Both incumbent President Barack Obama and Republican challenger Mitt Romney are making the case to American voters that each has better policy answers for future job growth. Obama touts total job gains of 4+ million jobs since the recession ended. Romney points out that this is less than half of the 9 million jobs lost since the end of 2007.
An economy is a dynamic resolution of the tension between supply and demand among all the people, companies and governments that participate in that marketplace. Obama’s approach focuses on the demand side of the economy and believes in government borrowing and spending to temporarily take up the slack in private sector demand. The stimulus of government spending is supposed to both support and kickstart demand in the private sector, particularly consumer demand. The fault of focusing on the demand side of an economy is that “demand-siders” presume that the supply side of the economy will naturally increase production to meet the sustained or increased demand. In 2009, the Obama administration, together with a Democratic House and Senate passed a stimulus bill that included a lot of money for sorely needed infrastructure projects. Democrats, most of them demand-siders, simply assumed that there would be a number of “shovel-ready” projects on the drawing board, projects that would employ construction workers laid off during the severe housing decline. Since demand-siders do not pay as much attention to the process of producing or constructing something, they were dismayed that there were so few such projects ready to go. Decades of labor, environmental impact and traffic impact regulations had dramatically increased the planning time required for many highway improvement projects. At a meeting with his council on stimulus planning, Obama commented wryly, “Shovel-ready was not as shovel-ready as we expected.”
Romney’s approach focuses on the supply side of the economic dynamic. “Supply-siders” believe that the government’s role in the economy should be limited; that government should remove many regulatory barriers and hinderances to the producers of economic goods and services. The fault of this approach is that it presumes that consumer and inter-business demand will naturally increase as producers are able to make more goods and products available at a cost that has been lowered by the removal of hurdles to production. The producers will hire more workers, will buy goods and services from other businesses who will hire more workers; demand will inevitably increase which will support and stimulate more production. Many adherents of the supply-sider hypothesis believe that defense of the country is a government’s primary proper role. They advocate a large amount of military spending but regard taxation as a barrier to production. These two competing and antagonistic ideas – more military spending, less tax revenue per dollar of economic activity – has resulted in large budget deficits which contradict the professed fiscal frugalness of many in this ideological camp. Libertarians advocate a more consistent supply-side philosophy, arguing for lower military spending in addition to reduced government spending on social programs.
Demand-siders argue that workers are both producers and consumers. Supply siders contend that workers are consumers but not producers; workers are a cost of production. Demand-siders focus on domestic civilian consumption. Although supply-siders do not focus on consumption, they do emphasize military consumption.
Who is right? Both of them and neither of them. The political discourse and election structure aims to separate people into ideological and emotional teams; over the past decade many politicians who were less polarized in this debate have lost their seats. A hundred years ago, this country began a transition away from party leaders picking candidates for national office to a primary system whereby voters would choose candidates. In the two decades after World War 2, our political system made a complete transformation to a primary system, which has produced two increasingly polarized political teams. A small group of voters in each political camp now elects the candidates for national office; in the last presidential election, less than a 1/4 of registered voters voted in the primaries. We have traded a system where party bosses in a backroom picked candidates to one in which a small contingent of passionate people pick candidates. We need a new system.
In his “Believe in America” plan Romney asserts that his policies will foster stronger job growth. (Long version and Short version). They include reducing the corporate income tax rate, more free trade agreements, more oil and gas leases, reducing federal retraining programs and a 5 percent reduction in non-defense discretionary spending, a relatively small reduction in federal spending of $20 billion, or 1/2 of 1% of total federal spending. (Discretionary spending is government spending which excludes those social programs like Social Security and Medicare and Medicaid whose spending is on “auto pilot”). Romney’s proposals are consistent with a supply-sider philosophy.
Beginning with the conventions in these next few weeks, both political campaigns are about to go into full court press during the remaining days before the election in November. Each candidate will argue that their approach will foster job growth. What neither candidate will tell us are some of the complexities that continue to trouble economists who study the labor market. Why has job growth been rather anemic during the recoveries of the past thirty years? Below is a chart of the year-over-year (yoy) percent gain in employment.
Notice two changes in the pattern: the frequency of job losses has decreased but so have the employment gains during recoveries. Economists at the Federal Reserve have analyzed the factors for this long term trend and concluded: “The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. ” (Source) The authors of the study analyze and isolate several factors to account for the change, including changes in how the numbers are reported, the longer duration of unemployment benefits, and the reduced manufacturing production in this country which would respond quickly during recoveries and recall laid off workers. Weak labor demand is the chief culprit of anemic job growth and the lengthening duration of unemployment. Why? In the past thirty years, underdeveloped countries in Asia, India and South America are now offering a ready supply of un-educated or moderately educated workers.
The increase in the global labor supply is a particularly challenging problem because it is accompanied by an increase in productivity; i.e. less workers are needed to produce a unit of something. Obama’s answer to this problem is more government support for educating young people and retraining those in the workforce whose skills are not suited to the changing demands of producers. Obama has essentially given up on jobs for low and moderately educated U.S. workers other than government spending on infrastructure projects. He hopes that American workers can command more of the global market for highly skilled workers.
Romney wants to reduce federal retraining programs for workers and turn that task over to states. He hopes that, somehow, someway, businesses with lower production costs will hire more workers. More oil and gas drilling will employ more moderately educated workers but even Romney knows that these job gains are modest relative to the entire labor market. More defense spending will employ workers in defense industries but many of those jobs require higher skills; lower skilled workers will benefit as a consequence, as part of an economy that supports defense contractors and military bases. Increasing the number of soldiers reduces the number of available workers and reduces unemployment.
Neither candidate proposes to address an intractable problem: too many workers around the globe. Below is a chart of the y-o-y change in the number of people employed. Due to a glut of workers, the structure of the labor workforce in this country is inherently weak. The chart below shows the drastic drop in employment.
A winning economy, like a top-rated tennis player, blends strategies. Politicians and players that strictly adhere to a school of thought or a school of play lose out to those are able to see and employ the benefits of differing strategies.