President Obama promises to deliver us still another plan to reduce unemployment. He is right about one thing: Jobs are not being created in modern-day America in any serious quantity. Consider these facts: In the 1980s, for every 100 new potential workers (defined as those aged 16 or more), 91 jobs were created. The same statistic for the 2000s (2000–10 was nine (see chart). In 2010, there were fewer Americans working than in 2004, the first six-year drop in employment since the Great Depression.
Why? On the demand side, employers are frightened to hire because of concerns that labor costs will rise above the value of workers’ output, lowering profits. Hence employers are hoarding cash, reputedly to the tune of between $1 trillion and $2 trillion. On the supply side, more and more workers find leisure preferable to work, so the employment-to-population ratio, which generally rose throughout the post-war era (because of the rising involvement of women), has fallen sharply in recent years. Were that ratio today what it was in, say, 2000, we would have 15 million more workers, and an unemployment rate closer to 5 than to 9 percent.
Some would argue that these statistics are grossly misleading, and point to business cycles. 2010 had a high unemployment rate, for example, while 2000 had a low one. But three facts largely negate the relevance of business cycles to the current employment problem.
First, the National Bureau of Economic Research tells us that the 2007–09 recession ended two years ago, whereas in the year after the end of the last really big recession, in 1984, the United States created jobs galore — at a rate almost double that of growth in the population of potential workers.
Second, the prolonged nature of the current economic malaise is the consequence precisely of bad public policy (of which more below), and not of some externally generated force.
Third, in the 2000–07 era, even before the recession took hold, job creation was markedly lower (47 jobs for every increase of 100 in the number of potential workers) than in the Reagan–Clinton era, or, for that matter, than in any of the five decades of the late 20th century.
Why has this happened? The simplest answer is that government is crowding out private enterprise. Federal spending accounted for around 18 percent of national output during most of the Reagan–Clinton era. The 1980s are known for tax cuts that created incentives for capital investment and job formation. In the 1990s, federal spending fell as a percentage of GDP for eight consecutive years, the longest such decline in U.S. history. In stark contrast, the 21st century thus far has been marked by a relentless expansion of the federal government’s size (it is approaching 25 percent of GDP), first under George W. Bush but far more aggressively under Barack Obama.
Most of that increased spending has been for transfer payments, which involve taking funds from taxpayers and lenders and giving them to persons in a manner that often discourages work. The purest example of this is the bipartisan move to extend unemployment benefits to 99 weeks. This has reduced the incentive for the unemployed to seek jobs. In the economists’ lingo, it has raised “reservation wages,” or the minimum amount people will accept to return to work. Our own estimate is that this has added enormously (maybe two to three percentage points) to the unemployment rate, as Harvard’s Robert Barro has also argued.
In the 1982–83 downturn, the unemployment rate peaked at 10.7 percent, which is higher than the top rate (10.1 percent) so far in current downturn. Yet the average duration of unemployment peaked at 21.3 weeks, compared with 40.3 weeks now. This was in large part because unemployment benefits were not extended for such a long period. If you pay persons to be jobless, they remain jobless. Additionally, tax reductions in 1982–83 raised the take-home pay of workers without increasing costs to employers, dampening the push for money wage increases and making labor more attractive. Contrast that with today’s climate, in which employers fear tax hikes and costly new regulatory mandates.
News accounts suggest that the president’s new jobs plan will call for further extensions of unemployment benefits. An equally destructive second component will surely be an increase in “infrastructure” spending schemes, a remedy that has been consistently ineffectual since it was first tried in the 1930s (our best estimates show that, five years into the New Deal, the unemployment rate was still over 19 percent), and that has fared no better with the recent stimulus bill.
Our current malaise stems from a series of policy mistakes that were simply not made during the last comparable recession, in 1982–83. In this downturn, the stimulus package, the bailouts, Obamacare, and the Dodd-Frank financial “reform” bills have probably destroyed more jobs than they have created, by sharply reducing investor confidence. None of these occurred in 1982–83. Then, a sound-money man, Paul Volcker, ran the Federal Reserve, and monetary restraint was the order of the day. Today, alas, things are different. In Volcker’s place is Ben Bernanke, a chairman who thinks that interest-rate manipulation will achieve “stimulus.” From 2007 to 2009, the minimum wage rose an extraordinary 24 percent, while from 1981 to 1983 it went unchanged. In 1983 the overall unemployment rate of 9.6 percent was identical to that of 2010. However, the teenage-unemployment rate was considerably lower (21.3 vs. 25.9 percent) in the earlier era, when federal wage legislation priced fewer relatively young, low-productivity workers out of the market. The list of recent policy sins is a long one.
The solution? Let markets work. Promote sound money, government fiscal responsibility, and the rule of law, and markets will do the rest. We hear things are pleasant on Martha’s Vineyard in September. The nation would be well served if President Obama returned there to relax with his family — and stayed a while.
— Richard Vedder and Lowell Gallaway are professors of economics at Ohio University, and Mr. Vedder is an adjunct scholar at the American Enterprise Institute. They are the authors of Out of Work: Unemployment and Government in Twentieth-Century America.