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Paul Krugman, wrong about structural unemployment

By James Pethokoukis

May 11, 2012, 1:54 pm

The NYTimes “economics columnist”:

What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills. A widely cited recent article by Raghuram Rajan of the University of Chicago asserts that the problem is the need to move workers out of the “bloated” housing, finance and government sectors.

Actually, government employment per capita has been more or less flat for decades, but never mind — the main point is that contrary to what such stories suggest, job losses since the crisis began haven’t mainly been in industries that arguably got too big in the bubble years. Instead, the economy has bled jobs across the board, in just about every sector and every occupation, just as it did in the 1930s. Also, if the problem was that many workers have the wrong skills or are in the wrong place, you’d expect workers with the right skills in the right place to be getting big wage increases; in reality, there are very few winners in the work force.

All of this strongly suggests that we’re suffering not from the teething pains of some kind of structural transition that must gradually run its course but rather from an overall lack of sufficient demand — the kind of lack that could and should be cured quickly with government programs designed to boost spending.

Or maybe the reason wages aren’t rising is that the “right” industries haven’t been invented since too many of our smarties are working on Wall Street and not in Silicon Valley. Arnold Kling on why Krugman’s story is wrong:

Modern Keynesians claim the problem is that businesses and consumers are not doing their part. Borrowing and spending is a tough job, the Keynesians say, but somebody has to do it, and that somebody should be the government.

Unfortunately, this view may not be correct. Instead, I believe that the process of creating employment is explained not by the theories of Keynes, but rather by the theories of Adam Smith and David Ricardo. … From the perspective of Smith and Ricardo, real jobs emerge in the context of patterns of sustainable specialization and trade.

Unfortunately, the patterns of specialization and trade that had emerged five years ago were not sustainable. Many jobs in home construction, durable-goods manufacturing and distribution, and mortgage finance were dependent on housing markets with ever-rising prices. In the U.S. and the U.K. in particular, the finance industry expanded well beyond its true economic value. Once the property bubbles burst, these jobs were exposed as not viable. Meanwhile, ongoing creative destruction brought about by the Internet and globalization have continued to allow substitution of capital and emerging-market labor for industrialized countries’ labor in many sectors. Together, these phenomena have caused widespread dislocation.

More government spending will not bring back the days when supposedly triple-A-rated mortgage securities could be fashioned out of dodgy loans to unqualified borrowers … The necessary adjustments can only be made by the decentralized efforts of entrepreneurs. … Entrepreneurs have to figure out ways to utilize resources that satisfy wants in an efficient way. The market mechanism first must undertake trial and error to create production processes that exploit comparative advantage. Until these new patterns of sustainable specialization and trade are discovered, there are no job slots.

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Categories:  Economic Policy, U.S. Economy   |   Tags: ,

Do we care if innovations come from America or somewhere else?

By James Pethokoukis

May 11, 2012, 1:34 pm

From Education Week:

Fewer than one-third of American 8th graders are proficient in science, but most students are improving, and achievement gaps are closing between students who are black or Hispanic and their white peers, a special administration of the test known as “the nation’s report card” shows.

The National Assessment Governing Board released findings Thursday morning on earth, life, and physical sciences mastery on the National Assessment of Educational Progress, or NAEP. The average 8th grade score rose from 150 in 2009 to 152 last year; that’s a statistically significant increase, but still well below 170, science proficiency on the test’s 300-point scale.

Here is why I might be concerned about this study: Economic growth comes from productivity and productivity is driven by innovation and innovation is driven in large part by science and technology.

But do I care who is doing the innovating? Since the actual innovators capture very little of the economic value of their innovations, does it matter if the innovation comes from somewhere else? As long as we can take advantage of the innovation, missing out on the actual employment or profits from a company that creates some new TechWidget or process is mostly irrelevant, right? Let China spend billions on innovation. We can just draft off them, right?

