July Unemployment: Ben & Barack Poison the Economy

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The July "Employment Situation" report that came out on Friday provided evidence that our economy is being poisoned by the monetary machinations of Federal Reserve Chairman Ben Bernanke and the tax and regulatory depredations of President Obama.

Free-market economies have a natural tendency to grow and thrive. If left alone, they will recover. That the U.S. economy is as sick as it is today, more than four years into Obama's so-called "recovery," suggests that economic foul play is at work.

Let's look at the symptoms, then at the economic poisons being administered, and then at the mechanisms by which these toxins do their damage. We'll start by examining our patient, the U.S. economy, which has supposedly been "recovering" in Barack Obama and Ben Bernanke's ICU for the past 49 months.

The July "Employment Situation" report that came out on Friday was actually pretty dismal. In terms of what is probably the best single-number indicator of the health of the labor market, the nation moved only 54,000 FTE* (full-time equivalent) jobs closer to full employment. This left us still 2.0 million total jobs (and 3.6 million FTE jobs) below the employment level of November 2007.

At July's rate of progress, it would take a generation (24+ years) to get America completely back to work. This is because we are currently 15.8 million FTE jobs away from full employment, 1.5 million more than we were as of the end of the recession.

Compounding our employment woes was the fact that 58% of the jobs that were created during July were in low-wage industries, and many of them were part-time positions. Both average hours worked and average weekly wages fell.

So, the July jobs numbers indicate a seriously ill patient. However, let's look at the symptoms from a wider perspective.

Obama's "recovery" has seen a continuous and unprecedented fall in labor force participation. The six-month moving average labor force participation rate has fallen by 2.3 percentage points since June 2009, from 65.7% to 63.4%. This measure is now at the lowest point that it has been since December 1978.

What this means is that, while total employment has increased by only 4.3 million over the past 49 months, 5.6 million people have effectively dropped out of the labor force.

Because of this exodus, the reported 2.1 percentage point reduction in the "headline" U-3 unemployment rate since the recession ended (from 9.5% to 7.4%) is pure illusion. The "real" July unemployment rate, adjusted to the labor force participation rate that pertained when George W. Bush left office, was 10.8%. This was unchanged from June, and actually 1.1 percentage points higher than when Obama's economic recovery started.

The broadest measure of labor market distress, the "SGS Alternate" unemployment rate published by Shadow Government Statistics, was 23.3% for July. This is only 0.1 percentage point below its all time record high, and up by 2.7 percentage points from the end of the recession.

During the four years of President Obama's so-called "economic recovery," real economic growth has averaged only 2.18%. For the "recovery" portion of an economic cycle, such growth is disastrously low. By way of comparison, during the first four years of the Reagan recovery (1Q1983 - 4Q1986) RGDP growth averaged 5.16%.

While RGDP surpassed its 4Q2007 peak in 2Q2011, RGDP per capita has only now (2Q2013) regained all of the ground lost during the recession. In contrast, 5.5 years after the start of the Reagan recession, GDP per capita was 13.2% higher than its previous peak.

While RGDP per capita may have (finally) recovered from the recession, real median family income has not. As of June, this measure was down by 6.1% from its pre-recession peak, and 4.4% lower than it was at the start of Obama's recovery.

We could go on, but suffice it to say, our economy is, and has been, one sick puppy.

So, after lying comatose for 49 months, can we now expect our economic patient to leap out of bed and start dancing? No. This is because President Obama and Ben Bernanke are pumping poison into our economy's veins.

Obama's poison is a mixture of tax increases and Obamacare, both of which took effect on January 1, 2013. Bernanke has been administering his toxin of choice, QE3, since October 2012.

To see the impact of these poisons on the American economy, let's compare the first half of 2012 with the first half of 2013.

During the first half of 2012, there was no Obamacare. Federal taxes captured 15.76% of GDP, and the monetary base increased by an insignificant 0.05%.

Under these policies, nominal GDP (NGDP) increased at a 4.32% annual rate, RGDP rose at an annualized 2.44%, and the economy added 1,363,000 FTE jobs.

At the start of 2013, Obama got some of the tax increases that he wanted, including a 50% increase in the capital gains tax and a near tripling of the tax on dividends. For the first six months of 2013, federal revenues rose to 17.74% of GDP. Obamacare kicked in on January 1. And, Bernanke put his QE3 pedal to the metal, increasing the monetary base by 19.45% during this period.

The result? NGDP growth slowed to 2.60%, RGDP decelerated to a 1.40% annual rate, and FTE employment rose by only 459,000 jobs.

Not only has job creation slowed to a crawl, but also many of the jobs being created these days are part time, and most are in low-wage occupations. All of this is happening because businesses are not investing sufficient capital in the U.S. to employ the available workforce at high levels of productivity.

It takes about $200,000 invested in nonresidential assets to create one average American job. Obama and Bernanke's economic poisons work largely by suppressing capital investment within the U.S. This, in turn, depresses job creation and real wages.

Many new college graduates are taking jobs flipping burgers, if they can find jobs at all. However, when you realize that McDonalds must invest more than $80,000 to create one job for one burger flipper, you begin to appreciate the problem we create when we discourage capital investment.

Would you prefer that your child work for Apple Computer rather than McDonalds? Each job at Apple is supported by $2.3 million in capital, which is what makes it possible for it to be a much better, much higher paying position.

It is obvious how raising taxes on capital has the effect of discouraging capital investment. However, if you want to know how our flailing Federal Reserve does its damage, look at the case of Barrick Gold Corporation.

On August 2, Barrick announced plans to either sell, close, or curb production at 12 of its 27 mines. Associated with this action were an $8.7 billion write-off, and a 30% reduction in headquarters staff.

Barrick's massive write off revealed a classic case of malinvestment. Obviously, all of Barrick's investments looked attractive at the time they were made. The problem is that unstable money distorts the price relationships upon which the long-term profitability of business investment depends.

Anyone that wonders why American corporations are not investing their $2 trillion in spare cash to create new jobs needs to rent the 1985 movie, "Fright Night." The reason that businesses are not responding to the Fed's monetary stimulus is that their executives have seen monetary horror movies before, and they know how they come out.

Without a stable dollar, no one can trust that the price relationships that exist in the marketplace today will persist long enough to permit a return on new investments. Lower long-term interest rates, even if the Fed can deliver them temporarily, do not remove the risk that, in the future, operating margins could become negative.

In the face of high taxes and unstable money, the best strategy for CEOs with stock options (pretty much all of them) is to use their companies' cash flow to buy back shares. This will tend to raise the stock price, and therefore the value of their options, without the risks associated with business expansion.

Excuse me Barack. Pardon me, Ben. But what, exactly, do you need to see to figure out that Obamacare, tax hikes, and QE3 are toxic to the economy? How many more college graduates do you need to see go home and live with their parents? How many full-time jobs need to be replaced by part-time positions?

If President Obama and Chairman Bernanke want our economy to thrive, they might want to stop feeding it poison.

*FTE jobs = full-time jobs + 0.5 part-time jobs



Louis Woodhill (louis@woodhill.com), an engineer and software entrepreneur, and a RealClearMarkets contributor.  


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