Unemployment Data Brutalize Krugman and Keynes

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When Republicans dug in their heels and allowed extended unemployment benefits to expire for 1.3 million people in late December, "progressives" charged that this "heartless" move would cause people to stop looking for work, and that the reduction in government spending (i.e., "stimulus") would slow job growth.

Oops. After falling by an average of 48,000/month during 2013, labor force participation surged by 523,000 in January. The total number of full-time-equivalent* (FTE) jobs shot up by 678,000, for the biggest one-month gain since April 2000. The number of long-term unemployed (27 weeks or more) declined by 232,000, or 6%, in a single month.

Although the reported headline (U-3) unemployment rate fell by only 0.1 percentage points in January, the true unemployment rate (adjusted to the labor force participation rate of December 2008) fell by 0.3 percentage points, to 10.6%. The broader U-6 unemployment rate fell by even more, 0.4 percentage points.

Given the spectacular results produced by the Republicans' courageous refusal to renew extended unemployment benefits, it would be tragic for them to give in now, and vote to extend a program that has had the unintended consequence of extending unemployment.  

Recent economic data have been brutal on Keynesians, who believe that GDP and employment growth are driven by fiscal and monetary stimulus.

The Federal Reserve's "tapering" of its bond-buying binge (a.k.a., quantitative easing) was supposed to slow the economy. The jobs numbers belie this.

During the first 11 months of 2013, the Fed expanded the monetary base by an average of $91.9 billion/month. It then began to "taper." The monetary base rose by $31.8 billion in December, and by only $12.7 billion in January. This amounts to a pretty drastic tapering.

The results? FTE job growth averaged 103,000/month for the first 11 months of 2013, but came in at 240,000 for December, followed by 678,000 for January.

We have seen this pattern before, in both the employment and GDP numbers. During both QE2 and QE3, the performance of the economy was inversely correlated with the amount of quantitative easing done by the Fed. "Printing money" just made things worse, at least for ordinary people.

Recent GDP numbers have also been unkind to Keynesians in the area of fiscal stimulus, the notion that higher government deficits boost the economy.

Federal borrowing fell by 32% from 2012 to 2013, while our real GDP (RGDP) growth rate (4Q over 4Q) increased by 40%.

OK, so if Keynesianism doesn't explain what we are seeing, what does? Supply-side economics does. Let's revisit Jude Wanniski's "wedge model," and its implications for our economic future under ObamaCare.

Progressive welfare-state programs involve taxing things that we want more of (e.g., work, profits, capital gains, savings) to subsidize things that we want less of (e.g., idleness, disability, irresponsibility). The taxes and subsidies create a "wedge" between economic decision-makers and reality.

As an example, let's take America's corporate income tax, which is the highest in the world. This tax causes investors to locate factories in places like Ireland, when the actual cost of production would be lower in the U.S. Because jobs follow investment, the corporate tax wedge reduces employment in the U.S., and suppresses American wages.

Our system of unemployment insurance taxes working, and subsidizes not working. Accordingly, it would not surprise any supply-sider that when unemployment checks stopped flowing to millions of people in late December (and when even more people noticed that the rules of the game had changed), both labor force participation and total FTE employment increased.

The Obama administration and progressive pundits (like Paul Krugman) had to scramble last week after the CBO predicted that ObamaCare would reduce the labor force by the equivalent of 2.5 million FTE workers by 2024. The best that the liberals seemed to be able to come up with was to praise ObamaCare for "increasing worker choice."

Great concept, guys. If we want to maximize "worker choice," why not raise payroll taxes to 80%, and institute ObamaChow (to pay for food), ObamaCar (transportation), and ObamaCrib (housing)? Then everybody could choose not to work.

The worst thing about ObamaCare is that it will kill people by suppressing private sector investment in medical research. However, its second-worst feature is that it adds to a welfare state wedge that is already far too large.

In 2012, the Pennsylvania State Secretary of Public Welfare determined that a single mother in his state was no better off earning $69,000 than $29,000. In other words, the government "wedge" (taxes plus phase-outs of welfare state benefits) between these two income levels was 100%. If you want to know why more and more Americans are becoming trapped in the underclass, look no farther.

The supply-side wedge model explains the economic data we are seeing, and the Keynesian demand-side model does not. The way forward to prosperity is clear. We must shrink the welfare-state wedge. 


*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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