Actually, I disagree with this. First of all, the direct jobs and profits are important. Second, Americans seem to be exceptionally innovative, so we shouldn’t assume if we become less so that someone else will pick up the slack and be as good at it as us. Third, if our workers are tech/sci stupid, they won’t be able to take full advantage of the innovations no matter where they are originally generated.

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Categories:  Economic Policy, Education, U.S. Economy   |   Tags:

Why JP Morgan’s trading blunder gives Romney a political opportunity

By James Pethokoukis

May 11, 2012, 12:02 pm

Putting policy implications aside (I will get to that later), here’s what I would advise Mitt Romney to say about JP Morgan Chase’s trading loss of at least $2 billion from a failed hedging strategy:

Today’s news of huge losses on Wall Street highlights the failure of Obama-Dodd-Frank to fix the broken U.S. financial system and prevent a repeat of the financial crisis. As president, I will repeal this well-intended but poorly-executed law. But we must go further. In the past, I have expressed skepticism about the wisdom of breaking up, shrinking, or otherwise limiting the activities of America’s very largest financial institutions. But when a bank like JP Morgan that most experts think is America’s best run can suffer a loss like this, it’s clear changes must be made. It’s time for radical surgery.

With each passing year, the banking industry has become more concentrated and more interconnected. Half of the entire banking industry’s assets are now on the books of five institutions. Their combined assets presently equate to roughly 58 percent of the nation’s gross domestic product. The combined assets of the 10 largest depository institutions equate to 65 percent of the banking industry’s assets and 75 percent of our GDP. Under Obama-Dodd-Frank, the “too big to fail” problem has gotten worse. And we simply cannot afford another bailout or Great Recession caused by a second financial meltdown.

So, I have concluded there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit. As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these mega-institutions into more manageable size. And as president, I will order my Treasury to immediately begin negotiations to that end.

A Nixon-to-China moment. In one fell swoop, Romney would undercut the charge that he’s a creature of Wall Street and the financial superelite. And given how many hedge fund managers and other investment pros dislike the mega-banks, Romney probably wouldn’t even take a fundraising hit. At the same time, he would outflank Obama on the financial reform issue by portraying Obama-Dodd-Frank as a sop to the big banks that failed to fix the problem. Another example of Obamanomics being more about rhetoric than results.

But might Romney actually do this? Certainly there are plenty of conservative thinkers who favor such an action and could justify it on policy grounds.

Still, I doubt it. I am guessing that Romney simply thinks this would be a terrible idea. I wonder if he sees the issue the same way as Ed Conrad, the former Bain Capital exec who just wrote a book, Unintended Consequences, that will be out next month. I got an early copy of the book, and here’s what Conrad says about breaking up the big banks:

Busting up big banks will only reduce our economy’s competitiveness. A fragmented banking industry may have worked when the economy was highly regionalized, but today the world continues to progress to a more integrated whole, with or without us. … London has already overtaken New York as the world’s center of finance. To strengthen our leadership in the world, we need financial institutions that can successfully serve, lead, finance, and compete in this increasingly integrated and growing market. And these institutions will necessarily be too big and too integrated to fail.

I don’t for a second think a President Romney would let a bank go under if he thought it would shock the financial system, much less multiple banks as may have been the case in 2008. As Romney said in his book, No Apology: The Case for American Greatness: “Secretary [Hank] Paulson’s TARP prevented a systemic collapse of the national financial system.” But to avoid another bank bailout, Romney would do what, exactly? Maybe JP Morgan’s troubles will given him an idea …

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Categories:  Economic Policy, Regulation   |   Tags: , ,

John Makin

JP Morgan fiasco demonstrates the ineffectiveness of Dodd-Frank

By John Makin

May 11, 2012, 10:40 am

Coming on top of renewed turmoil in Europe that has increased the selling of European bank shares, JP Morgan’s announcement of a $2 b. trading loss, with more to come, sharply raises the perceived risks of U.S. bank shares. This news will severely undercut JPM’s reputation as the best-run U.S. bank and pushes global markets to another encounter with systemic risk.

