Big Enough Bounce?
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RAY SUAREZ: In his economic report to Congress and in recent appearances like the one earlier today, the president has pointed to new data that he says shows the economy is gaining strength, including a falling unemployment rate, now down to 5.6 percent in January, the lowest rate in two years; the creation of 112,000 new jobs last month; and an increase in the Gross Domestic Product of the final quarter last year. GDP was up 4 percent for that quarter, 3.1 percent for the year overall.
But Democrats cite other data that they say point to a so-called jobless recovery and more troubles ahead, including 2.2 million fewer jobs than when the president took office, and a record deficit this year, projected to reach $521 billion by the White House.
For a closer analysis of these trends, I’m joined by two economists who watch things from different perspectives. Jared Bernstein is with the Economic Policy Institute and William Beach is with the Heritage Foundation.
Jared Bernstein, the economic report of the president looks ahead to 2004, sees a net job creation of 2.6 million jobs, and an overall growth rate of about 4 percent. Do you think that’s what’s going to be on tap for 2004?
JARED BERNSTEIN: I wish it were so, but I’m afraid not. We have to go back and look at where we’ve been to get a better sense of where we’re going. We are now 26 months into this recovery, and it is the weakest jobs recovery on record. In fact, it’s the first recovery where at this point we still have failed to make up the jobs lost from the recession in 2001.
Now, the economic report of the president has, I think, a credibility gap working. Back in 2002 they projected that we would add 400,000 jobs. We ended up losing 1.5 million that year. Next year, 2003, they projected that we would add 1.7 million; we were down about 400,000. Now they’re talking about, as you mentioned, 2.6 million for the year.
The important thing to keep in mind is that in order to reach that goal, they need over 450,000 jobs per month. Now, in the first month of this year we had 112,000. That’s the best month of job creation since this jobless recovery turned positive back in September of last year. So it’s a very high benchmark, and once again I’m afraid they’re going to miss it.
RAY SUAREZ: William Beach?
WILLIAM BEACH: The business that Jerry and I are in of looking at these numbers, we begin to notice some trends. If you compare the first half of 2003, Ray, with the second half of 2003, one of the things you’ll notice is a big jump off in the key indicators of economic activity. Gross Domestic Product, which is the total value of goods and services produced in the economy for sale that year, was weak and anemic in the first half and it grew significantly in the second half. In fact, we almost had a record at one point.
What I’m really encouraged by is the strong growth in investment spending. Investment spending usually precedes employment gain, so the stronger the investment spending, usually later on the stronger the employment gains. And in the third quarter and fourth quarters of 2003 we saw investment by businesses, that is their consumption of new equipment to make goods and services, at literally record levels, in the third quarter — in fact, we have to go back all the way to 1950.
So, I’m in the business of looking at these numbers and I’m saying to myself, “Well, this looks like a very solid recovery.”
We’ve had a number of shocks to this economy. Besides one of the most disastrous stock market bubbles we’ve had since 1929, a creature of maybe the new economy, we don’t know, or maybe public policies, and the collapse of investment like we’ve never seen before except for that disastrous period in the early 20th century, we followed on by a very real cataclysmic economic event which was 9/11, and we can’t underestimate how much that affected financial markets, confidence in this economy, foreign investment in the United States.
So we’ve had an exceptionally long recovery, but for some very good reasons. I’d throw corporate scandals in there although I don’t want to say as much about the president wants to say about that. Now, are we going to have the job growth that the president says? That’s the big question. Everybody wants to know that answer.
But I think there are two things I’d like to say, and then I’ll be quiet here: The first thing is, we have a real dispute as to whether or not we have a jobs problem or we have a jobs deficit. There are two surveys, Ray, one that’s showing a very significantly slower jobs growth in this recovery. The other survey is, for example, showing some pretty significant job growth. Which one is correct? Both are done by the Bureau of Labor Statistics.
And the second thing is, I think with this investment group that we’re seeing and the strong demand by businesses and households that those jobs are on the way by this summer. Whether we get 400,000 jobs a month, I don’t know. But we certainly could get 2-to-300,000, and that would be consistent with the numbers we saw in the second half of 2003.
RAY SUAREZ: Quickly comment on this difference between the employer sample and the household sample that Bill Beach makes.
JARED BERNSTEIN: I think the important point regarding the two different samples is that the Bureau of Labor Statistics, the Congressional Budget Office, and I thought interestingly in today’s economic report all come out in favor of the payroll survey, the establishment survey, the ones we’ve been citing so far that documents the worst jobs recovery on record. That’s the survey that in fact this 2.6 million is dependent upon that we’ve been talking about, and it’s the survey that all of these government agencies, including the president’s own, are saying is the most reliable.
