a series of misguided initiatives including spending on a  stimulus that did not stimulate, raises in wages and benefits for public employees and green energy grants that failed spectacularly in many instances.  Add to that a doubling of the national debt, a massive increase in the number of public employees, and the accompanying plethora of rules and regulations that have imposed an additional $100 Million annually on businesses – that is over and above the increases imposed previously by Presidents Bill Clinton and George W. Bush.  And yet, despite that epic mismanagement, the economy righted itself after the Bush/Obama recession and made progress albeit anemic progress.

One is tempted to say that not even Mr. Obama could destroy the American economy but that would imply “intent.” In Mr. Obama’s case it is more the case of ignorance, incompetence, ideology and conceit – a community organizer accustomed to street protests failing to acknowledge that his “great ideas” on the economy could possibly be wrong.

Still, in the wake of eight years of an economic malaise and an economic engine firing on only three cylinders, the opportunity to ignite all eight cylinders means significant opportunity for improvement in the near term.  One can say that we have an economy straining at the traces and waiting for the coachman to loose the reins.

President Donald Trump recognizes the pent up opportunity for growth.  He has set a goal of exceeding 4.0% annual economic growth that would basically eclipse Mr. Obama’s pathetic efforts.  It is a reasonable growth target and unlikely to lead to excessive inflation.  But the Congress has to act and that will be the challenge.

There continues to be a debate as to whether reduced regulation or lower taxes are best for stimulating the economy.  There is no question that changes in regulation have a more immediate impact – witness Mr. Obama’s plethora of burdensome regulations and Mr. Trump’s intent to remove most of them.  However, because they can be adopted and repealed at the whim of the chief executive their impact can be more transitory.  In contrast, tax policy requires the action of the Congress (a seeming oxymoron) and, therefore, takes more time to adopt and even a longer period to alter.  Frankly, lower taxes and less regulation acting in tandem probably have the best and most lasting impact and it appears that Mr. Trump is pursuing both.  The reduction in regulations can be adopted relatively quickly and will prove to be the beginning of economic stimulation.  Following with tax reductions for both business and individuals will pump needed capital into the economy and thus prolong the expansion.  Economic expansion creates more jobs, more jobs means more competition for employees and higher wages.  Higher wages means more disposable income providing its own ripple effect.

In all probability, absent international conflicts we are headed for a healthy expansion of the economy.  Mr. Obama oversaw a rapid recovery and expansion of the stock market indices following the Bush/Obama recession which wound up rewarding his financial backers on Wall Street but left the middleclass with fewer jobs, lower household income, and lower savings.  Expansion of the economy will most likely benefit working men and women as well as increasing the financial health of America’s businesses.

In a word “optimism” should be the word for the long sought after real economic recovery.

It’s too bad that we have had to wait for so long.