The Fed faces a difficult choice. The need to counter the impact of financial uncertainty on the economy has risen, while the opposition to doing so has also increased in view of JP Morgan’s apparent willingness to embrace risks that it does not understand and/ or cannot manage. In the short run, expect Bernanke’s assurance that the system is sound and that the Fed stands ready to meet any liquidity needs. Over the longer term, the Fed will want to put bankers on a shorter tether, that limits proprietary trading.

At the very least, the JP Morgan fiasco demonstrates the ineffectiveness of Dodd-Frank as a viable guardian of financial stability. The problem is structural. Depository institutions that enjoy protection afforded by deposit insurance and their absolute large size—too big to fail—should not be allowed to engage in proprietary trading. Time to implement the Volcker rule.

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When the U.S. really did try austerity, it worked!

By James Pethokoukis

May 11, 2012, 10:14 am

Now, we all all know “austerity” from deep spending cuts (not the tax hikes, of course) is killing Europe’s economy and would do the same here in America, right?

Well, here’s a story about austerity that critics such as President Obama, Paul Krugman, and Ezra Klein never seem to mention: From 1944 to 1948, Uncle Sam cut spending by a whopping 75% as World War II came to end. Spending as a share of GDP plunged to 9% in 1948 from 44% in 1944.

Superstar economist and devout Keynesian Paul Samuelson—later to become the first American to win the Nobel Prize in economics—predicted such shock austerity would cause “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” That dire, disastrous prediction was widely held by his fellow Keynesians, with one even predicting an “epidemic of violence.”

Except the doomsayers were wrong, even though Washington obviously ignored Samuelson’s call for gradual spending reductions. Despite cuts which dwarfed those seen in the EU today—not to mention those Republicans are calling for here at home—the U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces. As George Mason University economist David Henderson explains is his 2010 paper, “The U.S. Postwar Miracle” (which this entire post draws upon):

As demobilization proceeded rapidly, employers in the private sector, full of the optimism … scooped up millions of the soldiers, sailors, and others who had been displaced from the armed forces and from military industries. … The number of unemployed people did increase, rising from 0.8 million to 2.3 million, but with a civilian labor force of 60.1 million, the 2.3 million unemployed people implied an unemployment rate of only 3.8 percent. As President Truman said, “This is probably close to the minimum unavoidable in a free economy of great mobility such as ours.

Of course, liberals are quick to point out the U.S. economy suffered its worst one-year downturn in history in 1946, a drop of 12%. To many Americans, it surely must have seemed like Samuelson was right, that the Great Depression had returned. But no one thought that back then, especially with jobs plentiful unlike during the 1930s. The drop in output was a statistical quirk caused by the removal of price controls. As Henderson explains:

For example, imagine that the free-market price of a pound of filet mignon during the war would have been $1.40 a pound. But imagine further that the government had set the price at $1.00 a pound. Then, when the price control was removed, the price would have shot to $1.40 a pound. Inflation statistics would have recorded some amount of inflation due to this large price increase. But those statistics would have overstated the real price increase because getting beef at $1.40 a pound is better for many of the people who couldn’t, because of the shortage, get it at $1.00 a pound.

Second, those sky-high output figures during the war measured government spending on goods and services, lots of it military hardware, at their cost. But what was all that stuff really worth, in purely economic terms, vs. post-war consumer purchases of homes and cars and nylon stockings? While total output fell by 12% in 1946, private-sector GDP rose by nearly 30%.

Or look at it this this way: Real U.S. output in 1947 was 17% higher than in 1941 despite the decline in government spending. Why was the economy prospering in way it never did during the Great Depression? Taxes were cut a little, and government interference—including price and production controls and rationing—was reduced a lot. But perhaps just as important, Truman dumped many of FDR’s most radical New Dealers. That change boosted business confidence, and companies started to invest again in America.

