Wonkish; But True

Oooo-bama’s Scare Tactics
WSJ – 7/20/12

Slow Recovery or Failed Agenda?

by Edward Paul Lazear (Morris Arnold and Nona Jean Cox Senior Fellow)

President Obama has a tough task ahead of him. He must convince the American voter that the economy is improving and that he deserves the credit. At the same time, he must make the case that the blame for the slowness of the recovery lies with others. How might he make his case? And what facts might Republican challenger Mitt Romney use to counter his claims?

A graph titled “Private Sector Job Creation” on the Obama-Biden campaign website (barackobama.com) makes clear the president’s opening gambit. It announces proudly that 4.4 million private-sector jobs have been created over the past 28 months. The graph indicates the point at which the president took office and also when he signed the February 2009 Recovery Act.

Although the labor market continued to shrink during the entire first year of the president’s term, he will argue, justifiably, that he couldn’t have been expected to turn things around immediately and that the job loss is owned by his predecessor. He will also point out that the unemployment rate peaked at 10% in autumn 2009 and now stands at 8.2%.

Mr. Romney can reply that Mr. Obama wants to have it both ways. The president does not accept responsibility for any of the jobs lost, but he wants to take credit for all of the gains. Yet we know that all recessions end and that labor markets recover eventually. What distinguishes this labor-market recovery is not that jobs are finally being created but rather the rate of growth is so slow that it will be 2016 before we return to pre-recession employment levels.

Mr. Romney may also point out that there hasn’t been one day during the entire Obama presidency when as many Americans were working as on the day President Bush left office. Moreover, the unemployment rate, which we were told would not exceed 8% if we enacted Mr. Obama’s stimulus package (the American Recovery and Reinvestment Act of 2009), has never fallen below 8% during his presidency. The rate has averaged 9.2% since February 2009.

Still, the president will argue that he has turned things around. In the quarter during which he took office, the economy lost 2.3 million jobs and the economy as a whole was shrinking at almost a 7% annual rate. By summer 2009, the economy was growing again. The employment level hit bottom in early 2010 and started moving up, regaining, as noted in the Obama-Biden graph, more than 3.9 million jobs by the end of this February.

Mr. Romney will have to concede that the turnaround occurred after the first year of the Obama term, but he can point both to the weak recovery and to a renewed slowdown that began on the president’s watch in summer 2010, while he and his party controlled the executive and legislative branches of government.

The GDP growth rate in late 2009 was almost 4%, giving hope of a rebound. But by spring 2010, it slipped to 2.2%, below the long-term average growth rate for the economy.

Over the last six quarters, it has been crawling along at an average 1.9% growth rate, with the most recent quarter logging in at just 1.5%.

Job growth has also slowed dramatically. From December 2011 through February 2012, jobs increased at an average rate of 252,000 per month. During the last three months, that average has fallen to 75,000.

With hiring as slow as this, the unemployment rate, which has risen from its low of 8.1% this April, will continue to rise. Unfortunately, the economy is creating jobs more slowly than the population and labor force are growing.

Mr. Romney will suggest that this new round of slowing is attributable to the Obama policies, not to those of his predecessor. He can add that this is not a “recovery” at all. To recover, our economy must make up for lost ground and therefore needs to grow at rates that exceed rates at normal times. That is what has occurred in every recession except this one. And because we are growing so slowly, we are widening rather than narrowing the gap between where we are and where we should be.

Somewhat more subtle, but also important, President Obama can boast about the decline in layoffs that occurred since his policies have taken effect. In January 2009, the month in which the president took office, 2.6 million workers were laid off. There has been a general downward trend in layoffs during his entire term, and monthly layoffs are one million per month fewer than when he started. Furthermore, surveys conducted by the Bureau of Labor Statistics find that the most frequent reason for leaving a job today is that the worker quit, in most cases to move to another job. When the president took office, the most frequent reason was that the worker was laid off.

Mr. Romney can point to the hiring deficiencies that persist. Layoffs are highest when an economy is declining, not when it has reached bottom. After discretionary labor has been released, layoffs slow because firms are already lean. But this does not imply that the labor market is healthy. Employment does not grow at recovery speed until hiring picks up, and monthly hiring is only slightly above where it was in January 2009.

Worse for the president, the number of monthly hires remains almost one million below where it was when the labor market was healthy in 2006 and 2007. Mr. Romney can also point out that fewer workers are being hired now than during the average recession month between 2007 and 2009.

Ultimately, to serve a second term the president must convince voters that the economy is improving rapidly enough to make a real difference in their lives. In a Feb. 1, 2009, interview with NBC’s Matt Lauer, Mr. Obama said, “If I don’t have this done in three years, there’s going to be a one-term proposition.” Mr. Romney’s hope is that the American people will make the president’s one-term prophecy come true.

Mr. Lazear, who was chairman of the President’s Council of Economic Advisers from 2006-09, is a professor at Stanford University’s Graduate School of Business and a Hoover Institution fellow.

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