Under Obama, Economic Stagnation Is the New Normal

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Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) showed that 5.4 million Americans have dropped out of the labor force since Barack Obama took office. The labor force declined by 350,000 in November, despite an increase of 191,000 in our working age population.

The unprecedented decline of labor force participation under President Obama is not news. However, it also appears that millions of brain cells have dropped out of the mental labor force of America's economic analysts. How else can we account for headlines like these?

"Jobs report: A pleasant surprise" (Jared Bernstein)

"The employment emergency is over" (Felix Salmon)

"Fiscal cliff? What fiscal cliff? No evidence in jobs numbers" (Stephen Gandel)

In case anyone didn't notice, the BLS jobs report was terrible. Unemployment didn't go down in November (from 7.9% to 7.7%) as the BLS reported, it actually went up. The true unemployment rate, calculated at the labor force participation rate that existed when Bush 43 left office (65.8%), increased from 10.7% to 10.8%. This put the true unemployment rate 1.3 percentage points higher than when Obama's so-called "economic recovery" began, almost 3.5 years ago.

As of November 2012, total employment was still 3.2 million below its peak, which occurred five years earlier. This is particularly ghastly, because America's working age population has increased by 11.2 million since then. Less than 1% of incremental working-age Americans have managed to get jobs since Obama took office.

But wait. There's more.

America moved another 246,000 jobs further away from full employment during November. We had fewer full-time jobs last month than we did in January 2005, which was almost eight years ago.

Assuming that November's CPI comes in as expected (2.0% annual inflation rate), the real wages of ordinary ("production and non-supervisory") workers were 1.9% lower in November 2012 than they were in November 2010. They were also 9.0% lower than they were in November 1964, for that matter.

Question: How can anyone look at something as dismal as Friday's BLS report and see anything but economic stagnation? Answer: Under Obama, economic stagnation has become the new normal.

Just as fish don't know that they are wet, many economic analysts seem to have lost sight of what an economic recovery is supposed to look like. Hint: It's supposed to look like the Reagan recovery from the severe 1981-1982 recession.

November 2012 marked 60 months since total employment peaked (in November 2007). At this point in the Reagan recovery (April 1986), total employment was 7.8% above the previous peak. If the Obama recovery had been as strong as Reagan's, there would be 14.8 million more Americans working right now.

During Reagan's first term, the employment ratio, which is total employment divided by the working age population, rose by 0.9 percentage points. With one month to go in Obama's first term, the employment ratio has declined by an unprecedented 2.3 percentage points during his time in office. During the recent campaign, Obama sought to be identified with Bill Clinton, but during Clinton's first term, the employment ratio went up by 2.0 percentage points.

Reagan produced his recovery via a combination of a strong dollar, tax cuts, and regulatory relief. Obama has continued Bush 43's weak dollar policy, but has added the Obamacare tax increases and a blizzard of new regulations. And, he has vowed to fight for even more tax increases.

Not surprisingly, opposite causes produce opposite effects. From an employment point of view, there has been no economic recovery at all.

On November 6, Obama won a second chance to turn the economy around, by defeating clueless conservative Mitt Romney. So, what is Obama's plan? His plan is more of the same. More of Ben Bernanke's "quantitative easing", more tax increases, and even more regulations. Oh, and don't forget the $50 billion in additional "stimulus" spending Obama wants.

Part of Obama's new normal involves ignoring the staggering difference between the president's promises and the actual results delivered.

Obama's $842 billion in stimulus spending was supposed to get the unemployment rate down to 5.2% by now. The actual unemployment rate in November (calculated at the labor force participation rate assumed for the stimulus plan) was 10.8%. This is not only more than twice as high as the level promised, it is higher than the 10.4% rate (calculated on the same basis) that existed when Obama signed the stimulus bill into law.

So, is there any hope for the working class, and for jobless Americans that want to join the working class? As things stand right now, no, there isn't. Here's why.

Right now, America is about 14.7 million jobs short of full employment. To create one average job, someone has to invest about $200,000 in nonresidential assets. Therefore, to create the additional jobs we need, someone would have to invest an additional $3.0 trillion or so in the U.S. economy.

If an additional $3.0 trillion had been invested by the private sector during Obama's recovery, 3Q2012 GDP would have been $1.5 trillion, or 9.5%, higher than it actually was. Real GDP growth during those 13 calendar quarters would have averaged 5.11%, rather than the 2.21% actually achieved. By way of comparison, real GDP growth averaged 5.67% during the first 13 quarters of the Reagan recovery.

Coming out of a severe recession, a sustained period of fast economic growth has been normal for America,. However, under Obama, slow growth and high joblessness has become the new normal.

OK, so, who happens to have $3.0 trillion lying around, plus the knowledge and skills required to invest it wisely to create sustainable jobs? The poor? The middle class? The government?

No, the investment required to transform America's stagnant jobs picture can only come from the people that actually have the money, as well as the demonstrated ability to manage capital investment. In other words, it would have to come from the hated and reviled "one percent".

Obviously, "the rich" are already investing all that they are willing to invest under the current structure of incentives. Obama's plan is to do everything he can to make investment even less attractive for "the one percent" than it is now. This is why economic stagnation has become the new normal.

A good measure of the driving force for "the rich" to invest in job-creating nonresidential assets is the Real Dow, which is the Dow Jones Industrial Average divided by the price of gold.

A rising Dow reflects a flow of capital into productive assets. A rising gold price indicates that capital is moving into inflation hedges. The Real Dow, which is the ratio of the two, reveals the balance between the competing investment options available to "the rich".

The jobs picture will not improve until and unless the Real Dow begins a sustained rise. Unfortunately, the Real Dow ended November at 7.61. This is down by 16.6% since Obama's so-called "economic recovery" began, lower by 23.6% than when Bush 43 left office, and down by a staggering 80.6% since we last enjoyed full employment (in April 2000, under Bill Clinton).

So, if you are waiting for an improvement in the employment picture, watch the Real Dow, but don't hold your breath.

There will have to be big changes in policy before the jobs situation will improve significantly. Essentially, Obamunism would have to be supplanted by Reaganomics. America would have to move to a strong, stable dollar, lower taxes (especially on savings and investment), and cost-effective regulations.

As things stand, the American people can look forward to more years of economic stagnation, as well more years of pretending that there is a light at the end of the tunnel. Don't worry if your kids graduate from college, only to move back home and play video games in the basement. It's just the new normal.


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


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