The typical Keynesian response mostly centers around dismissing the immediate post-war boom as a one-off event complicated by many unique factors. But it happened again, as Henderson notes! After the Cold War ended, overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But again the economy boomed. Real U.S. GDP grew by 40% with an average annual growth rate of 3.8%. Henderson speculates that perhaps the decline in defense spending freed up knowledge workers to help make technological miracles happen in the private economy.

The lesson here: Spending cuts might well produce prosperity instead of austerity, especially if accompanied by less government interference in the economy and less fear in the private sector of anti-market government policies.

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Categories:  Economic Policy, Fiscal Policy and Taxes, U.S. Economy   |   Tags: ,

Income inequality and the belief that America is a zero-sum game

By James Pethokoukis

May 10, 2012, 10:58 am

Scott Winship makes an excellent point on income inequality:

CBO finds that the share of income received by the top one percent rose from 8 percent to 17 percent from 1979 to 2007 (the Piketty/Saez increase is from 10 percent to 24 percent). It also finds that this “share” was taken from each of the four bottom fifths of the income distribution (but not from the other people in the top fifth).

When one sees the share of income received by the top rising and the share received by the bottom 80 percent falling, it is natural to think in zero-sum terms and to assume that the gains at the top must have come at the expense of the bottom. This is a complicated issue, but what is not complicated is that if the economic pie grows enough, the top can take a bigger piece of it even as everyone gets more pie.

That is what has happened. CBO reports that the bottom fifth of households saw their incomes increase by nearly 20 percent over this period, while the rest of the bottom 80 percent saw its income rise by nearly 40 percent. To be sure, the income of the top one percent nearly quadrupled. But it is still the case that everyone else is a lot better off in 2007 than in 1979.

It is not a zero sum game. And for the most part—though not entirely—those outsized income gains at the top are due to technology and globalization. (My caveat reflects the crony capitalism in the financial and housing sectors.) And as I have written, the P&S numbers should hardly be taken as gospel on the topic.

And how could we have successfully redistributed that wealth without hurting incentives to innovate and create wealth? And even assuming taxes didn’t change behavior, would funneling revenue from tax hikes into, say, the unreformed U.S. educations system have improved learning and thus reduced inequality? Not so sure about that …

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Categories:  Economic Policy   |   Tags:

Kenneth P. Green

Can we undo the plastic bag restrictions and taxes now?

By Kenneth P. Green

May 10, 2012, 10:49 am

Back in March of last year, I wrote about a pair of studies that should give “cloth grocery bag” fans pause. One study pointed out that reusable grocery bags actually have a bigger environmental footprint than regular, disposable plastic bags. The other study pointed out that reusing grocery bags increases your risk of food contamination and illness.

Hence, it was no surprise to see this headline turn up last night: “Oregon norovirus traced to reusable grocery bag.” Apparently, a girl’s soccer team from Beaverton passed around a reusable bag while sharing some cookies, and 6 of them managed to pick up norovirus, a stomach ailment that is making the rounds these days:

Norovirus causes about 21 million illnesses, 70,000 hospitalizations and 800 deaths a year in the United States. It caused 139 of 213 outbreaks of gastroenteritis in Oregon in 2010.

The germ can spread quickly in places like day care centers, nursing homes, and cruise ships.

Usually, it’s transmitted by direct human contact, but can contaminate surfaces. Leafy greens, fresh fruits and shellfish are commonly involved in foodborne outbreaks.

My conclusion from last year’s article still holds: “So the verdict seems clear: the traditional, thin plastic bag, though increasingly demonized and taxed, has better environmental performance and is likely to be considerably safer for human health. Time to wash and re-task those cloth bags. Maybe grow tomatoes in them or something.”

