Our Jobs Disease Isn't Trade Trauma, It's Investment Anemia
Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) was more of what we have seen over the past six months: more people working, but each worker producing less and earning less.
In terms of the reported number of jobs, March was another decent month. FTE* employment increased by 272,000, which was not far from the reported 215,000 increase in payroll jobs. This still left America 12.6 million FTE jobs away from full employment, though.
The labor force participation (LFP) rate edged upward for the sixth month in a row, to 63.02%. This recovered the ground that this important indicator had lost over the prior 18 months. However, LFP was still down by 4.3 percentage points from its peak (reached in April 2000), and this is equivalent to 10.9 million Americans giving up on finding work.
The Bureau of Economic Analysis (BEA) recently reported that real GDP (RGDP) grew at an annualized rate of 1.38% during 4Q2015 and at 2.43% for 2015 as a whole. However, there are a number of reasons to doubt these numbers, despite the robust job creation reported by the BLS.
As economist John Williams noted in his "Shadow Government Statistics Commentary #796," which was published on Friday, the Cass Freight Index has been trending downward since the start of 2015, and total liquid petroleum consumption has been falling for the past two calendar quarters. These physical indicators of the economy have been signaling recession, not growth.
On Friday, the Federal Reserve published big downward revisions to its Industrial Production (IP) numbers. The Fed is now saying that IP growth fell steadily through 2015, and that IP was lower in 4Q2015 than it was in 4Q2014. Given that GDP numbers are subject to large revisions long after the fact, we could be in a recession right now, and not have it officially declared until six months from now. This is, in fact, exactly what happened in the case of the last recession, which began in December 2007, but was not officially declared until a year later.
Right now, the government is asking us to believe that the economy as a whole was 1.98% larger in 4Q2015 than it was in 4Q2014, even though industrial production was 1.60% smaller. The Fed's IP data only goes back to 1986. However, since then, a 4Q/4Q fall in IP of this magnitude has always been associated with a recession.
However, let's put this aside and assume that the BEA has the RGDP numbers through 4Q2015 right. And, let's further assume that 1Q2016 RGDP growth comes in at 0.7%, as currently forecasted by the Fed's "GDPNow" model, even though the average IP for January and February was less than that of 4Q2015.
Even with these optimistic assumptions about output, RGDP per FTE worker was lower in 1Q2016 than it was in 4Q2013. Prior to President Obama, the only time that this productivity indicator had fallen over a 9-quarter period was during the Great Inflation of the 1970s.
Over the 29 quarters of the Obama presidency to date, RGDP per FTE worker has increased at an average annualized rate of only 0.87%, with almost all of the growth occurring in 2009 and 2010, when the number of FTE jobs was plummeting. Since the end of 2010, RGDP per FTE worker has grown at only a 0.11% rate.
By way of comparison, RGDP per FTE worker growth rates were 1.81% under Bill Clinton and 1.42% under George W. Bush.
Stagnant RGDP per FTE worker means that the new jobs that are being created can't be very good ones. And, the data bear this out. We have lots more bartenders, waitresses, and task rabbits, and fewer high-paying manufacturing jobs.
OK, so, what has all of this got to do with foreign trade?
There is a big difference between a disease and the symptoms of that disease. If the patient is to get well, a doctor must accurately diagnose the disease, and prescribe a treatment appropriate to that disease. Both gastroenteritis and cancer can cause high fevers, but plunging the patient into ice water won't cure either malady.
America's economic disease is investment anemia-we aren't accumulating real nonresidential assets fast enough to produce strong growth in RGDP, jobs, and income. Unfortunately, to the untrained eye (say, Donald Trump's), the symptoms of investment anemia can look a lot like issues relating to foreign trade. Even more unfortunately, the kinds of remedies that political witch doctors like to prescribe for trade problems would only make our sick economy even sicker.
Memo to The Donald: China is not the problem. Washington is the problem. Our investment anemia is being caused by unstable money, the highest corporate tax rate in the world, and excessive regulation. China has nothing to do with it. Here's the evidence.
The North American Free Trade Agreement (NAFTA) went into effect on January 1, 1994. This huge liberalization of trade was supposed to produce a "giant sucking sound" (GSS), as American jobs fled to Mexico. The arguments against free trade with Mexico in the early 1990s were the same as what we are hearing from politicians and economists with respect to trade with China now. So, what actually happened?
Despite NAFTA and the GSS, from 4Q1993 to 4Q2000, RGDP grew at 3.97%, America created 15.9 million FTE jobs, and real family income rose to its all-time high.
There were no big trade deals under Obama. Amazingly, despite no new GSS's, RGDP growth from 4Q2008 to 4Q2015 averaged only 1.76%, and only 6.9 million FTE jobs were created.
The difference between the seven fat years under President Clinton and the seven anorexic years under Obama was the climate for investment in the U.S. Under Clinton it was good and getting better; under Obama it has been bad, and getting worse.
There is effectively an infinite supply of capital in the world. The only question is whether it will be invested, and, if so, where. If it is invested in the U.S. to create nonresidential assets, each $300,000 of capital will generate $132,000 of annual GDP and one average FTE job.
In the 1990s, America was a relatively welcoming place for capital investment. Our corporate tax rate was below the OECD average, and we cut the capital gains tax from 28% to 20%. Most important, the U.S. dollar was relatively stable, with the Federal Reserve secretly running a commodity price rule designed by former Fed Vice Chairman Wayne Angell.
NAFTA actually contributed to the U.S. providing a favorable environment for capital investment in the 1990s. NAFTA created profitable investment opportunities on both sides of the border. It also permitted economic optimization on a larger scale, and a finer division of labor. NAFTA is part of the reason that the 1990s were so prosperous.
Today, the U.S. has the highest corporate tax rate in the OECD, and Obama's battalions of bureaucrats are conducting a regulatory jihad against the private sector. Worst of all, the Federal Reserve has been running a 100% discretionary, make-it-up-as-we-go-along monetary policy. The result has been the least stable dollar (in terms of the volatility of the CRB Index**) in U.S. history.
There is a reason that our economic system is called "capitalism." Jobs, wages, and output are all driven by capital investment. During the first 6 years of NAFTA, real nonresidential assets (which are the kind that support GDP and jobs) increased by 21.71%. During the first six years of Obama's term, real nonresidential assets rose by only 6.75%. This is why the Obama economy has been so dispiriting.
Imposing tariffs to try to fix an economy whose problem is sluggish investment would be like breaking someone's leg to try to cure them of cancer. We need the next president to be someone that understands this.
*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
**The CRB Index is a commodity price index comprising: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gasoline, and Wheat.