- The Washington Times - Thursday, December 3, 2009

ANALYSIS/OPINION:

It shouldn’t take a whole day for the economists and business leaders at the White House “Jobs Summit” Thursday to explain to President Obama why unemployment keeps rising despite 3 1/2 percent growth in gross domestic product .

Whether the president or his closest economic advisers will listen is another question.

There are two common reasons for the current “jobless recovery” - and one bad policy decision that is making the current spell of joblessness unnecessarily long.

(1) The simple math of jobless recoveries is rooted in population dynamics. The U.S. labor force of 154 million keeps growing by 1.5 million to 1.8 million people a year due to population growth and continuing immigration. This means we must create at least that many new jobs just to keep the unemployment rate from rising.

Even that’s not enough job creation in a world of rising productivity, where employers can produce more with less every year. The combination of population and productivity growth means we need at least 3 1/2 percent GDP growth before we have any hope of declining unemployment.

(2) Lags in hiring come next. As we’ve just witnessed, even 3 1/2 percent GDP growth doesn’t generate an instant decline in unemployment. Employers don’t rush to hire new workers the first time new orders begin to pick up. There are significant fixed costs associated with new hires and recalls (costs that will rise significantly if Obamacare becomes law).

Before incurring those costs, employers want assurance that the sales pick-up has staying power. In the interim, they can fill new orders by keeping existing workers on the job longer. That is why increases in weekly hours always precede increases in employment. So we can’t expect the unemployment rate to decline until we have sustained (two to three quarters) of 3-plus percent GDP growth. That is why the Congressional Budget Office sees rising unemployment until next spring.

Productivity and population growth, together with hiring lags, explain much, but not all the jobless recovery syndrome. Policy choices also affect the extent and duration of lingering unemployment. Here the $787 billion stimulus package comes into play.

Mr. Obama was explicit about his preference for long-term investments in infrastructure and alternative energy. Though the president claimed these investments would focus on “shovel ready” jobs, there are no such jobs.

Federal procurement and environmental regulations create a long lag between congressional appropriations and actual spending. The American Recovery and Reinvestment Act of 2009 didn’t set aside those regulations. So it’s not surprising when the Congressional Budget Office reports that more than half of the stimulus money hasn’t yet been spent. Money spent was mostly fiscal relief to the states.

Thus, Mr. Obama’s “stimulus” preferences never gave priority to short-term job creation, as most observers now recognize. That is why they never had a chance of delivering the 8 percent unemployment they promised for 2009.

Were there better job-creating options? Of course there were. Although Mr. Obama characterized tax cuts as “the tired dogma of past failures,” tax cuts could have accelerated the recovery and created more jobs sooner. One only has to look back at the Economic Recovery Act of 2008 to see the potential.

Consumers spent those $300 to $600 rebate checks as soon as they got them. In fact, because people knew when their check would arrive (based on their birthday), many consumers spent their rebates before the check even arrived. In the process, consumer spending jumped from a 0.6 percent decline in the first quarter of 2008 to a 0.1 percent increase in the second quarter. Not a huge increase, but enough to jump-start GDP growth.

Even larger consumer-led turnarounds occurred in the wake of earlier (and larger) tax cuts (1982, 2001-03).

Mr. Obama’s economic team doesn’t want to recognize these facts. They defend their historic amnesia by citing surveys of consumer intentions. When asked what they would do with a windfall tax rebate, consumers piously swear to save rather than spend it.

If we’re going to base economic policy on such surveys, we might as well use New Year’s resolutions to predict a healthier, leaner, smoke-free population next year. Experience reveals that people typically violate their New Year’s resolutions within 72 hours. And so it is with tax-cut intentions: American consumers can’t resist the temptation to spend every dime they get - and sometimes even more - no matter how much they promise not to.

The Obama team would be well advised to spend more time observing market behavior rather than scrutinizing survey data. They should look back not just to 2008, but all the way back to 1982. That’s when the unemployment rate hit the post-war record of 10.8 percent. That was also the year unemployment started declining just one month after massive tax cuts returned spending money to consumers and GDP started growing again.

Voter anguish over rising unemployment clearly has both the White House and congressional Democrats in panic mode. In these anxious circumstances, the Obama team covets a second stimulus package with yet more government spending.

If Mr. Obama really wants to keep his jobs promises, he should instead simply go back and amend the first stimulus package. How about an immediate $200 billion rebate program, paid for with an equivalent cutback in long-term “stimulus” spending? That wouldn’t drive the deficit any higher. It might jump-start holiday spending enough to shorten unemployment lines before next spring.

Bradley Schiller is a professor of economics at the University of Nevada in Reno. He is the author or “The Economy Today” due out next year from McGraw-Hill.

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