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Categories:  Energy and Environment, Health Policy   |   Tags:

The Chinese are coming … to a bank near you

By James Pethokoukis

May 10, 2012, 9:16 am

It looks like China will literally be America’s banker. From the WSJ:

Giant banks owned by the Chinese government are coming to the U.S. The Federal Reserve on Wednesday approved plans by three state-backed Chinese banks to expand in the U.S., including the first acquisition of a U.S. retail-banking network by a state-owned Chinese lender.

The approval is a landmark step for U.S. banking regulators. Chinese banks long have sought access to the U.S. banking system in order to provide financing to Chinese companies operating overseas and to do business with foreign investors looking for exposure to the Chinese currency, the yuan. But they have been stymied in previous attempts by assorted delays and rejections.

The Federal Reserve effectively is giving its seal of approval to China’s bank-regulatory system, a big step for U.S. regulators given their past concerns about the adequacy of Chinese supervision of banks.

The decision could open the door to other Chinese takeovers of U.S. banks, although it is unlikely China will make significant inroads into the U.S. banking industry anytime soon.

In general, I am all for closer economic ties between the U.S. and China. They force Beijing to accept international norms and incrementally cede control of the economy from government to markets. They are normalizing in this sense.

But am I imagining things or have I not read numerous stories about how shaky the Chinese financial system is? This analysis from billionaire shortseller Jim Chanos is typical:

The banking system in China is extremely fragile, and that’s one of the messages we wanted to get to people.

In fact, because what happened the last two crises, in ’99 and ’04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we’re short, those restructuring receivables are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.

Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.

Indeed, the Agricultural Bank of China was one of the banks the Fed just approved. Or check out this review of Red Capitalism by The Economist:

Chinese banks were not, in the main, exposed to toxic Western debt and, perhaps more importantly, never adopted dangerous Western methods of hiding risks. But China’s own approach presents these problems in a different form.

To the extent that risk has been distributed, it is largely from state-controlled banks to other state entities in increasingly arcane ways. This distorts external perceptions of China’s solvency. State debt appears to be quite low by international standards (just under 20% of GDP) but when all government obligations are lumped together, the authors reckon it is actually 76%.

The bigger problem, though, is that the system trades almost entirely with itself. Critical information about liabilities and pricing is deliberately concealed or impossible to discern; there are no outside entities establishing prices by bidding in the market. That undermines efficient capital allocation and allows excesses to fester.

Many officials are aware of this, but conflicts of interest get in the way of resolving the problem. As the book details, the whole business of providing, receiving and regulating money involves one state entity or another. It may be in China’s overall interest for the system to open itself up, but doing so would pit the government against itself. That will not happen without commitment from those on top.

Now, it is one thing for a Chinese bank to open branches here or even buy a mid-sized bank … and to buy Wells Fargo or some such. And any merger approvals are far from a rubber stamp. As the WSJ story notes, “During the financial crisis, U.S. regulators rejected a bid by China Minsheng Banking Corp., a midsize lender, to buy San Francisco lender UCBH Holdings Inc., the holding company for United Commercial Bank. People familiar with the bid said U.S. regulators rejected it because of worries about Minsheng’s overall strength, risk-management, and anti-money-laundering procedures.”

But would Washington allow a merger or takeover, some day in the future, of a mega-bank so that China would own a “primary dealer” institution that the Fed runs monetary policy through?

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Categories:  Economic Policy, Financial Services, Regulation   |   Tags: ,

The social issues election? Really?

By James Pethokoukis

May 9, 2012, 4:43 pm

A nice reminder from Pew about the state of the U.S. labor market (H/T to NRO’s The Agenda):

 

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OK, here’s what wrong with Greece, too …

By James Pethokoukis

May 9, 2012, 3:50 pm

Let me give Greece the same treatment that I did in the previous post: Here is the World Economic Forum analysis:

 

Wow, I wonder why German taxpayers don’t want to cut Athens a check!

