Friday, October 26, 2012

Stagnating

In his highly effective DNC speech Bill Clinton gave the impression that employment had increased during the Obama Presidency:

“when President Barack Obama took office, the economy was in free fall....Are we doing better than that today? The answer is yes. Now, look. Here’s the challenge he faces and the challenge all of you who support him face. I get it. I know it. I’ve been there. A lot of Americans are still angry and frustrated about this economy. If you look at the numbers, you know employment is growing...here’s another job score. President Obama: plus 4 1/2 million. Congressional Republicans: zero.”

Since it is impossible to measure counterfactuals, we will never know if employment would have been better or worse with other policies than those pursued by Obama. Because science cannot give us the answer it is reasonable to give the actual record of each President some weight when evaluating them. This is precisely the standard followed by Clinton in his speech, where he for instance takes credit for the 1990s boom.

The “Employment-to-Population ratio” or “Employment rate” measures the share of the population that works and is robust to discouraged workers exiting the labor force. The Employment-Rate for the working age population (20-64) is the best measure of labor market health.

Contrary to the impression given by Clinton there has been no recovery in employment during the Obama Presidency. The share of American who work is lower now (70.9%) than when President Obama entered office (71.8%).


Everyone knows that the job-market was declining when Obama entered office and that the decline stopped during his Presidency. Employment not dropping forever is however a pitifully low bar to set for oneself. The historical experience is that recessions always end and are always followed by recoveries.

The most remarkable story of the Obama-economy is the failure to sustain a vital recovery. The employment situation is actually worse now than when Obama took over. Even if we instead measure from the end of the recession in mid-2009, only one fifth of employment lost during the recession has been recovered in three years. This is despite President Obama’s Keynesian experiment of pumping $4 trillion in deficit financed spending into the economy. 

Another way to measure the recovery than employment is the output-gap. This is the difference between actual GDP and Potential GDP. Potential GDP is a constructed measure; it is estimated by the CBO as what output would be if resource utilization in the economy was at normal levels. 


Based on this metric the economy is not doing worse now than when Obama entered office; it’s doing barely noticeably better. The output-gap was 7% of Potential GDP when Obama entered office and was 6% in the second quarter of 2012. Once again only one fifth of the increase in the output-gap during the recession has been recovered in the three years since the recession in mid-2009. 

It is also interesting to compare employment situation for ethnic groups. 


Non-Hispanic Whites weather the crisis best, with their employment rates declining the least. In the third quarter of 2012 White employment was 5 percent (note: not percentage-points) below where it was when the recession started.

Hispanics employment decline was steeper and started earlier than Non-Hispanic White employment, presumably because of concentration in the sun-belt and in the construction industry. At the same time Hispanic employment recovered faster than other groups during the Obama presidency. Hispanics are the only group that has higher employment now than when the President entered office. 

African-Americans fared worst during the Bush crisis and the Obama non-recovery. Their employment was already the lowest prior to the crisis, it declined the most during the downturn and recovered the least since. Currently the Black employment rate is 9 percent below where it was when the recession started and 2.5 percent below where it was when President Obama entered office. 

African-American income also fell faster than white income during the crisis. It is a bit ironic that the decline in African-American income and employment occurred during the Obama Presidency.  In fairness the tendency of the employment of African-Americans to be more sensitive to the business cycle is not unique to Obama and has long been documented by economists.

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