An Explanation Of the Obama Jobs Gap

With the economy seemingly stuck in a low growth rut, there is little chance that tomorrow's jobs report will show a break-out in employment growth during the month of September. More than any other single data point, this disappointing result underscores the failure of the Great Keynesian experiment of the 21st century.

The Obama Administration put all of its chips on a vast increase in government spending and targeted tax rebates and credits to stimulate the economy. But after 19 months of the most rapid increase in discretionary federal spending in history, total nonfarm employment has declined by approximately one million jobs. By contrast, 19 months after the January 1983 implementation of the Reagan across-the-board reduction in tax rates, total employment adjusted for today's larger work force had increased by 7.6 million.

This 8.6 million jobs gap is likely to grow wider in the months ahead. Private sector job growth is likely to remain subdued as companies contend with increased regulations, skyrocketing health insurance premiums caused in part by the new insurance mandates, and the prospects of higher tax rates. Moreover, the combination of stagnant revenues from a slow growth economy and the run-off of federal "stimulus" funds will force state and local governments to shrink their work forces. By contrast, job growth in late 1984 accelerated, adding the equivalent of 2.4 million jobs in what would be the final quarter of this year.

Relative to the size of the economy, the Reagan tax cuts were roughly the same size as the Obama stimulus plan. In addition, they occurred against the backdrop of a global economic and financial crisis. The economy was suffering from its second bout of double-digit inflation and high unemployment in 7 years. In December 1982, the yield on 3-month Treasury bills was 10.7%. Corporations with a Baa credit rating had to pay 16% to borrow money, and the mortgage rate to purchase a new home was 11.9%. The civilian unemployment rate stood at 10.7%.

But the jobs gap is not unique to the comparison of the Obama and Reagan economic programs. For example, President George W. Bush in 2001 focused on tax policies that "put money in peoples' pockets" through tax rebates, tax credits and the like, largely postponing tax rate reductions. Government spending also accelerated. By July 2002, total jobs had fallen by 2.2 million, including the loss of 2.9 million private sector jobs.

By contrast, the 2003 across-the-board reduction in personal income tax rates, and reductions in the tax rate on capital gains and dividends, signed into law in May of that year retroactive to January 1, produced significant job gains. During the 19 months following April 2003, total nonfarm employment increased by 2.3 million jobs, including 2.2 million in the private sector.

Increases in government spending and tax rebates and credits do not stimulate the economy or create jobs. This strategy cannot increase "aggregate demand" because every dollar spent by government or returned to tax payers in the form of a rebate or credit is a dollar taken from the private sector through either taxation or government borrowing.

Lower marginal tax rates stimulate the economy by reducing the tax barrier between individuals and companies that seek to do business with each other. Income taxes are tariffs, except they fall on domestic as opposed to international commerce.

A 10% sales tax is the equivalent of a 10% tariff on goods and services subject to that tax. It raises the price you pay, reducing demand, even as it can cause the seller to cut the pre-tax price, reducing supply.

The current 35% top marginal tax rate is only superficially a tax on those with high incomes. In a dynamic economy, it should be viewed as a 35% tariff barrier on doing business with high-income individuals, with the economic burden falling disproportionately on those who suffer the consequences of lower employment and less investment.

Tariff-barrier reductions lead to more trade not by putting money in peoples' pockets or increasing aggregate demand, but by narrowing the difference between what the buyer pays and the producer receives. In exactly the same manner, reducing marginal tax rates leads to more economic activity, more opportunities for employment and investment and an increase in jobs.

President Obama says we should stop pursuing the failed policies of the last decade. But, the historic data -- and the results of his own economic policies -- suggest that the failed policies he should reject are the precise ones that he continues to pursue: increased government spending and targeted tax credits and rebates that do not reduce marginal tax rates.

The implications for the current debate over tax policy are also clear. Raising marginal tax rates on "the rich" will raise the domestic tariff barriers on doing business with high-income individuals, including but not limited to owners of small businesses. Such an increase in "domestic tariffs" would lead to less trade or economic activity within our economy thereby reducing the opportunities for investment and job creation. The result would be fewer investments and a further increase in the Obama jobs gap.