Let us begin by saying we don’t like the title of this post and believe it is misleading.
The President cannot, in our opinion, directly create permanent jobs in the private sector. Of course, he can hire federal workers and/or direct taxpayer funds to, say, defense or infrastructure projects, which creates, though temporary, a derived demand for labor. More important, however, is the administration’s policies that incentivize private sector hiring through creating an environment that empowers businesses and entrepreneurs and gives them confidence to expand capacity.
What seems evident, at least to us, in this sluggish recovery is that the business sector, after reacting to a surge in demand and expanding capacity during the dot.com and housing bubbles, is very reluctant to invest its excess savings and hire more workers. We suspect a large portion of the investment capital being put to work today is in labor saving technology and equipment. The private sector has been twice burned on demand surges caused by asset bubbles – i.e., the wealth effect — which were caused, in part, by irresponsible monetary policy.
Though stimulus can replace aggregate demand either through direct spending or indirectly though asset inflation and the wealth effect, the business sector, after being caught long excess capacity appears no longer to be a believer in “fake” or artificially inflated demand. The private sector understands that interest rates will have to increase at some point and stimulus/government spending eventually reduced, which is exactly what is currently taking place at the state and local government level due to financing constraints.
Thus, witness no stimulus multiplier as Friedman’s permanent income demand hypothesis meets Ricardian equivalence. Could it be the private sector has the right economic model and policymakers the wrong model? We don’t know but do agree with Alan Greenspan that the correct model of the economy has yet to be discovered,
There is, regrettably, no simple model of the American economy that can effectively explain the levels of output, employment, and inflation. In principle, there may be some unbelievably complex set of equations that does that. But we have not been able to find them, and do not believe anyone else has either.
Consequently, we are led, of necessity, to employ ad hoc partial models and intensive informative analysis to aid in evaluating economic developments and implementing policy. There is no alternative to this, though we continuously seek to enhance our knowledge to match the ever growing complexity of the world economy.
Job Creation and Presidential Terms
Nevertheless, because one of the presidential candidates seems to believe the election is one dimensional and only about jobs, we take a look at the nonfarm payrolls data in each presidential term since Truman assumed office after the death of President Roosevelt in August 1945. The data surprised us.
First, as Chart 1 illustrates, something happened to the economy and labor force at the turn of the new millennium. During the last three presidential terms, for example, private sector net job creation has been negative, -231K, with total nonfarm payrolls increasing only 834K. President Bush and President Obama inherited very ugly economies and had to clean up the aftermath of a “once in a generation” stock market and housing bubble, which devastated the labor market.
During the same period — January 2001 to August 2012 — the real effective monthly fed funds rate has been negative more than 60 percent of the almost 140 monthly observations. This indicates, at least to us, and contrary to conventional policymaker wisdom that monetary policy has very limited impact on labor markets over the long run.
In the short term, however, quantitative easing and negative real interest rates can generate asset bubbles, which can affect the real economy and hiring. But the experience of the collapse of two major bubbles in just a little over a decade illustrates there is always pay back and the monetary induced artificial boom will eventually turn to bust.
Second, and this really surprised us, the Carter Administration witnessed an almost 13 percent increase in nonfarm payrolls during its tenure as 10.3 million new jobs were created. The growth rate in payrolls is second only to the LBJ’s s full term. Surprising, given the widely held perception the Carter Administration was one of abject failure. Must be more to a successful presidential term than job creation, no?
Third, though some manufacturing jobs have been recovered in the past few years, employment in this sector has declined in six out of the past eight presidential terms.
Finally, the Obama Administration has witnessed a decline of almost 700K government jobs, most of which have taken place at the local and state level. However, excluding the loss of 118K post office jobs, President Obama has expanded the Federal payroll by 6.4 percent (132K) the highest of any president since LBJ’s second term.
So there you have it, folks, the raw employment data for each presidential term since Truman and a couple of our observations, which we found quite surprising. Let the spin begin!
Click table to enlarge and for better resolution.
(click here if charts are not observable)