Should Candidates (and Voters) Be More Optimistic?

Justified Optimism

Maybe Not

In a recent Washington Post opinion piece, Jonathan Capehart praises President Obama's optimism about America's future, optimism the President recently expressed in his final state of the union address. Capehart also analogizes President Obama's optimism to that expressed by President Ronald Reagan in the latter's 1989 farewell address.  In that address, President Reagan referred to America as a "shining city on a hill" that was, at the end of his administration, "more free, more prosperous, more secure and happier than it was eight years ago." Capehart also chastises the current field of Republican presidential candidates for rejecting such optimism. According to Capehart, these candidates repeatedly invoke Reagan, but "bombard us with gloom, doom and defeatism."

Capehart is certainly correct that both President Obama and President Reagan struck optimistic tones as their administrations came to a close.  He is also correct that many Republican candidates for President seem anything but optimistic about the nation's current trajectory.  At the same time, Capehart does not mention the fact that most Americas do not seem to share President Obama's optimism. For instance, two thirds of Americans believe the nation is "on the wrong track," compared to 55 percent early in President Obama's first term.  (Go here for these data.)  Only one third of Americans believe that today's children will be better off than their parents.  (See here.)  The rate of new business formation is near a 30 year low. Capehart does not consider the possibility that glum Republican presidential candidates are simply reflecting the mood of the people --- Republicans, Democrats and Independents --- they hope will elect them.

Of course it may be that the American people are simply unduly pessimistic about what the future holds for this country. However, a little reflection, informed by recent economic history, suggests that there is significantly less reason for optimism about the nation's economic future than there was when Reagan delivered his farewell address in 1989.  While President Reagan left his successor a booming economy resulting in robust job creation, President Obama's successor will inherit a tepid economic recovery which has left millions of Americans behind and with little or no prospect of improvement.

Like President Obama, President Reagan inherited a deteriorating economy.  When Reagan took office in January, 1981, the prime interest rate had just hit 21.5 percent, inflation was running over 13 percent, and unemployment was 7.5 percent, on its way to 10.8 percent in December, 1982.

Like President Obama, who proposed an economic stimulus package that Congress would later pass, President Reagan proposed a package of tax cuts also designed to stimulate the economy, and Congressman Jack Kemp led the Congressional efforts to enact Reagan's proposals.  (To his credit, President Obama would later award Kemp the Medal of Freedom.)   The plan, which cut tax rates for all Americans, was similar in design and rationale to that offered by President John F. Kennedy in 1962.  As previously explained on this blog, President Kennedy sold his plan as an effort to stimulate economic growth, reduce unemployment, and, ultimately, eliminate the short run budget deficit that such cuts would produce.   As President Kennedy explained in a December, 1982 speech to the Economic Club of New York:

"The purpose of cutting taxes is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

Congress enacted President Reagan's proposed tax cuts in the summer of 1981.  While a portion of the cuts took effect immediately, most were phased in over the next three years.  His administration also accelerated the pace of deregulation. What followed was a veritable economic boom.  While the economy contracted in 1982, a recovery started in November of that year.  Over the six year period 1983 through 1988, the American economy grew at an annual rate of 4.6 percent on average.  (See here)  During the same period, total employment increased from 88,993,000 in January, 1983 to 106,906,000 on December 1, 1988, a 20.1 percent net increase. (See here).

The economy has not experienced a similar boom under President Obama, despite passage of his stimulus package.  The economy contracted during 2009 and began a recovery in the summer of 2009. Over the six year period of 2010 through 2014, GDP grew an average of 2.2 percent, less than half the rate during the Reagan boom, with annual growth never exceeding 2.4 percent.   During the same period, total employment grew from 129,717,000 in January, 2010 to 143,242,000 in December, 2014, a 10.3 percent net increase.  (See the sources cited in the prior paragraph for these data.)

In short, the rate of economic growth during the Reagan recovery was more than double the rate for Obama recovery.  Moreover, the rate of employment growth during the six years of the Reagan recovery was more than 60 percent higher than the rate during the first six years of the Obama recovery.  Nor is there any indication that the Obama recovery is picking up steam, with 2015 growth predicted to be a disappointing 2.5 percent.  (By contrast the economy grew 3.7 percent in 1989.)  It is little wonder that many Americans are pessimistic about the nation's economic future.  Even former President Bill Clinton recently expressed his view that, if elected, former Secretary of State Hillary Rodham Clinton would "do what needs to be done now to restore prosperity."  Like former President Clinton, many Americans are old enough to recognize robust economic growth when they see it, and they know this is not it.

