The Case of the Missing Jobs

by James Sherk & Salim Furth

Sherlock Holmes once famously remarked that “once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” The Washington Post’s WonkBlog appears to have read this as “if you eliminate a few possible reasons for weak job growth, then it must be the sequester’s fault.”

In a post on the WonkBlog, Neil Irwin called last week’s jobs report “blech.” No argument there — jobs have grown slowly during the recovery, and hiring has slowed in recent months. But Irwin curiously blames the sequester:

The sequestration policy of automatic spending cuts that went into effect in March really are [sic] having an effect . . . 

Perhaps the best evidence for federal spending cuts as the culprit behind weak growth is this: It’s the only culprit left standing when you consider the other possibilities. Financial markets have been on a tear, and business and consumer confidence has been strong this year (at least until the October shutdown). Consumers have made major progress reducing their debt burdens. The housing market has stabilized, and is no longer a drag on the economy. One possible alternate explanation for the sluggishness is a rise in interest rates that has happened since May, when the Fed started signaling that tapering could be near, but generally it takes more than a few months for the impact of higher interest rates to translate into slower job creation.

In other words, there’s every reason to think this should have been a good year for the American economy. Yet here we are back in the doldrums, experiencing the same ambling pace of recovery that has been all too common since the technical end of the Great Recession in the summer of 2009. Americans can probably look to Washington to assign blame — and that’s before the tumultuous last few weeks exact whatever toll they will exact on growth.

His deduction ignores a few possibilities. The sequester reduced spending by $85 billion this year. But Congress also increased payroll taxes, income taxes, and taxes on saving and investment by $150 billion. Simple powers of observation, as exercised by Harvard economist Alberto Alesina and IMF researchers, reveal that tax increases have a much more harmful effect on the economy than spending reductions.

If fiscal policy hurt the economy in 2013, the large tax hike — not the more moderate spending discipline — probably bears the blame.

Irwin also fails to observe how Obamacare has raised employers’ health-care costs. In the long term, employers will compensate by reducing wage growth. In the short term, hiring workers just became more expensive. The most recent Federal Reserve Beige Book reports that many employers are curtailing hiring for just this reason.

To quote the Cleveland Federal Reserve Bank: “Many of our contacts are concerned about the implementation of the Affordable Care Act and the effect it will have on their total labor cost.” By contrast, the Beige Book mentions sequester concerns only among federal contractors, not the wider private sector.

Washington may well bear the blame for the poor recovery, but tax increases and Obamacare make far more likely culprits than the sequester.

— James Sherk is a senior policy analyst in labor economics at The Heritage Foundation. Salim Furth is a senior policy analyst in macroeconomics at The Heritage Foundation.

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