Politics, Presidents, and Jobs

By: Robert Folsom | Sun, Oct 31, 2004
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We're about to learn if President George Bush will be reelected or replaced by Senator John Kerry, but a few facts are painfully clear right now. Take the specifics of their economic policies, for example: In a race with no shortage of shamelessly misleading and intentionally devious claims from these candidates, none matches what they have said about the U.S. job market.

So don't look here for arguments that support one candidate or the other. If you want economic facts unfiltered by political fiction, please keep reading.

Their deceptiveness is bad enough, yet it's made worse by the fact that the Republican president and his Democrat challenger have also completely ignored the real issue when it comes to job creation -- namely that the government's only "solution" has already been tried exhaustively and failed totally. Unless the economy creates jobs does it without government, the pathetically weak "recovery" will prove even more elusive that it has appeared all along.

Few issues become more clear when mixed with politics, least of all the issue of job creation. The government's labor statistics come from a variety of sources -- household surveys, business surveys, state and federal unemployment claims, and anecdotal evidence like "mass layoffs." Most of it involves estimates of very large numbers, thus it's oh-so-easy to "mine" the data until you find a juicy number that seems to support your argument. It's economic spin 101, and both sides in the presidential campaign have been at it for months.

President Bush lists the 1.5 million new jobs added in the past year as "evidence" that his tax cuts "have worked," when in fact that number falls miserably short of the job creation his own economists said would come with a cut in taxes. Employment is up an average 0.1% over the past 10 quarters, or the period since the "recovery" began.

For his part, Senator Kerry contends that we are in the "worst economy since Hoover" -- yet in 1932, the final year of President Hoover's term, the unemployment rate was 23.6% -- the highest level since the Bureau of Labor Statistics began compiling data in 1920. The unemployment rate today is 5.4%.

Believe it or not, it is possible to unspin the facts. A few broad statistical measures, seen in their historical context, can indeed show whether the private sector has or has not been creating new jobs at a healthy pace.

Here I need to repeat myself for emphasis: stop reading if you hope to find a political endorsement. What follows is a rejection not only of the candidates' claims, but also of the very notion that a president can do anything to create job growth in the private sector.

Alas, "a plan to create jobs" is an essential part of every presidential campaign. Yet give it a moment's thought. The plain-as-the-nose-on-your-face fact is, the only jobs a president can literally create are government jobs. He can't sign a new Ford auto plant into law, much less require that your neighborhood grocery add more cashiers. The candidates may say their "plan" is for the private sector, yet the private sector ALONE can create those jobs.

What their "plans" invariably do is tinker with the tax code, since a president actually does have some power over how much money the government takes from businesses and people like you. If you can keep a little more of your money the economy will grow, or so the logic goes -- stretch that logic a bit further and you come up with "tax cuts promote the economic growth that produces job growth."

When Al Gore ran for president in 2000 he promised a $480 billion tax cut, a paltry sum compared to the $1.3 trillion tax cut promised by then-candidate Bush. Now Senator Kerry is the Democratic hopeful, and if elected his promise is a tax cut for "98% of all Americans and 99% of American Businesses."

George Bush won in 2000, and of course he did deliver across-the-board income tax reductions. Just so we're clear, I've never met a tax cut I didn't like, but that's irrelevant to the question at hand, which is: Did this (or any other president's) tax cut "create jobs"?

In a word, "No."

In a sentence, "The president and his economic wise men hoped it would, but it didn't."

The tax cut became law in June 2001 and was made retroactive to January of that year. In turn, this enabled the Treasury to send tens of millions of tax "rebate" checks to U.S. households. Problem was, the trend in the economy by that time was not "job creation" but the opposite -- millions of people were losing their jobs. You can check this at the Bureau of Labor Statistics web site under the "B-1" tables, which are the broad and reliable statistical measures I mentioned above.

The job losses continued into 2003; the president proposed a second round of tax cuts, arguing that this one would surely do the trick for job creation.

His own Council of Economic Advisors (CEA) endorsed the idea in February 2003, with a briefing paper and a chart titled, "Employment Effects of President's Proposal." From mid-2003 through the end of 2004, the chart projected 4.1 total million new jobs "without" the tax cuts, and 5.5 million total new jobs over the same period "with" the tax cuts. (A link to download the CEA briefing paper is at the end of this article.)

Clearly these were "best case" projections, with the CEA assuming that the tax cuts would add 1.4 million new jobs. Yet, notice that 75% of the job gains in their projection were supposed to happen even with no tax cuts: Where did that assumption come from?

It came from studying previous economic expansions. Fifty years of data showed that once a recession ends, the strongest job gains should come early in the recovery cycle. And virtually all economists believed that the economy had started to recover as 2003 began.

So in the world of macroeconomic models, their projection made sense. The 5.5 million figure was at the high of the historic range, but if the economy only created 4.1 million new jobs they would still be 3/4 right -- more than enough for their boss to say, "Imagine how much worse things would be without the tax cut!" The CEA economists believed history was on their side.

In hindsight, even the low end of the CEA projection now looks downright reckless; this "expansion" has made a mockery of macroeconomic models. By now the economy should have created between 3.5 and 5 million new jobs, when at best the number is 1.8 million. The total number of non-farm jobs held today remains below the number held when the 2001 tax cuts began.

And speaking of reckless, it's not as if the economists who whisper in Senator Kerry's ear have been humbled by the failed projections of their colleagues in the other camp. His "Jobs First economic plan" has been a staple in his campaign speeches, along with this line: "My pledge -- and my plan -- is for 10 million new jobs"

What's the truth about jobs and government policy?

Simply put, the size of the U.S. private sector makes presidents and their "job creation" plans irrelevant. Presidents cannot create private sector jobs.

What's more, in terms of scale, the changes they make to the tax code are marginal. Soon after Bill Clinton took office in 1993, he passed one of the largest tax hikes since WWII -- yet it amounted to only about 2.5% of U.S. Gross Domestic Product. This was not enough to slow the already-upward trend in job creation, which continued for years despite the tax increase.

President Bush has cut taxes, but in terms of job creation the effect is the same as an increase -- negligible. It will be no different for John Kerry's "plan" is he becomes president.

Campaign promises about jobs deliberately obscure a deeply disturbing truth about this particular juncture in the economy. The private sector is not even producing enough new jobs to keep up with the growth of the working-age population.

And compared to where the economy should be by this point in an expansion, a similar anemia afflicts personal income, industrial production, manufacturing and trade sales, and other important measures of economic growth.

Regardless of who becomes president, the more his "job creation" policies fail, the larger you can expect his promises to become. At least you'll understand the irony.


 

Robert Folsom

Author: Robert Folsom

Robert Folsom
Elliott Wave International

Robert Folsom is a financial writer and editor for Elliott Wave International, a financial analysis company. He has covered politics, popular culture, economics and the financial markets for 19 years, and today writes EWI's popular Market Watch column. Robert earned his degree in political science from Columbia University in 1985.

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