I’m pretty sure everyone reading this has experienced a bad hangover after a night of too much partying. You wake up with an oversized cotton ball in your mouth, your head is ringing like a fire bell, you have strange cravings for McDonald’s French fries and you can’t seem to move faster than a poorly fed snail. You want to kick yourself. Yeah, the party was awesome (and you still can’t find that missing lamp shade), but man, the hangover is more price than you wanted to pay.
I get the feeling many on the left are feeling something like that today. First, after the euphoria of Bill Clinton’s speech Wednesday night, they had to deal with a less than impressive performance from Barack Obama last night. Either Obama’s speechwriting team needs a shake-up or the President is out of ideas; most of what we heard last night is best summed up as “Hey, I want a do-over!” Most media outlets, including admittedly left-leaning publications like the NY Times and Politico, panned the speech as not one of his best efforts.
Then, along came this morning’s jobs report from the Bureau of Labor Statistics. No wonder the president wants a do-over.
By now, you probably read all of the doom-and-gloom reporting about it. Make no mistake, this was a pretty lousy report. But worse than the numbers themselves is what it all means when you actually dig into them a little.
First, the headline numbers: the economy only created 96,000 new positions in August, but the unemployment rate dropped to 8.1%. This should be good news for the President, right? The unemployment rate is dropping (if somewhat unsteadily) and may actually get under the magic 8% mark most pundits think is needed if Mr. Obama is to have a real shot at reelection. And 96,000 new positions is better than no new positions, right?
Well, yes, sort of. For a better picture of why the jobs report is foreshadowing a major problem, see figure 1. This is the raw BLS data for the past year. Before your eyes begin to glaze over, there are three numbers to pay particularly close attention to.
The first number is the increase in the working age population over the past year. The second is the number positions created in the past year. That last one? That’s the number of working age Americans who simply gave up looking for a job in the past year. To put it another way, more of your friends, relatives and neighbors gave up the hope of even finding a job than actually found one. Nearly a million more, in fact. That’s one million American’s who are now dependent on some outside source just for survival, be it a friend, relative or the handout machine that’s become the US government.
Most economists say we need between 110,000 and 175,000 new jobs each month just to keep up with population growth. But when you look at the actual increase in working age population, the average number actually needed is around 330,000. This is very bad news for team Obama, otherwise he could point to the average of 150,000 jobs created over the past year and claim that his policies are working, albeit slowly. But the reality is that his policies are, at best, creating jobs at only half the rate needed to bring the US back to full employment.
This is particularly troubling, given that every other indicator says we should have been creating jobs at a much faster pace over the past 24 months. If you look at hourly wages, those increased by an average of 3 cents per month between March 2010 and June 2012. Although not at the level of increase seen during the Reagan, Clinton or Bush recoveries, it is still stronger than historic wage growth. Worker productivity across all sectors is also nearing an all-time high and produced solid gains during the same period. Taken together, high wage growth and productivity gains always produced significant jumps in employment before – but not now. What could possibly be holding back the “jobs engine”?
The BLS publishes an “Employee Cost Index” on a quarterly basis, and a large part of the answer can be found there. While wages and productivity show considerable growth, the ECI is also growing – in fact, it’s grown by nearly 11% since March 2010. Of that, change only 18% is represented by increased wages and a 12% drop in non-cash benefits (things like health coverage and gym memberships) counterbalances that number. So, where is the additional 10.3% in employee cost coming from? The answer is a combination of regulatory costs and taxes, the results of 3 years of this administration’s ceaseless efforts to tie nearly every industry into a Gordian knot of inefficiency. New regulations and business taxes now exceed the productivity gains made by our nation’s workforce by a 4:1 ratio, effectively wiping out the need to hire. Indeed, those costs are probably now the single biggest impediment to real employment growth our nation faces. After all, if you owned a business, you would need to be looking at explosive growth potential, not just modest growth, before bringing that much excess on board.
Many of my friends on the left insist that breakneck pace of regulations passed by the Obama administration are not having a negative effect on the economy. I submit they’re not only negatively impacting the economy, but giving business owners throughout all 57 50 states a hangover of our own.
Face it, you just went to fill up your tank this morning and discovered that it cost you $2 more this week than last to put 12 gallons into the tank. Last week, it was $1.80 more than the week before. And so on, all the way back to the first week in January.
You complain. You gripe. Your neighbors are equally disgusted. One of your coworkers seems to bring up the topic of exploding gas prices every day. In the meantime, you noticed that your wife spent $30 more on groceries this week but brought home less food. She’s half-heartedly joking that at this rate, it will be PB&J for dinner by summertime.
