The jobs report for March came out today, and it was not pretty:
“American employers increased their payrolls by 88,000 last month, compared with 268,000 in February, according to a Labor Department report released Friday. It was the slowest pace of growth since last June, and less than half of what economists had expected.”
“The unemployment rate, which comes from a different survey, ticked down to 7.6 percent in March, from 7.7 percent, but for an unwelcome reason: more people dropped out of the labor force, rather than more got jobs.
The labor force participation rate has not been this low — 63.3 percent — since 1979, a time when women were less likely to be working. Baby boomer retirements may account for part of the slide, but discouragement about job prospects in a mediocre economy still seems to be playing a large role, economists say.”
There are a number of reasons for this dismal jobs report. The most obvious explanation would be the sequester, but this is incorrect. The sequester has not had enough time to work its way through the economy enough to significantly affect unemployment–most economists agree unemployment will spike at the end of the year due to the sequester. The payroll tax holiday expiration is a more plausible cause; part of the “fiscal cliff” deal, the tax increase disproportionately hit low income American’s disposable income starting in January. Both policies compromise aggregate demand (the payroll tax through consumption, sequester through government spending), reducing any incentive businesses might otherwise have to increase hiring.
Is it surprising we have had stagnant growth and stubbornly high unemployment given the current conditions? Any economist who understands basic macroeconomics could have predicted the growth-recession that has come to define post-Great Recession America, given the current global economic environment and political gridlock here at home. Paul Krugman, who always seems to focus on the most pertinent indicators and explain complex economic issues in an accessible way, does it again:
“But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):”
” That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail.
This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake.”
Driving most of this deficit is lower budget revenues, a legacy of the G.O.P.’s failed “starve the beast” theory of governance.
But enough finger pointing. The real issue here is how much austerity has been pushed through (3% of GDP) at a time when the private sector cannot make up the slack of reduced government spending (what the zero lower bound essentially means, that even at a 0% interest rate, the private sector still cannot provide enough capital for the economy to run at full capacity).
How far from full capacity are we? According to the CBO, America has produced under capacity by a large margin since 2009 (-6.8% in ’10, -6.2% in ’11, -5.7% in ’12 and an estimated -5.9% this year). If we multiply those numbers by the GDP of those years, we get this much lost output: $896.24 billion in ’10, $883.28 billion,$ 779.19 billion in 2012. That’s a whopping 2.558 trillion dollars over the last 3 years. If the U.S. government had captured 20% of that in tax revenue, that would’ve been an additional $511 billion in revenue over those 3 years (actually, these numbers are an underestimation, as the GDP gap is based off potential GDP I used real GDP).
Also alarming is that the 2013 projected output gap is supposed to go up, from 5.7% in 2012 to 5.9% in 2013. Not only is our economy recovering, austerity measures are actually pushing the economy in the wrong direction.
There is a large cost to both the government and the people with so much idle production capacity. The government has to pay more benefits and receives less tax revenue, exacerbating the federal deficit. People are sitting idle, their skills are deteriorating, not to mention the psychological effects of long term unemployment.
Once you correct for these automatic stabilizers, the U.S. is basically on a stable fiscal path. Automatic stabilizers are cyclical, they do not have to be addressed by policy as they adjust automatically based on the economy. Low revenue from inadequate taxation is structural, and requires tax reform. Spending on social programs and government employment did not get us into our current problem, and cutting these programs will not get us out of it–it will actually dig us into a deeper hole.