Of course, GDP and employment growth are not the only indicators of national well-being.  A nation might choose policies that alleviate poverty or result in a more equitable distribution of income, even if such polices cause somewhat smaller economic growth.  However, there is no indication that slower growth has bought us greater equality or lower poverty.  Poverty rates are higher than when President Obama took office and lower than 1989, when President Reagan left office.  (See page 12 of this report.)  Income inequality is by many accounts on the rise.  The Reagan boom brought greater wealth and less poverty; the Obama recovery has been disappointing by comparison.

None of this is to condone the sort of pessimism that Capehart claims to see in today's crop of Republican candidates.  In 1980 then-citizen Reagan believed the country was moving in the wrong direction but was nonetheless optimistic about America's future.  In particular, he had faith in the power of free markets and individual initiative and a plan for unleashing both to serve the common good.  With the help of Congress, his administration implemented that plan, and the rest is (economic) history.  Hopefully one of the current presidential candidates will follow Reagan's example and articulate an optimistic vision for the nation's future coupled with a workable plan for making that vision a reality.

Job Growth Still Weak, Like the Recovery

Last week brought more mediocre news about the Nation's economy. According to the Bureau of Labor Statistics ("BLS"), the economy added a seasonally-adjusted 223,000 jobs in June, 2015, the 73rd month of this economic recovery.  (The current recovery started in June, 2009.)   The BLS also revised downward the employment growth figures for April and March.   These results follow prior reports that the economy grew a mere 0.2 percent in the first quarter of 2015, "nearly grinding to a halt," as a report in the Washington Post put it.

The New York Times, for instance, claims these latest employment figures show "healthy" job growth, consistent with its prior claim that May job growth (now revised downward) was "strong." (To be fair, another Times analyst opines that the June numbers are "weaker than they look.")  Analysis of the historical record, particularly that of the nation's recovery from the 1981-82 recession, suggests that June job growth, like that throughout this recovery, was quite disappointing.

As noted above, June, 2015 is the 73rd month of the recovery that began in June, 2009.  By comparison, the so-called Reagan recovery began in November, 1982.  The 73rd month of that recovery, November, 1988, saw job growth of 339,000, about 52 percent larger than that of June 2015.  (Go to this website and insert the appropriate dates to generate these figures.)    Moreover, this 52 percent figure actually understates the gap between job growth in these two months. After all, the workforce and thus total employment was significantly smaller (106,277,000) in October, 1988 than it was this most recent May (141,619,000).   Hence, employment grew at a rate of just over three tenths of one percent in November 1988 compared to the prior month's level, slightly more than double the June 2015 rate of growth. The significant disparity between these two months is not an anomaly: total employment increased by nearly nine tenths of one percent in the combined months of September, October and November of 1988, compared to less than five tenths of one percent in April, May and June 2015.     Previous posts on this blog have reached similar conclusions about the relative strength of employment growth during the Reagan recovery and the Obama recovery.  (See here and here, for instance.).  The left-leaning Center for American Progress apparently agrees.  In a recent essay about the state of the employment market, the CAP concludes that: "job growth remains weak compared to previous recessions."  (By "previous recessions" the essay apparently means "recoveries from previous recessions."). 

Such disappointing employment growth should not be surprising, given the slow pace of economic growth during this recovery which, as noted above, began in June, 2009.  Here are the annual rates of GDP growth for the last five years, according to the World Bank, beginning with 2010, the first full year of recovery from this most recent recession:


2010:   2.5

2011:   1.6

2012:   2.3

2013:   2.2

2014:   2.4

Thus, annual GDP growth averaged 2.2 percent during this period.

Here, by contrast, are the annual rates of GDP growth during the Reagan recovery, beginning with 1983, the first full year of recovery from this recession:

1983:  4.6

1984:  7.3

1985:  4.2

1986:  3.5

1987:  3.5

1988:  4.2

Annual GDP growth averaged 4.6 percent during this period, more than twice that during the Obama recovery.  (Note that excluding the 1983 figure results in the same rate of average annual GDP growth, namely, 4.6 percent). 

Economists and others will no doubt spend decades debating why the Obama recovery is so weak.  However, there can be no doubt that, judged by the rate of economic expansion and employment growth, this recovery is a disappointment that still leaves millions of Americans without the economic opportunities they deserve.   

Reflections on 2014 Employment Growth: Neither Boom Nor Bust

The Obama Administration and its allies are pointing to employment growth in 2014, during which the economy added about 2.95 million jobs, as evidence in support of the President's economic policies.  The President even bragged in his State of the Union Address that: "the economy is growing and creating jobs at the fastest pace since 1999."  More recently, media outlets characterized January job growth of 257,000 as "strong,"  (see here and here, for instance), and February job growth as evincing a "labor market boom."  (see here).

