Earlier today, the Obama administration took a blow to its economic credibility with a jump in unemployment to 9.7%. Eventually, these numbers will begin to decline, however, and Ramesh Ponnuru warns conservatives not to fall in love with pessimism:
Like Larry Kudlow (if less influentially), I think conservatives and Republicans are overdosing on economic pessimism. If the jobs-on-Obama’s-watch number turns positive by the summer of 2010, will Steele be willing to say that the stimulus did work? Republicans are helping the Democrats take credit for a jobs rebound should one occur. And the information in today’s jobs report by no means suggests that we’re in a deepening recession. Private-sector payrolls saw their smallest drop in a year (even with a minimum wage increase and a concomitant drop in employment among teenagers). Wages seem to be going up.
Maybe I’m naive, but I think conservatives and Republicans need to have a much more solid, and less knee-jerk, economic message. My own stab at one would be: The economy’s regenerative powers are strong enough to overcome even seriously mistaken policies in Washington, but we would be recovering faster–and running less risk of ruinous debt and inflation–with better policies.
It’s good advice, and it has the benefit of being true, as Edward Lazear explained in his analysis from last month. Lazear, the former chair of the Council of Economic Advisers and currently a professor at Stanford and a fellow at the Hoover Institution, looks at the historic data on recessions and unemployment and predicts an eventual return of job growth. The problem, Lazear predicts, will be the massive crowding-out impact of Porkulus on capital in the market, which will delay and depress the normal curve:
The labor market will be slow to recover, and, unfortunately, there is little the government can do to speed it up. Stimulus spending occurs too slowly and has only small and delayed effects on the labor market. Recoveries have a consistent pattern. First, GDP recovers and productivity grows. Firms increase their output not by hiring more workers, but instead by getting more output out of the workers that they have. With significant delay, as demand continues to increase, firms then hire additional workers and the unemployment rate falls. Finally, when unemployment reaches sufficiently low levels, say in the 5% rage, we start to see upward pressure on wages. An examination of recessions dating back to the 1960s exhibits the same pattern throughout each recovery. We can expect that this one will be no different from the past, and that it will take a significant amount of time for the labor market to recover. The pain of this slow labor recovery will tempt the government to try to speed up the labor market’s resurgence. This temptation should be avoided as succumbing to it will be counterproductive.
The chief threat to future economic growth and stability is the vast expansion of government announced by the current Administration. A large part of this expansion has been camouflaged as stimulus. The additional spending of $787 billion, most of which will occur in 2010 and 2011, with the smallest amount occurring in the current year when the recession is at its height, represents permanent government expansion cloaked in the guise of temporary spending. Additionally, plans to change the health care system and other budget announcements by the Administration make clear that we are on target for a major change in the size of government relative to GDP. Using the Administration’s own projections, the 10-year deficit will be nine trillion dollars and will, in 2009 alone, be in the range of 10-11% of GDP, more than three times the highest deficit during the Bush years. A key number to consider is the ratio of public debt to GDP, which has averaged about 37% for the past forty years or so. When the Obama team came into office, it was at 40%, and by the end of this Administration’s first year in office it will reach 50%. If the Obama administration’s projections prove correct, the ratio of public debt to GDP will be 80% by 2019. Excessive government spending must be paid for. And it will be. Present borrowing will be paid for in the future either in the form of taxes, inflation, or further borrowing from abroad, which in turn means higher taxes or inflation.
On the other hand, Lazear also notes that the apparent slowing of job losses does not always indicate a recovery cycle has begun:
In particular, the Administration celebrates that job losses are only a quarter of a million jobs per month rather than more than half a million and that initial unemployment claims are in the high 500,000 range rather than the high 600,000 range. However, as the economy reaches very low levels of employment it is natural that we shed jobs more slowly. Indeed, the first jobs to go are the easiest to cut, and since we are now at a low level of employment, cutting additional jobs becomes increasingly difficult. But, that does not mean that the labor market will turn around rapidly. The 9.4% unemployment rate speaks for itself. (During the Bush term, it averaged 5.4% and during the Clinton term, it averaged a similar 5.3%.) Persistently high unemployment is an unfortunate characteristic of recessions and the one that is felt broadly, directly or indirectly, by most Americans.
With the CBO predicting an average of 200,000 net job losses per month through the end of 2010, the delay may be considerable as employers squeeze productivity hard before committing capital into labor growth. Given the rate of government spending, businesses have to consider the strong possibility of large tax hikes in the future, which will discourage risk-taking and investment. Those factors will combine with the loss of capital in the markets to slow the curve even further between recovery and employment improvement.
In short, we’re in for a long ride, and that isn’t just undue pessimism. When jobs do begin to recover, as they will, conservatives will need to point out that we endured unnecessary pain thanks to the fiscal policies of a reckless administration. And all of this assumes that we don’t apply the cap-and-trade policy that passed the House last July, which would further depress business growth and employment through large-scale increases in energy costs that would filter through the entire distribution chain.