Tuesday, July 10, 2012

Obama's Economic Fictions Are Unraveling

Obama's Economic Fictions Are Unraveling

President Obama's statement that "the private sector is doing fine" is not just gaffe. It is a lesson in bad economics and an explanation of the failure of Obamanomics.
The specific premise behind that statement is that the cause of persistent unemployment is not the weakness of the private sector but rather a decrease in employment by state and local governments.

The Heritage Foundation provides the graph that refutes this on a purely factual level. It shows employment levels in the private sector versus state, local, and federal government since the beginning of the recession. Private-sector employment crashed by 7.6% during the depth of the recession and has only crept back up slowly. It is now about 4% below its pre-recession level, which means that it's still not quite halfway to a full recovery. That's not exactly "doing fine."
State and local employment, by contrast, continued to rise during the first year or so of the recession and only began to creep down in later years, declining 1.3% and 2.8% respectively, still much better than the private sector. And then there is the federal government, where hiring shot up during the first three years of the recession. You've got to have a lot of extra bureaucrats to cut all of those bailout checks and to figure out what's in Obamacare after Congress passes it. So even after a slight recent decline, federal employment is still up 11.6% since the beginning of the recession. So yes, the public sector is doing just fine.
These figures are all in percentages. Look at it in terms of absolute numbers, as this graph does, and the picture becomes even clearer. There are about ten times as many state and local employees as there are federal employees, so the big increase in federal hiring during the recession does not entirely compensate for the small drop-off on the state and local level. But there are five times as many private-sector employees as there are public-sector employees, so the weakness in private hiring is far more significant than the minor decline in public employment. Public-sector jobs are down by a couple of hundred thousand. Private-sector employment is down by four and a half million.
So how do Obama's apologists back up their claims? First, they don't mention the surge in federal hiring, as if that isn't part of the "public sector." Second, they simply cut off the beginning part of the graph and show only the changes in employment since the beginning of the recovery, not since the beginning of the recession. So what you see in their version is private-sector employment marching slowly but steadily upward while state and local employment slide slowly downward. It's easy to change the story if you just leave out the first half, the part where private-sector employees got laid off by the millions while public employees all kept their jobs.
Show the whole story, as in the two graphs I linked to above, and it is visually obvious what is really happening: public employment was flat or rising during the entire downturn, with only a minor downward slide in the last year or two—compared to a deep crash for the private economy, followed by a weak, inadequate, unfinished recovery. It is clear that the real story here is the private economy's failure to rebound.
Yet the fiction created by Obama's advocates is worth examining, because its assumptions are revealing.
Paul Krugman declared, "By this point in Obama's presidency, if we had normal public sector job growth, we would have around 800,000 more people. Firefighters, schoolteachers, police officers. Instead, we've got 600,000 fewer. So right there, it's like 1.4 million jobs that we should have had in the public sector."
Notice the new standard created here. Krugman's baseline is "normal public sector job growth" at pre-recession rates. This is what allows him to take a job decrease that he counts as 600,000 (again, not counting federal employment) and inflate it to 1.4 million, by counting 800,000 non-created phantom jobs as "lost."
Note that he does not apply the same standard to the private sector. He makes no attempt to project how much more private employment would have been created if we had continued to enjoy "normal private sector job growth." It is only the public sector that is entitled to be immune from recession. The underlying assumption is that it is "normal" for the government to blithely keep expanding, regardless of the ability of the private economy to pay for it.
So how is the government supposed to keep expanding in a recession? The New Republic's Jonathan Cohn makes it a little more explicit.
"Stabilizing the public-sector workforce or, better still, increasing it would be among the very easiest things for the federal government to do: It can simply write checks to state and local government, as it did with the Recovery Act and has traditionally done during times of economic distress."
If you are in personal financial stress because of the recession, take heart! Expanding your spending is the easiest thing to do. Simply write checks.
Of course, this would be a disaster if a private individual tried it. So why do we think it will work if the government tries it?
Economist Josh Bivens gives us the last piece of the puzzle. We can keep borrowing to pay for government stimulus, he says, "Because there is no discernible upward pressure on interest rates."
True enough. There is no upward pressure on interest rates—at the moment. By the time upward pressure comes, however, nations tend to have built up such a vast, unserviceable debt that they end up in an "interest rate death spiral." When interest rates finally rise, governments have to make huge payments just to cover the interest on their debt. If they try to get the extra money by raising taxes and cutting government spending, they plunge their economies into recession, which decreases their revenues and increases their costs further. That makes them even less solvent and causes lenders to raise their interest rates yet again. It is a vicious cycle that usually ends in default and national catastrophe.
Aren't we all watching this happen in Europe right now? In countries like Greece and Italy they implemented the policies of our sage American economists to the letter. Following the advice of Mr. Krugman, they propped up their economies by maintaining a "normal" rate of growth of government employment and the welfare state. Following the advice of Mr. Cohn, they paid for it all by simply writing checks. And following the advice of Mr. Bivens, they didn't worry about their ever-increasing debt because there was no upward pressure on interest rates. Until, suddenly, there was.
Years ago, the great free-market economist Henry Hazlitt wrote a book called Economics in One Lesson. The "one lesson" is: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." If Krugman and his ilk followed this rule, they might ask such questions as: why can't we continue to increase the government payroll indefinitely? Why can't we simply go on writing checks? Why can't we assume that interest rates will flop around near zero forever?
If they asked, they might find a specific answer. 
Robert Tracinski writes daily commentary at TIADaily.com. He is the editor of The Intellectual Activist and TIADaily.com.

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