Full Employment - Hope vs Reality
Louis Woodhill, who authors a column for Forbes, wrote today about "Endless Recessions & Jobless Recoveries" in which he covered the Employment To Population Ratio that we have addressed many times in the past as the "real indicator" of the employment situation in the United States. I also recently addressed Tim Pawlenty's pipe dream of 5% economic growth recently in our weekly newsletter which Mr. Woodhill for some reason actually thinks is a reality in our current economic environment.
Let me state for the record that I am just about as conservative as it comes when it comes to finance and economics. However, in our current economic situation we need to stop throwing out ideas that are backed by hope, and wrapped in a prayer, and start discussing and facing up to the reality of our economic dilemma. Only then can we actually start fixing it rather than kicking it down the road.
Louis states that; "...It has now been eleven years since we had full employment, and the jobs situation has been getting steadily worse for the past 4.5 years. And, they don’t even have the numbers right. Judged against the labor force participation we would have at full employment (67.3%), the true jobless rate right now is 13.2%. Using Professor Blinder’s formula, ten years of 5% growth would bring unemployment down to 3.2%, which is not absurdly low."
In order to achieve Louis' goal of an employment to population ratio of 67.3% we will need more than just Tim Pawlenty's "unicorn" of 5% economic growth. We are talking about creating 400,000 jobs, every single month starting now, until April of 2020. This means no recessions in the next 10 years, consumers leveraging themselves back up to consume in order to create the incremental demand that businesses need to expand and hire and you need government to get out of the way of business creation and clear up the political and economic uncertainty that is keeping businesses locked down. None of this seems likely.
The median monthly job creation since 1948 is about 145,000 jobs per month. During the Reagan years of massive deficit spending where we had some of the highest job creation on record it only averaged 238,000 jobs per month from 1983-1990. So, to hope that we will somehow get the economic back into a super growth cycle and actually create jobs at a rate that is almost twice as high as any other period in history is really wishful thinking. This is particularly the case when you consider that the average household is trying to delver the balance sheet with stagnant wage growth which is crimping their ability to consume.
"The reality is that only very fast economic growth will bring unemployment down to a tolerable level in a reasonable length of time. To plan for anything less than 5% growth is to condemn millions of people to years of unemployment and despair. It is shameful that the Democrats, the so-called “party of the people”, have been the most vocal in disparaging Pawlenty’s 5% growth goal."
It isn't just Democrats that are "disparaging" Pawlenty's goal. It is just not based in reality. As we showed in our newsletter on this very topic we have not seen 5% or greater annualized GDP growth since before the 1980's which coincides with America leveraging up their balanced sheet from 150% to currently 350% of total credit market debt to GDP. This explosion in leverage due to easy monetary policy, lax lending standards and mortgage equity withdrawals allowed the economy to expand and grow but detracted from household savings and productive investment. We are now going to be faced with a long road ahead of adjusting these imbalances back to structurally manageable levels where savings, productive investment, production and consumption can return to normalized levels.
Louis then says "If the Republican Party is to be anything, it has to be the party of economic growth. Given that 5% real annual growth is about the minimum required to provide a path to prosperity for the average American, it is a goal that all Republicans should get behind."
The Republicans need to get behind a plan with REAL ideas to get Government out of the way of businesses so that they can plan for the future. Real pro-growth strategies that will allow businesses to invest in production, create jobs so that consumers can increase wages so that they can deliver their balance sheets, bring manufacturing back to America, investments into oil and gas drilling rather than obstacles, etc. Eventually, the consumer will be able to return more historical levels of consumption, savings and productive investment which ultimately begets more production and growth. It is what built America the first time and can build it again.
Eventually, America will come to realize that "this time is not different" and you cannot have an economy that organically grows with sufficient job creation. Leverage and credit can not supplant production in an economy indefinitely and certainly not to the degree that it has been taken over the last 30 years.
5% economic growth - yes, eventually we will get there. However, at the current rate that things are being done it could be very, very long time.