Election 2012

Democratic Myth No. 5: Economy is growing stronger, the recovery is speeding up

Democratic Myth No. 5: Economy is growing stronger, the recovery is speeding up

While most myths embrace at least a modicum of reality, this one avoids that temptation.  President Obama and his surrogates have repeated the “things are getting better” myth on a number of occasions and in a number of ways.  In February of this year the President stated that “the economy is growing stronger. The recovery is speeding up.”  A month later he again said that “the economy is getting stronger” and “better days are ahead.”

Friday’s unemployment report provided the kind of mixed results that the Obama administration and the candidate’s surrogates doubtless will spin into a broad recovery scenario. The report said job growth was up 171,000, which was higher than expected, and the 7.9 percent unemployment rate, as several news outlets reported, increased a tick from the previous month because of the way the data was collected and was — counter-intuitively! — a sign the job market is getting better. Things are looking up.

But, finding a bit of silver lining — and I’m all for optimism — is a lot different than understanding the economy we are living in, have been living in, and will be living in if President Obama is re-elected.

Americans understand they are living with President Obama’s declining economy every day and, at the very least, sense that the country is headed in the wrong direction. Our economic growth rate is at anemic levels and discouraged workers are leaving the labor force in droves.  So, why tell us that things are getting better?  Is it simply the old “who are you going to believe, me or your eyes” approach to persuasion?

The answer comes from no less a Democratic strategist than James Carville.  Mr. Carville recently explained that the way for a presidential candidate to deal with a “bad economy . . . the skill, or the way to thread the needle [is] saying things are getting better when people don’t feel like they are getting better.”  And so, a myth is born.

To debunk the myth, let’s take a look at economic growth and job creation, two widely accepted measures of whether an economy actually is “growing stronger.”

Anemic GDP growth

Gross Domestic Product (GDP), is “one of the most comprehensive and closely watched economic statistics,” and a widely accepted statistic for measuring economic growth.  GDP measures the value of final goods and services produced in the United States over a given period of time.  “It is used by the White House and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street as an indicator of economic activity, and by the business community to prepare forecasts of economic performance that provide the basis for production, investment, and employment planning.”  Generally speaking, if there is strong GDP growth, businesses are expanding and creating jobs and personal incomes are increasing.  To use the President’s phrase, “the economy is growing stronger.”  If GDP growth is weak, the economy is getting weaker and employment often declines.

The Bureau of Economic Analysis (BEA) (the research arm of the Department of Commerce) updates GDP every month and releases the GDP Growth Report, which describes how fast the economy grew in the prior quarter.  From 1947 until 2012, the GDP growth rate in the U.S. averaged 3.2 percent.  Economists generally consider the ideal growth rate to be between 2 percent and 3 percent on average, because that rate of growth is slow enough to avoid inflation and fast enough to create jobs.  However, the ideal rate can change due to economic circumstances.  For example, a higher growth rate is desirable coming out of a recession as the economy needs to create more jobs and inflation is less of a danger.

After Congress passed President’s Obama’s $800 billion “Stimulus” bill, the White House projected that the GDP growth rate would “accelerate in 2011 to 3.8 percent and . . . exceed 4 percent per year in 2012-2014.”

If, as President Obama contends, the economy truly is “growing stronger” and the recovery truly is “speeding up,” we should see the GDP growth rate over the last three years increasing along the lines the White House projected in 2010.  Unfortunately, the trend has been just the opposite.  In 2010, the GDP growth rate was 2.4 percent.  In 2011, it declined to 1.8 percent. In the first quarter of 2012 the GDP growth rate was 2 percent, in the second quarter it was an anemic 1.3 percent and in the third quarter it was 2 percent.

The increase in third quarter was due, in part, to a 9.6 percent increase in “federal government consumption expenditures and gross investment.”  “Overall government outlays rose 3.7 percent and accounted for about 0.7 percentage points of the 2 percent overall GDP increase.”  Growth in government is not what we need to see for a real recovery.  Meaningful job creation will only occur when there is robust private sector growth.  Nonetheless, even taking the 2 percent GDP growth rate for third quarter at face value, it is well below what we should be seeing.  Year to date through the first three quarters, the GDP growth rate has averaged only 1.8 percent.  Even if we annualize the first three quarters of 2012, the result is only a 1.9 percent growth rate. These are unacceptable levels of growth by any rational standard, particularly coming out of a recession.

However, the economy’s trend is even more disturbing.  Last year’s GDP growth rate was lower than the year before and this year’s GDP growth rate will be close to last year’s anemic rate.  Economists, and most other people, would call this a “decline leveling off at an unacceptably low number.”  To use the inimitable Mr. Carville’s words, only a politician “threading the needle” could refer to this economy as “growing stronger” or to the purported “recovery” as “speeding up.”  Our economic growth is slowing or, at best, stalling at a very low level.  That is an extremely dangerous trend particularly coming out of a recession where economic growth should be and needs to be improving dynamically.  Despite what the President may contend, the “absence of a downward spiral” is not synonymous with “heading in the right direction.”  We should be and we need to be at over 4 percent GDP growth as the President projected.  We’re not.