It is certainly true that job growth in 2014 was an improvement over the very slow growth or negative growth from 2008 through 2012.  The economy lost 3 million jobs in 2008, and another 4 million in 2009.  It added just over 2 million jobs per year from 2010 to 2013.   (Go here for these data). However, closer analysis reveals that 2014 job growth is still nothing to brag about and that reports of a "boom" are premature to say the least.

The years 1999 through 2013 did not display particularly strong job growth.  Between 1999 and 2007 the economy was at or near full employment.  Indeed, the unemployment rate only exceeded 6.0 percent (peaking at 6.3 percent) during one year of this period (2003), and then for only seven of the twelve months of that year.  (Go here for these data)  As the economy nears full employment, job growth naturally slows.  After all, employers must compete for a diminishing pool of qualified workers willing to work at current wages.  Such competition puts upward pressure on wages, dampening hiring.  These wage increases can also impact inflation, inducing the Federal Reserve to tighten the money supply in an effort to increase interest rates and slow economic growth, further reducing the demand for labor and resulting job growth.

By contrast, the economy has remained far from full employment for several years now, leaving room for faster growth in employment than was sustainable between 1999 and 2007, for instance. Nonetheless, job growth has been sluggish from 2008 through 2013.  Thus, thus, job growth that exceeds  that in the years 1999-2013 is not necessarily something to write home about.

Any assessment of the relative strength of last year's employment growth must begin by identifying a period, like 2008-2014, during which the economy strayed far from full employment. The obvious candidate for such a comparison is the period 1983-1984, during which the economy was recovering from the deep recession of 1981-1982.  During the 1981-82 recession, which followed high inflation and record high interest rates, the unemployment rate peaked at nearly 11 percent in 1982.

According to this website, job growth during 1983 and 1984 was significantly more robust than in 2014.  In particular, the economy added 3.45 million jobs in 1983 and 3.88 million jobs in 1984. Thus, the average job growth for these two years was 3.67 million. almost 25 percent higher than the 2.95 million figure for 2014.

Moreover, this gap actually understates the relative strength of employment growth in the two periods in question.  After all, the labor force was significantly smaller in 1983 and 1984 than in 2014.  That is, the civilian labor force averaged 112,547,000 for 1983 and 1984 combined and  numbered 155,922,000 for 2014. (Go here for these data).  Thus, the annual rate of job growth for 1983-84 was about 3.26 percent, compared to 1.9 percent for 2014.  Replicating the 1983-84 rate of job growth would thus have required the economy to create 5.083 million jobs in 2014, or 72 percent more jobs than the economy actually created that year.  Compared to 1983-84 anyway, employment growth in 2014 was about 2 million jobs short.  While not a "bust," such growth was, by historical standards, not really a "boom" either.

Obama "Recovery" Still Fizzling

This morning the Labor Department reported that the economy added a mere 114,000 jobs in September.  (See here for the story)  That's less than half the number of jobs the economy added in September, 1984, during the Reagan Recovery, when employment increased by 240,000.  (Go to this website and insert the appropriate dates to obtain the September, 1984 figures.)    This poor showing is no surprise, given that real GDP is growing at a snail's pace: annual rates of 2.0 percent and 1.3 percent in the first and second quarters of 2012, respectively (see this Department of Labor Press Release for the GDP figures), compared to real economic growth of 6.8 percent in 1984.

Moreover, as previously explained on this blog with respect to prior months (see also here and here), the actual jobs gap between the Reagan and Obama recoveries for this most recent month is even larger than these data suggest.  After all, the 1984 labor force was significantly smaller than it is today, with the result that the addition of 240,000 new jobs reflected a larger rate of employment growth than would a similar increase today.  Thus, to replicate the September, 1984 rate of job grow, the economy should have created over 300,000 jobs in September, 2012.  (See here for an example of such a calculation in a prior month.)  Thus, the jobs gap between the Obama and Reagan recoveries, which stood at 1.7 million for the months of April through August, is still growing.

Only 80,000 Jobs in June/Reagan-Obama Jobs Gap Widens

A few minutes ago the Labor Department released another disappointing jobs report.   The economy added only 80,000 jobs in June.  This is the third month in a row that the economy has added fewer than 100,000 jobs.  Indeed, the latest figures show that the economy added 68,000 jobs in April and 77,000 jobs in May, for a total of 225,000 in the entire second quarter of 2012.     By contrast, in July, 1984, during the Reagan recovery, the economy added 379,000 jobs after adding  308,000 in May, 1984 and 363,000 in April, 1984, for a total of 1,050,000 in the second quater of that year.   (Go to this website and insert the appropriate month and year to locate this data).

