The Jobs Stall
For 18 months we’ve been on track to never return to full employment—why won’t the Federal Reserve do something?
Job applicants line up to meet potential employers at a job fair in New York City, as unemployment remains above 8 percent.
Photo by John Moore/Getty Images.
Headlines out of the July employment situation report released this morning have been a bit unduly influenced by rounding errors. The unemployment rate ticked up an almost imperceptible amount—from 8.22 percent to 8.25 percent—in a survey with a fairly high margin of error, but it was enough to stop rounding down to 8.2 percent and start rounding up to 8.3 percent. The underlying reality from the more precise establishment survey was sunnier—a net addition of 163,000 is a decent number. Except that in broader context, there’s nothing decent about it. Across the first half of 2012, the economy’s added 151,000 jobs per month. Across 2011, the number was 153,000 per month. Those are the kind of numbers a healthy economy would be adding. But the American economy didn’t start this period in a healthy place, and needs to be adding jobs at double or triple that rate to get us back to full employment.
This bleak reality will, naturally, become further grist for the presidential campaign—spun as favoring Mitt Romney’s argument that Obama’s leadership has failed, and Obama’s argument that recovery is being stymied by his opponents in congress. But what’s truly striking about this data is that, though bad, it was hardly unexpected. Just on Wednesday the Federal Reserve’s Open Market Committee met and proclaimed that “economic activity decelerated somewhat” in recent months and that it anticipated “that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.” The guardians of macroeconomic stability, in other words, knew nothing particularly good was coming. And the truly shocking thing isn’t the news but the proposed response—to do nothing different.
Standing pat might sound prudent, and doubtless it feels prudent to central bankers. But it’s the equivalent of holding the steering wheel steady while driving on a road that bends to the left. Any reassurance that comes from cautious, watchful waiting is pure illusion, from fixing your eyes on the wheel rather than the road. The actual safe strategy is to steer at all times for the center of the road.
Paralysis might be understandable if the issue were actual disagreement about the state of the world. Grave errors in analytic judgment about whether economies are weakening are important, and nobody can deny that even state-of-the-art economic forecasting is pretty unreliable. Yet this week there seems to be no dispute. The Fed, as we’ve seen, believed growth had slowed and full employment was a long ways off. In the United Kingdom, the most recent read of economic data showed that the country has entered a second recession. Total British output is now lower than it was when David Cameron took office and much lower than it was before the initial crash. On a per person basis, the British economy is back to its 2003 level despite substantial technological advances in the interim.
As far as the eurozone goes, perhaps the less said the better.
Here in the United States, Congress is naturally prepared to make things even worse. At the end of 2012 the Bush tax cuts are scheduled to expire fully. This is somewhat perverse in light of the combination of high unemployment and ultra-low interest rates that militates in favor of bigger rather than smaller budget deficits. But what makes it especially perverse is that Democrats and Republicans both favor extending the majority of the tax cuts. The disagreement is only over the extension of reductions on marginal rates beyond the first $250,000 in taxable income. Democrats want to bring those back to their pre-Bush level. Republicans don’t. And in order to try to preserve their leverage, Republicans are refusing to vote for the tax-cut extension that both parties favor unless Democrats will throw the high-rate cuts in as well.
Some clever political moves by Harry Reid got the Democratic tax plan through the Senate with “only” 51 votes. That set up a vote in the House of Representatives, where the GOP had to affirmatively reject a broad tax cut. In terms of political strategy, that’s a huge win for the Democratic campaign in November. In economic terms, it’s setting us up for a further hit.
Meanwhile, the “budget sequester” spending cuts that were agreed to in order to resolve the debt-ceiling standoff also stand ready to take a healthy bite out of the economy. While it was once thought Congress might come to its senses and find some way to kick this can down the road, it looks increasingly like the cuts will happen. The only alternatives with substantial momentum behind them on the Hill are Republican plans to roll back the military cuts and pay for them with larger domestic cutbacks—a wash in economic terms.
Still, though fiscal policy matters, it ought to be something of a sideshow. During the long years of the so-called “great moderation,” central bankers were happy to take credit for the brevity of recessions. They claimed that precisely because legislative politics tends toward the tempestuous, macroeconomic stabilization was too important to be left to the politicians. Alan Greenspan was the “maestro” of the American economy. But now that the going’s gotten rough, the word from the Fed and the European Central Bank is that monetary policy is “not a panacea.” And, indeed, it isn’t. Just as there’s more to driving than turning the wheel left when the road bends. But if you don’t turn the wheel when the road bends, you’re going to crash the car no matter what else happens. If economic conditions were good and stable then the Fed would—of course—be holding policy steady. To do anything else would be absurd. But if steady as she goes is the right response to good and stable economic conditions, how can it also be the right response to conditions that are bad and show no sign of improving?
The answer is it’s not. But don’t expect thing to improve until the people with the power to change direction decide they want to do something.