February 23, 2004
Stimulate It, and They Will Come?
Despite superlative growth statistics the US recovery has, thus far, been long on promises and short on new jobs. If President Bush is not yet worried he should be.
By Brady Willett & Todd Alway
“Fed Officials Say Jobs on Way Eventually” Reuters
“I'm encouraged about consumer spending, particularly driven by the higher tax refund and, eventually, from improvements in the job picture.” Wal-Mart Chief Executive Lee Scott
Eventually: At an unspecified future time.
Kevin Costner built a baseball diamond in a corn field. Passers-by mocked him for his apparently fruitless expenditure of energy, but before you could say Iowa the ghosts of baseball past emerged to take their place on the playing field. Costner’s film is, perhaps appropriately, titled ‘Field of Dreams’ since it suggests that following a dream and persevering, despite the disbelief of nay-sayers, can enable one to save the proverbial farm. President Bush and Fed Chairman Greenspan have likewise attempted to sculpt a well-ordered playing field out of apparent disarray by applying stimulatory energy to the US economy in every way possible: Where Costner aimed to attract long-dead ball players, Bush and the Fed are aiming to create hospitable conditions for employers of all stripes. Wall Street has, in their eyes appropriately, cheered the valiant effort. However, there is reason to believe that nine months from now Bush’s dream of stimulating the economy to create jobs will turn into a ‘Field of Nightmares,’ at least insofar as his election hopes are concerned.
The near-term problem with the administrations job-creation efforts, at least to the average onlooker, is readily apparent: with the U.S. recovery being coddled with ultra low interest rates, rising stock market prices, and wave after wave of tax cuts a negligible number of new jobs have been created. In fact, the record during Bush’s tenure has been abysmal: since Greenspan’s first interest rate cut and Bush’s first tax cut package was passed millions of jobs have been destroyed. Since the current economic expansion began November 2001, 1.05 million jobs have been eliminated. With this in mind, how can the US economy now begin to add jobs given that it is nearly universally held that interest rates will soon (not ‘eventually’) head higher, that the stock market looks likely to stop bubbling upwards on any jump in rates, and that Bush’s tax cuts schemes are, for the most part, set to expire in 2004?
To those sharing in the stimulatory dream the above is mere histrionics: there has merely been a lag in jobs growth during the current expansion. This lag is finally going to be remedied as the ongoing cyclical recovery takes a more traditional shape:
“Household spending will be bolstered early this year by unusually large federal tax refunds stemming from last summer's tax cuts…Later in the year faster job creation and rising wage and salary growth is expected to take up the slack as the effects of the tax cuts fade.” Blue Chip Forecast.
However, and despite the nearly universal consensus that inventory rebuilding will help keep the US economy growing in 2004, there remains a thick haze over the employment outlook. To be sure, the closely watched Blue Chip forecast is calling for jobs growth simply because the economy is growing – an apparently logical but flawed assumption that has been made since mid-2003. What this, and similar outlooks may be overlooking is that employers have been able to keep up with demand via productivity improvements and the implementation of unused capacity, and outsourcing. Should these trends continue, growth alone would do little to manufacture new jobs.
As for the annual report of the White House Council of Economic Advisers, 2.6 million new jobs were recently forecast to be created this year. However, after another soft jobs report no one is backing this figure today. Rather, Gregory Mankiw, ‘who as chairman of the CEA was responsible for the report that included the figure’, joined Treasury Secretary Snow and others last week, saying that they were unable to state exactly how many jobs will be created this year. Quite frankly, if Bush’s disciples are not prepared to stand behind this number 10-days after it is released who is?
“We don't have a projection today. It will be months before we sit down and go through that exercise again.” Mankiw. Reuters (Feb 17).
Bush & Greenspan Will Be in Trouble if Jobs Growth Remains Lackluster
“I would stake my reputation on employment growth happening before Christmas”
October 20, 2003. Treasury Secretary Snow.
Why are Wall Street economists and Fed members using the word ‘eventually’ when it comes to jobs growth? Why are Bush’s policy makers so indecisive about when their jobs forecasts will be reached? Because there is ample evidence to suggest that the US jobs machine is broken. Moreover, the fixes provided by the government and the Fed could actually be ensuring that the jobs machine will remain broken for some time.
To begin with, policy makers like Richmond Federal Reserve President Alfred Broaddus have speculated that productivity gains are making it difficult for the capacity built up during the 1990s to be worked off. This speculation continues that many US jobs have been permanently lost due to a structural shift in the economy. A related concern is that while corporations previously became more productive by simply laying off workers that this year they will become more productive by increasing capital spending. Ironically, productivity gains are bad news because it means fewer new employees may be required to ramp up capacity.
On this second point Bush appears to have made a miscalculation. To be sure, Bush’s corporate tax incentives are time sensitive: to take advantage of greater capital expenditure deduction allowances, companies need to spend in 2004, not in 2005. Encouraging corporations to spend is not the same thing as encouraging them to expand their workforce.
Lastly, there is the problem of outsourcing employees. The hope is that a weakening dollar will help cool the outsourcing trends. However, this will certainly not be the case so long as countries like China keep their currencies pegged. Greenspan has suggested that education and a skilled workforce will enable outsourced jobs to be replaced. Fed McTeer has said that “Good economics says you don't try to stop destruction of jobs in the creative destruction process”. This rhetoric is all fine and dandy, but the US economy is roaring now and President Bush needs new jobs, not esoteric discussions on comparative advantage, to get reelected.
Few would have believed it possible that the U.S. economy would grow as strongly as it did in the second half of 2003 without creating a landslide of new jobs. And while the statistical surveys supplied monthly by the BLS are often imprecise, the fact is that the surge in jobs growth that should have arrived many months ago in the expansion has yet to appear. This has led economists and policy makers to push forward their expectations for jobs growth. The fear that lurks now is that expectations for new jobs will be pushed past the end of monetary or fiscal stimulus…
Again, the average onlooker is stupefied: why is weaker growth in the latter half of 2004 going to bring about more new jobs? If the average onlooker is representative of the average voter, Bush will be left dreaming of a Hollywood ending come November, and all of his stimulus actions will have been for not.
But alas, the more broadly based conclusion is that if they (jobs) don’t soon arrive, eventually some yet to be named President of the United States will be inheriting an economy that cannot be stimulated due to the already massive government deficits Bush has lined up.
Related:
White House Backs Off Prediction For ‘Average’ Jobs Growth PDF
Meager job growth and the poor track record of the administration's job forecasts EPI
BWillett@fallstreet.com
TAlway@fallstreet.com