A Solid Jobs Report Reminds Us That Incentives Matter
It took an absurd length of time, but in January 2015, America finally finished recovering the 10.3 million FTE* jobs it lost to the recession. Keep the champagne corked, however. In the time since the last FTE jobs peak in November 2007, our working age population grew by 16.6 million. On the margin, only 19.7% of these people entered the labor force, and only 4.2% of them landed FTE jobs.
Still, Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) was solid. The economy moved 288,000 FTE jobs closer to full employment. If this rate were to be sustained, we would reach full employment in early 2019.
By the way, it's not true that the financial markets did not like the BLS report. While the nominal Dow fell by 0.34% on the day, the "Gold Dow," which is the Dow divided by the price of gold, rose by 2.18%.
Also on Friday, the market interest rate on 5-year Treasuries jumped to 1.48%, from 1.30% the day before. This is also a positive sign for the economy. Normal economies have normal interest rates. Interest rates near zero are a sign of economic depression, not prosperity.
Liberals and Keynesians are in denial about this, but it is now crystal clear that the Republicans' December 2013 refusal to renew extended unemployment benefits helped reduce long-term joblessness. The number of people that were unemployed for 27 weeks or more fell by 28.2% during 2014. This contrasts with declines for 2011, 2012, and 2013 of 12.9%, 14.8%, and 18.7%, respectively.
When the unemployment benefits extension issue was being debated during late 2013 and early 2014, liberals claimed that if benefits were cut, the unemployed would stop looking for work. This didn't happen. The ongoing decline in labor force participation (LFP), which has been a defining feature of the Obama economic recovery, actually slowed dramatically after extended benefits were ended.
After falling by 0.31 percentage points (PPs) in 2010, 0.33 PPs in 2011, 0.35 PPs in 2012, and a whopping 0.85 PPs in 2013, LFP declined by only 0.10 PPs in 2014. And, we more than made up for the entire 2014 decline during January 2015.
The notion that handing out unemployment checks will boost the economy (via fiscal "stimulus") is pure Keynesian fantasy. Whatever good they may do, unemployment benefits amount to paying people not to work. What is amazing is not that more of our long-term unemployed started getting jobs after we stopped paying them not to work, but that this result surprised so many left wing economists and politicians.
OK, now, let's say that you wanted a new career as an economic terrorist. Your mission would be to reduce U.S. RGDP growth, depress LFP, suppress total employment, and reduce real wage growth. Lucky for you, a handy guidebook has been published for economic terrorists, and it is available on the Internet. It is called "President Obama's FY2016 Budget."
RGDP, jobs, and wages are driven directly by non-residential capital investment, so your first order of business as an economic terrorist would be to raise taxes on capital. Whatever you tax, you get less of, so if you raise taxes on savings and investment, you will get less savings and investment.
President Obama's budget appears to raise taxes on capital by about 0.86% of GDP. Given that tax increases impact the incentive to invest, not just the cash flows available to invest, the negative effect on economic growth of Obama's tax hikes could be very large. However, if all Obama's new taxes accomplished were to reduce U.S. nonresidential investment "dollar for dollar," the impact would be to reduce our long-term RGDP growth rate by 0.37 percentage points. This is because a change of 1.00 percentage point of GDP in nonresidential capital investment can be expected to produce a 0.43 percentage point change in RGDP growth.
According to the Congressional Budget Office's (the CBO's) latest forecast, under the current tax regime, the long-term growth rate of America's "potential GDP" is only 2.1%. If so, Obama's tax plan would limit RGDP growth to no more than 1.73% (and possibly less due to incentive effects).
As it happens, Americans know exactly what an RGDP growth rate like this feels like. It feels like the last 14 years under Bush 43 and Obama, during which RGDP growth averaged 1.78%. During this period, we moved 13.2 million FTE jobs away from full employment, real median family incomes fell, and Social Security and Medicare went (effectively) bankrupt.
Of course, if you are an economic terrorist, slow RGDP growth is what you want, and Obama's budget shows you just how to get it.
Of course, slow economic growth means sluggish growth in total employment. If you're like Obama, you don't want this to show up as a high "headline" unemployment rate. What to do? The answer is right there in the "Economic Terrorists' Guidebook," (a.k.a., the Obama Budget): pay young people to stay out of the labor force.
Making community college free for everyone is a good start. If classes are free, there is less economic incentive to finish in two years, so why not take six? However, it is Obama's "college loans that you don't have to repay" program that is the real ticket to depressing LFP.
By administrative fiat, Obama has moved to offer his "pay as you earn" student loan debt relief program to essentially all borrowers. This would cap student loan repayments at 10% of "discretionary income," and forgive the unpaid loan balances after 20 years.
What this amounts to economically is "free money for people that are deriving no economic value from going to college." In other words, once a student gives up on the idea of obtaining a college degree that will allow him to earn a substantial income after graduation, he might as well keep borrowing and take a taxpayer-funded vacation.
Any prospective economic terrorist worth his salt would recognize this program as a clever way to keep young people out of the workforce, thereby reducing LFP and suppressing the reported unemployment rate.
Incentives matter. People tend to do what you pay them to do, and to stop doing what you tax them for doing. Hopefully, the Republicans will produce a 2016 presidential candidate that understands this.
*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