Lackluster job growth

Anything more than a cursory look at the unemployment numbers demonstrates that our anemic GDP growth rate and the associated trends are very reflective of what Americans are experiencing in the jobs market.

The official unemployment rate in January of 2009, the month President Obama took office, was 7.8 percent.  This was also the lowest official unemployment rate during the Obama presidency.  In October of this year, the BLS reported the unemployment rate for September 2012 as having returned to 7.8 percent.  After 43 consecutive months of unemployment over 8 percent, “the longest stretch of high unemployment in this country since the Great Depression,” President Obama saw another opportunity to “thread the needle” stating: “Today, I believe that as a nation, we are moving forward again. We’re moving forward.”

But, are we moving forward?  A look at the numbers reveals quite clearly that we are not.

First, the unemployment rate for October was 7.9 percent which s higher than the rate when President Obama took office and certainly higher than the 5.4 percent rate the White House projected following the “Stimulus”.  However, perhaps more importantly, the unemployment rate is only as low as it is because of how that rate is calculated.  In reality, the economy is in much worse shape than even a disturbingly high a 7.9 percent unemployment rate would indicate.

The unemployment rate is a percentage the Bureau of Labor Statistics (BLS) calculates by taking the number of unemployed people in the work force as a percentage of the total number of people in the work force.  When calculating the “official unemployment rate,” BLS removes from the work force people who do not meet certain criteria. An example of this are those classified as “marginally attached” to the work force.  Marginally attached workers are people “not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.”  http://www.bls.gov/bls/glossary.htm.  Such individuals are commonly called “discouraged workers.”

If BLS removes unemployed people (including discouraged workers) from its work force calculation at a greater rate than the economy is adding jobs, the unemployment rate will decline because the remaining unemployed will be a smaller percentage of the now smaller work force.  This is true even if the number of people with jobs is stable or declining.  To take an extreme case, if the economy lost 10 percent of its total jobs in a given month, but 15 percent of unemployed workers became “discouraged” during the same period and were no longer looking for work, the unemployment rate would go down, even though the economy was actually shrinking.

As such, while a decline in the official unemployment rate is relevant when looking at the economy, the real question is whether the decline is due to the economy adding a sufficient number of jobs to outpace population growth or whether it is simply due to unemployed people leaving the work force.  In the latter case, the unemployment rate can decline even without job creation or, as has been the case during President Obama’s term in office, it can decline with feeble job creation.   Rather than positive news, a declining unemployment rate due to discouraged workers leaving the work force in droves is a symptom of an economy in serious trouble.

Let’s take a look at the unemployment rate under President Obama.  The numbers I use below are taken from the BLS website.

What the BLS calls the “civilian noninstitutional population” consists of “persons 16 years of age and older . . . who are not inmates of institutions . . . and who are not on active duty in the Armed Forces.”  Essentially, this is the segment of the population that would potentially be looking for jobs and I will refer to this segment as the “population.”  Over the 46 months President Obama has been in office, the “population” has increased from 234,739,000 to 243,983,000.  This is a total increase of 9,244,000 people or an average of 200,957 people per month.

As these are, by definition, people who are over 16 years old and neither institutionalized nor in the military, one could reasonably expect a significant portion of them to join the work force.   However, during this same period of time, the work force has increased a total of only 1,405,000 people or an average of only 30,543 people per month.

So, where are the other over 8 million people?  Well, there were 80,502,000 people “not in the labor force” in January of 2009 versus 88,341,000 in October of 2012.  This is an increase of 7,839,000 people or an average of 170,413 people per month who left the labor force (85 percent of the population increase).  In other words, people gave up their search for employment at nearly 6 times (170,413 people per month) the rate that the work force increased (30,543 people per month).  This is a sign of a seriously troubled economy.

How about the number of people employed during this period of time?  There were 142,187,000 people employed in January of 2009 and 143,384,000 in October of 2012, an increase of 1,197,000 jobs or an average of merely 26,022 jobs per month.  Since the population increased at a rate of 200,957 people per month, or nearly 8 times the number of jobs the economy created each month, how could the unemployment rate be 7.8 percent in January of 2009 and 7.9 percent in October of 2012?

The answer, quite simply, is that 170,413 people per month (again, 85 percent of the population increase) dropped out of the work force lowering the number of people in the work force so dramatically that anemic job creation of 26,022 jobs per month actually resulted in an unemployment rate of 7.9 percent.