Everyone seems to be talking about the way prices are skyrocketing, but nobody seems to be doing anything about it. And I’m going to let you in on a little secret: there isn’t anything anyone can do about it.
The reason prices are taking off is the dirtiest word in economics: inflation (okay, maybe the second dirtiest word after recession). Why? People automatically assume inflation means rising prices. But rising prices are the symptom, not the problem. Inflation occurs when the money supply outgrows the demand for that money. It is classical, John Smith economics at work in its most basic form: supply and demand. When supply outstrips demand, prices fall. That’s true of any product. Build more cars than the public wants and the price of cars drops. Grow more wheat than you can sell and you slash the price to where you’re virtually giving it away. In those cases, the fix is relatively simple but usually takes time to implement. Build fewer cars. Grow less wheat. Of course, you’ll need to wait a full manufacturing cycle for production to drop to a point where the supply of cars matches the demand. You need to wait an entire year before wheat prices correct.
But what happens when you print too much money? Well, basically the same thing: you shrink the availability of money. You raise interest rates on the purchase of new capital, to make it less palatable to prospective buyers. You restrict international trade of currency. You can also do things to tinker around the edges, like demand banks hold more cash in reserve and prevent corporations from dumping cash into the market. But the reality is all of these things take time to work – a lot of time. In the meantime, the hangover effect of inflation – raising prices – hits everyone hard.
And again, the reason is simple. Wages are tied to productivity, not the price of money. In fact, inflationary periods result in reduced wage pressure because as money sloshes around in the economy, productivity declines. Not because people are working less (they’re usually working more, and harder) but because the value of work is declining along with the value of the currency. The net result is you work harder to bring home the same amount of money you were before – but that money has reduced purchasing power.
Now here’s why nothing can be done about inflation in the near term: the inflationary bubble was created between 2008 and 2010 and we’re just now beginning to feel the effects. Picture the way a tsunami moves – if you’re out on the ocean, you’ll hardly notice a ripple. As you get closer to shore, the pressure builds. Enough of a wave will swamp everything for miles inland once it reaches shore. Inflation is similar in that the pressure is created much further away than when the effects are felt – and like a tsunami, there is no way to stop the momentum once it’s put into motion. We created the current inflationary bubble when we decided to print money in order to escape the Great Recession. Most Keynesian economists (guys like Paul Krugman and Robert Reich) cheered on the printing presses and have been vocal in their calls for cranking them up even faster. They’ve pointed to the short-term pain felt throughout economies that chose to choke down on the money supply while disregarding the damage to our economy rampant inflation will cause. In short, they’ve forgotten the lessons of the 1970’s in the US and the 1990’s in Japan.
Under ordinary circumstances, their calls for greater government borrowing would make sense – given the insanely low current interest rates. But they either ignore or fail to understand how that borrowing is financed. In ordinary times, governments issue bonds which guarantee a certain return on the initial investment. Private markets purchase those bonds and new money is generated (i.e., printed) to cover the interest earned on the bonds. So long as the increase in the money supply roughly matches real growth in the economy, inflation is kept minimal. But the current spending spree ignored those basic rules of supply and demand. First, The US Treasury dumped about $3 trillion of the $5 trillion borrowed over that time directly into the finance sector. Besides the bank bailouts in 2008 and 09, there wasn’t enough demand for US Treasuries to absorb all of the new bond that were floated. So the Federal Reserve purchased them and then resold them through two round of “quantitative easing.” That direct infusion of currency outpaced real GDP growth by 5.6% alone. It doesn’t factor in the interest owed on those bonds or the effects of the nearly $2 trillion in cash the Federal Reserve created on its own. When you add all of it up, the economy now has roughly $2.5 trillion more in cash than needed to meet demand. That equates to 17% inflation – 17% more money supply than demand would allow.
This isn’t to say that we’ll actually see 17% inflation before all is said and done – there are other things that could keep the number lower. For instance, if the world’s other major currencies remain weak then the dollar will retain a semblance of strength and that would mitigate the effects of inflation. At the same time, a country with a relatively weak currency that holds large reserves of dollars (say, China) could decide they need to strengthen their currency’s relative strength against the dollar and start dumping our currency.
But until then we can conserve, or drill, or do some combination. While it will have a short-term effect of mitigating the price at the pump, the end result will be the same: gas (along with everything else) will cost more this time next year than it does today. The problem with gas prices is not supply (we have more than at any time in the past 40 years) or demand (the world is using less gasoline than at any time in the past decade). In fact, the cost per gallon of gas has actually decreased, relative to actual dollar value, over the past 5 years. But because the cost hasn’t dropped as fast as inflation has risen, the price continues to move upwards.
THAT is the dirty little secret no politician in either party wants to tell you.