Just as with Italy, Greece had a malfunctioning political economy that certainly didn’t need higher taxes. Actually, Greece may have been a good case for a low, broad, and flat consumption tax given the problem with tax evasion.

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What’s wrong with Italy (and much of the rest of the EU) in a nutshell

By James Pethokoukis

May 9, 2012, 3:34 pm

I think these two tables from the World Economic Forum tell the story of Italy, as well as several other struggling EU nations:

Bad government, too-high taxes, too much debt, too much regulation. And the response is to raise taxes? What could go wrong?

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Sweden’s amazing supply-side, tax-cut experiment

By James Pethokoukis

May 9, 2012, 2:59 pm

Can we replace Tim Geithner with Anders Borg, ASAP?

 

Mega-thanks to my pal Mark Perry at Carpe Diem for pointing out this article detailing Sweden’s amazing supply-side experiment in tax cuts (bold for emphasis):

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

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Oh, by all means, France should certainly spend more instead of deregulating … not

By James Pethokoukis

May 9, 2012, 2:34 pm

When economists talk about pro-growth structural reforms in Europe, this is the kind of thing they mean:

Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.

French businesspeople often skirt these restraints by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, chief executive officer of consulting firm Atos and Minister of Finance from 2005 to 2007, said at a Paris conference on April 4. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.’ We have to review our labor code.”

While polls show job creation and the economic crisis are the top issues for voters in the May 5 second-round vote for president, neither President Nicolas Sarkozy nor Socialist challenger François Hollande are focusing on Breton’s concern. Companies say the biggest obstacle to hiring is the 102-year-old Code du Travail, a 3,200-page rule book that dictates everything from job classifications to the ability to fire workers. Many of these rules kick in after a company’s French payroll creeps beyond 49.

There are now 2.9 million people out of work in France, almost 10 percent of the workforce and the most in 12 years. “For the 100 employees we have in France, we have 10 employee representatives, for whom we have to organize weekly meetings even when there is nothing to discuss,” Haan says. “Every time a social security contribution changes, which is frequently, we have to update software and send our HR people for training. We can’t fire anyone without exorbitant costs.”

The code sets hurdles for any company that seeks to shed jobs when it’s turning a profit. It also grants judges the authority to reverse staff cuts years after they’re initiated if companies don’t follow the rules. The courts even deem some violations of the code a criminal offense that could send executives to jail.

And this is the best, or worst, part:

Hollande makes no mention of labor regulations in his platform, which seeks to generate jobs through tax incentives and government hiring, such as creating 60,000 new teacher posts. He said on April 25 that if elected he would act to counter “a parade of firings” expected after the election: Companies may be holding back job cuts until then to avoid drawing political heat.

Given what you just read, you’re probably not surprised to see how the World Economic Forum analyzes France’s competitiveness problems:

And out of 142 countries, the WEF ranked France 68th in labor market efficiency. The U.S., by contrast, ranked 4th.

 

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Categories:  Economic Policy, Europe and Russia, Regulation   |   Tags: ,

Will Obamacare crush middle-income Americans?

By James Pethokoukis

May 9, 2012, 2:18 pm

More and more, Obamacare is looking like the ultimate case study in unexpected consequences. AEI’s Scott Gottlieb:

A family of four with an aggregate income of more than $88,000 annually or an individual earning around $44,000 could find themselves badly strained by healthcare costs under the Obama plan.

Many of these folks currently get their health coverage from work. They benefit from an implicit subsidy built into that workplace coverage that lets them spend pre-tax dollars through their employer to purchase health insurance.

Under the Obama plan, many of these families could instead find themselves buying their health insurance on the new state-based exchanges that get started in January 2014. For a family of four, premiums on even one of the lower priced “silver” options could still cost more than $15,000 annually on the exchanges.

Only their incomes will make them ineligible for the “premium assistance credits” that are meant to offset some of the cost of buying the pricey comprehensive coverage that the Obama plan mandates. These families will also no longer have the benefit of being able to defray some of these costs by spending pre-tax dollars.