The key factor in determining whether an improving unemployment rate is due to an improving economy or to people simply giving up in their search for a job is what BLS calls the “labor participation rate.”  This is simply the percentage of the population that is in the work force.  The labor participation rate has continually declined throughout President Obama’s term in office.  When President Obama took office, the labor participation rate was 65.7 percent.  It stayed in the 65 percent range throughout most of 2009.  It entered the 64 percent range beginning in December of 2009 and continued to decline through December of 2010 and 2011 hitting the 63 percent range in January of 2012.  It has been in the 63% range all year. In October it was at 63.8 percent the same rate as in March, May and June of this year, indicating an economy in a virtual standstill, at best, and certainly not “growing stronger.”  Prior to 2012, the labor participation was last as low as 63.8 percent in March of 1982, over 30 years ago.

Despite claims that this decline in the labor participation rate is due to baby boomers retiring and distorting the numbers, the reality is that labor participation rates have actually increased for individuals of retirement age as “more people as a ratio are working in these so called retirement years than before the recession.”  Rather, labor participation rates “have dropped dramatically for people in their prime working years and thus there really is a large segment of the population that probably needs a job that [is] not being counted as unemployed.”

Any college graduate looking for a job could attest to the accuracy of this analysis.   Clearly, the decline in the labor participation rate is reflective of people who could work and often would prefer to work dropping out of the work force in very meaningful numbers throughout President Obama’s time in office.  This fact bears repeating.  Virtually the entire decline in the unemployment rate since 2009 is attributable to people dropping out of the labor force.  If the labor participation rate today (63.8 percent) were the same as when President Obama took office (65.7 percent), the official unemployment rate would be 10.6 percent.  The BLS calculates a rate that includes people “marginally attached to the labor force.”  It’s called the U-6 rate (the “official rate” is called the U-3 rate).  As noted, the U3 unemployment rate through October 2012 is 7.9 percent.  The U6 unemployment rate, including people marginally attached to the labor force, is 14.6 percent.

This continuing “dropout” rate is neither a positive comment on the economy nor justification for a presidential victory lap.  To the contrary, our economy is in serious trouble.

Government dependence

Obviously, unemployed individuals need to support themselves and their families if they are unable to find jobs.  The result is increasing dependence on government programs such as food stamps and Social Security disability.

The number of people receiving foods stamps during President Obama’s term in office has increased an astonishing 46 percent from 31,983,716 people in January of 2009 to 46,681,833 people in July of 2012.  The current U.S. population is approximately 315 million people.  This means 15 percent of Americans are now on food stamps.

The number of people receiving Social Security disability benefits has also meaningfully increased from 7,442,377 in January 2009 to 8,753,935 as of July 2012.  That’s an increase of 1,311,558 people or about 18 percent.  To put this number in context, it actually exceeds by 9 percent the increase in the total number of employed people since President Obama took office (1,197,000).  Studies have shown “a correlation between when people seek Social Security disability payments and when their unemployment benefits are exhausted.”

Combined, 55,435,768 Americans were either receiving food stamps or social security disability benefits as of July 2012.  That’s nearly 18 percent or nearly one in five Americans.  Obviously, these programs are an important safety net for Americans who need help.  My point is that decreasing the number of people in the American work force and increasing the number of people dependent on government benefits is an indication of a seriously troubled economy.  It also indicates increasing desperation and resignation among those who would otherwise be looking for work.  These numbers demonstrate that, as most voters intuitively understand, we are headed in absolutely the wrong direction.  We are in need of dramatic change in the approach we are taking to solving our economic problems.

Time for a change

As a nation, our economy is in serious trouble.  We simply cannot afford to stay on our current path through a second Obama administration.  Doing so would severely damage our ability to turn these numbers around, get people back to work and reduce government dependence.

We are at a turning point.  The choice we make will shape the future of this nation.   But, more importantly, we will pass on the consequences of our choice to future generations.  Each of us must ask: Are we prepared to continue on the path of the last four years, with feeble economic growth compelling people to abandon their search for a job as they become increasingly dependent on government?  Or, should we seek greater opportunity independent of government? This choice is ours to make.

I will end this series on “Democratic Myths” by quoting Mitt Romney. Speaking in Ames, Iowa on Oct. 26.  Gov. Romney stated:  “We will grow jobs by making America the best possible place for job creators, for entrepreneurs, for small business, for innovators, for manufacturers. This we will do by updating and reshaping regulations to encourage growth, by lowering tax rates while lowering deductions and closing loopholes, and by making it clear from day one that unlike the current administration, we actually like business and the jobs business creates … This election is a choice between the status quo — going forward with the same policies of the last four years — or instead, choosing real change, change that offers promise, promise that the future will be better than the past.”

Andrew Puzder is CEO of CKE Restaurants, Inc., which employs about 21,000 people at Carl’s Jr. and Hardee’s restaurants. He is co-author of “Job Creation: How it Really Works and Why the Government doesn’t Understand it.” He is an Economic Adviser to presidential candidate Mitt Romney. To read all five of Mr. Puzder’s Democratic Myths, go here.

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