Moreover, as previously explained on this blog, the gap between the 1984 numbers and the 2012 numbers actually understates the difference between the Reagan Recovery and the Obama Recovery when it comes to job creation. After all, in 1984, the American workforce was significantly smaller than it is now.  In particular, the civilian workforce in June, 1984 was 113,817,000, while the June, 2012 figure is 155,163,000. Thus, even if the economy had added 379,000 jobs in June, 2012 as it did in June 1984, such an increase would reflect a significantly smaller rate of employment growth than the June 1984 increase. A true "apples to apples" comparison of the 2012 and 1984 figures therefore requires one to adjust the 1984 figures upward, to determine how many jobs the economy would have to add today to achieve the same rate of job growth achieved during the Reagan recovery. We can obtain the relevant conversion factor by dividing the June, 2012 labor force by the June, 1984 labor force; the result is 1.3623.

If we apply this conversion factor to the June, 1984 employment increase, we obtain 516,312. Thus, the true jobs gap between the Reagan and Obama recoveries for June, 1984 is 436,312.    Moreover, applying the same methodology reveals that the jobs gap between the second quarter of 2012 and the second quarter of 1984 is 1,205,415 jobs for these quarters alone, a stunning gap that is just one example of the underperformance of the Obama recovery.

Vive La 49 ?

A recent article in Business Week highlights one inefficient byproduct of over-reaching French labor legislation.  The article reports that, in France, there are 2.4 times more companies with 49 employees than with 50 employees.  The article convincingly contends that there is a reason for this apparent statistical anomaly, namely, regulation.  Under French labor law, any company that employs 50 or more individuals is suddenly subject to certain onerous requirements.  Such companies must create three different "worker councils," inaugurate profit sharing, and submit proposed "restructuring" plans to the worker councils if the company plans to lay off employees for economic reasons.  (See this treatise for additional details of this regulation.)  (It is not clear whether employees of covered firms must also share losses with the a covered firm's owners.)  As Business Week reports, French entrepreneurs often seek to avoid such requirements by dividing what would otherwise be a single company of more than 50 employees into several companies with 49 or fewer employees, thereby avoiding altogether the onerous regulations explained above. 

It should go without saying that this artificial restructuring of economic activity to avoid regulation reduces the economic welfare of the French people, other things being equal.  For one thing, entrepreneurs must incur the real costs of organizing and incorporating more than one business entity.  These same entrepreneurs must also manage several nominally separate concerns, in some cases hiring additional and economically redundant managers to do so.  Such entrepreneurs must also forgo whatever economies of scale they might otherwise realize by expanding a single firm beyond 50 employees.  Finally, some entrepreneurs might forgo the benefits of vertical integration by dividing input suppliers and downstream customers into separate firms even if the combination of such entities would reduce the cost of economic activity.  Simply put, predictable efforts to avoid regulations applicable to firms with greater than 49 employees divert economic resources from productive to less productive uses thereby reducing economic welfare.

The sort of conscious regulatory avoidance just described does not exhaust the negative impact of the distinction between 49 and 50 person firms.  To the extent that the labor regulations just described increase the cost of economic activity, firms with 49 or fewer employees will, other things being equal, incur lower production costs and thus possess a competitive advantage vis a vis larger firms. 

Of course, the mere fact that firms will incur costs to avoid regulation does not necessarily counsel repeal of such regulations.  Such regulations might themselves increase welfare, by eliminating inefficient externalities or combating other sources of market failure such as monopoly.  Moreover, larger firms may pose a greater risk of the type of harm that the regulation seeks to combat and/or be better able to absorb the cost of such regulations.  In these circumstances, limiting such regulations to a subset of a nation's firms --- particularly its larger firms --- may constitute an optimal regulatory strategy.  If so, the costs of regulatory avoidance detailed above may be the unavoidable and incidental price of regulations that, on balance, create wealth.

Still, the labor regulations in question do not seem to combat any externalities or other market failure and thus themselves distort the allocation of resources and reduce welfare.  As a result, the costs of regulatory avoidance detailed above simply compound the inefficiencies resulting from the regulation itself and thus, along with many other anti-growth policies, help account for France's sluggish growth and high unemployment.  Indeed, some estimate that, by 2050, France's GDP, now 6th in the world and ahead of the United Kingdom's, will rank 11th,  behind that of Mexico and the United Kingdom.  Regulatory policies have consequences, and the consequences of the policies imposed by France are negative.