People aren’t forced to carry health coverage on the exchanges if the cost of these policies exceeds 8 percent of their pre-tax income. But many families may find that the exchanges crowd out other low cost insurance options. Even if these families aren’t forced to buy one of these exchange policies, they may find few alternatives.

Do the math: A family of four earning $90,000 annually takes home about $60,000 after local, state, and federal taxes. If they lose workplace coverage, and move onto the exchanges, they could find themselves spending as much as 25 percent of the family’s take home pay for an average policy ($15,000 for the “silver” plan).

That’s just on premiums. If they get sick, they could be stuck with another $11,500 more in deductibles and cost sharing, and this doesn’t include co-pays on drugs. The upshot is that the exchange-based insurance is broad but not very deep. While full coverage for a lot of routine care is mandated under these plans – raising the cost of the insurance policies – the overall co-pays on other stuff can still be steep.

1. We don’t know how many people will be ejected into the exchanges as employers choose to accept the $2,000 per worker penalty for dropping coverage. At least at larger companies, health benefits are certainly a way of attracting talent. But the number could be sizable.

2. Employers could raise salaries as a form of compensation for dropping coverage.

3.  Government could raise the subsidy levels for insurance purchased within the exchanges. But it would take more than the Buffett rule to fund that.

So we may be looking at a scenario where individuals have to pay a lot more for health insurance or perhaps pay higher taxes to fund Obamacare—or both.

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Categories:  Economic Policy, Health Policy, Retirement and Social Security   |   Tags: ,

Kenneth P. Green

Are environmentalists shale-gas deniers?

By Kenneth P. Green

May 9, 2012, 1:10 pm

That’s the question energy-blogger John Hanger asks, in a post extolling the greenhouse-gas and pollution-reducing virtues of the shale-gas boom (emph. mine):

Yet, despite the massive carbon, mercury, soot, and lead benefits provided by the rise of gas, the bashing of gas is now politically correct, even a political imperative, in some but not quite all environmental circles. In green precincts, denying the environmental benefits of natural gas is becoming as required as denying climate change is in conservative politics.

Hanger, a former environmental regulator, who is anything but a climate skeptic points out that the shale-gas boom has led to immense reductions in greenhouse gas emissions:

One billion tons of carbon dioxide avoided is the result when one adds together the 630 million tons of carbon avoided from coal plant cancellations tracked by the Sierra Club with the 450 million tons avoided by the decrease in coal’s market share and corresponding increases in natural gas and renewable energy. That’s a huge amount equal to about 18% of US energy related carbon emissions and 3% of world carbon pollution.

I don’t usually care for the invocation of holocaust denial in climate discussions, so I’m unlikely to start responding to charges of climate-denial with shale-gas denial (though, it’s tempting!). But Hanger raises a point that will increasingly haunt environmentalists: The benefits of the shale-gas boom are so tremendous that environmental opposition can only seem increasingly irrational.

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Europe’s failed experiment in tax-hike austerity

By James Pethokoukis

May 9, 2012, 12:59 pm

The anti-austerity crowd on the left just can’t seem to accept “yes” for an answer. Yes, austerity isn’t working in Europe. But for some reason, austerity critics decline to acknowledge that such a high-tax region probably shouldn’t have started cranking up taxes. Here’ s just a taste of the EU’s tax-hike mania:

Greece. In 2010 and 2011, Greece passed a bunch of tax hikes — including a 10 point, 77% increase in its value-added tax — meant to raise revenue equal to 3.4% of GDP. How did that work out? Not so good:

The finance ministry said the central government deficit grew by 15 percent in the first nine months of the year compared with the same period last year. It rose to 19.16 billion euros. That was despite tax increases that were supposed to bring in more money – tax receipts actually fell.