Let me get back to a couple of points that Bill made. I think he makes an implicit error that’s also in this, in the president’s forecast. You can’t simply go, in this economy, from growth to jobs, and I think that’s really the fundamental problem. We’ve got…
RAY SUAREZ: Why not? That’s always been part of the theory, that employment lags economic growth and then eventually…
JARED BERNSTEIN: Not this much. Not this much. I mean, Bill mentioned 6 percent growth in the second half of ’03. True. Job growth in the second half of ’03, flat. So why not? The explanation here most commonly is fast productivity growth, American workers and firms are producing that much more efficiently so they’re able to make more stuff in fewer hours and so we don’t need to add more jobs. But, in fact, that just redefines the problem.
What’s holding this economy back, what explains the gap between growth and jobs is a sense of caution among employers, regarding hiring, regarding on taking on labor costs that I have never seen this deep into a recovery. It’s really quite profound. Why are employers so cautious? Peel the onion back again. It’s because this recovery has never really had the legs that it ought to have this far along, especially with the administration throwing over a trillion dollars of tax cuts at it.
This recovery has grown in fits and starts. We’ve had a couple good months, couple bad months. We had a strong quarter in the third quarter of last year, but that was mostly on a sugar high based on tax cuts and mortgage refinancing. Take that out of the system and what you’re left with is the fundamental problem, a weak labor market.
You simply can’t build a robust recovery like we’d like to get, like we need, with jobs lagging and now with wages falling behind. This is another important point. If you lost your job, if you’re unemployed, you got hurt in this recovery, now job holders are falling behind because their wages are no longer keeping pace with inflation. That’s what happens when you sustain such a persistently weak labor market.
RAY SUAREZ: William Beach, how do you explain Jared Bernstein’s question about why employers are so reluctant to add jobs when consumers are clearly spending money and tax rebates, you know, have filtered out through the economy?
WILLIAM BEACH: Well, the reluctance that’s out there may be in adding jobs inside the firm. I’m not convinced, I’m kind of an old fashioned economist. I’m not convinced that we’re adding jobs outside the firm.
One of the key things about the survey taken called the household survey that used to be several years ago the survey of choice before the employment survey that we’re talking about tonight was chosen, is that it goes and asks people, “Are you working now?” And they can answer “Yes,” and it could be a temporary job or a half time job, but they’re working. “Are you working at some business or something?” “Well, I have a business in my bedroom.”
A lot of dot-com software engineers were unemployed and are operating like consultants today. I’m not convinced the jobs are actually absent. I know that’s a radical view, but look, if the unemployment rate is falling and discouraged workers are falling, the number of discouraged workers are falling, that means that just to hold even we’re adding 110,000 jobs a month just to keep up with the population growth.
So if just to keep even is 110,000 and the unemployment rate is falling, jobs are being done somewhere. But look, there is caution. And I think we’ve got to make sure we do everything possible to keep a rosy view of the future in the minds of employers. One of the main things we don’t want to do, at this point in the recovery, is to start telling employers, “Well, look, in order to make the budget in Washington balance we have to raise your taxes and we have to reverse what Congress did in lowering marginal tax rates and giving you incentives to buy and to equip your plant.”
That’s one of the key mistakes that Congress could make right now, because of this. We know the recovery is real, and now we’re waiting, patiently, for the jobs to come back.
RAY SUAREZ: Let me get a very quick political read on how this might play out over the cost of an election year.
JARED BERNSTEIN: It seems to me that the president is falling into the same trap that his father did, and in terms of going out to the public with a very rosy view of the economy, when that’s quite dissonant with the experience of so many people in the labor market. I ask myself why would he be doing this — they’ve told themselves they’re not going to make that mistake.
I think the reason is, their tax cuts have been ineffective, and if they go out and say we’ve got a jobs problem now and we need to pass unemployment insurance and we need to help get this labor market back on track, that is admitting that the tax cut has failed to generate jobs, which in fact the numbers show clearly that it has.
RAY SUAREZ: Bill Beach?
WILLIAM BEACH: The president has a growing economy, it’s his to lose really. If he keeps his policies in the direction which he has in the past, if he thinks in terms of economic growth and stays the course, economics, experience, history, and I think common sense tells you that we will have a recovery throughout 2004. It may not be the kind that you can write home to your mom about, but will it be a solid recovery that should serve him well politically.
RAY SUAREZ: Gentlemen, thank you both.
JARED BERNSTEIN: Thank you.