Spain. Heading into 2012, Spain had already increased its value-added tax, excise duties, and top income tax rates. Then last December, its new government, Reuters reported, “announced a slew of surprise tax hikes” as well as spending cuts. It announced “initial public spending cuts of 8.9 billion euros ($11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year” to tackle its debt problems. Thanks to those tax hikes, Spaniards will now be paying one of the highest personal income tax rates in Europe. Investment taxes were also raised to as high as 27% from 19%, according to a Cato Institute analysis. And last month, the government announced it will increase its value-added tax in 2013 as well as other indirect taxes in order to raise about 8 billion euros.

Italy. Here is technocrat Mario Monti’s idea of austerity:

But for the most part, the new austerity package is based on tax increases. It would reinstate a property tax on first homes, which Mr. Berlusconi had eliminated as an election promise in 2008. It would also impose a 1.5 percent tax on revenues brought into Italy under an earlier tax amnesty, and add taxes on cigarettes and gas, which is close to 1.70 euros per liter, or more than $8 a gallon. The governor of the Bank of Italy, Ignazio Visco, said last week that the measures would increase Italy’s tax burden to 45 percent, a level that businesses say is unsustainable.

And Monti again:

With local governments starved for property tax money, Monti has revived the property tax, reinstating it at even higher rates. The property tax “shouldn’t have been abolished,” Monti said, adding that Italy now “needs to make up for lost time, not in years, but in months.” Monti brushed off political criticism that his government was relying too much on new or higher taxes to reduce Italy’s debt. He blamed stubbornly chronic tax evasion for being one big reason new taxes were needed. He also fingered as a culprit what he called the “hidden tax of corruption in public contracts and hiring.”

The economic literature is clear. The way to cut debt is by cutting spending. Tax hikes should be kept to a minimum and best accomplished by base broadening rather than by raising marginal rates. As an AEI study found:

Our results indicate that there are several traits common to successful consolidations. … To facilitate success in future consolidations, our results and the previous literature indicate that a suitable low-end target for the expenditure share is around 85 percent of the total fiscal consolidation. … Of the individual expenditure items, our results indicate that social transfer reductions should comprise the largest share of the consolidation; there is a stark difference between the very large transfer shares in successful consolidations and very small transfer shares in unsuccessful consolidations. Reductions to subsidies, government wage expenditures, and investments should play a smaller, but sizeable role.

… It is more difficult to make a prescription for the revenue items as there is little consensus across our results. … Given these caveats, our results indicate that revenue increases should come from indirect and business taxes more than income taxes, but the magnitudes of these preferences are not clear. More likely the best recommendations derive from the tax literature, which are to maximize revenues where possible by lowering rates and broadening the base.

Putting aside the issue of the euro for a moment, the fiscal reforms Europe needs are clear: Smaller welfare states, less intrusive regulation, and pro-growth tax cuts. Of course, just raising taxes is a lot simpler. Sure is a lot quicker. But it’s not working. I hope the Obama White House notices the tax-hike fiasco going in Europe since it is pretty much the exact path he wants the U.S. to follow.

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Categories:  Economic Policy, Europe and Russia, Fiscal Policy and Taxes   |   Tags: ,

Romney and the investor class

By James Pethokoukis

May 9, 2012, 11:13 am

Larry Kudlow makes a killer observation here:

A recent survey by Raghavan Mayur for the highly regarded Investor’s Business Daily shows Obama losing his lead as the economy again stalls. A month ago the president led Romney by eight points. Now his lead is down to three. Among independents, after being down three points a month ago, Romney has opened up a 46 to 37 lead.

But Mitt Romney needs to look carefully at an important subhead: Among investors who are registered to vote — about 60 percent of likely voters come November — the pro-business, market-friendly, fiscally conservative Romney has a mere 47-44 lead over Obama. A mere three points.

Successful Republican politicians, like George W. Bush in 2004, generally carry the investor class by 10 or 12 percentage points. A three-point lead is not enough.

Paradoxically, although 65 percent of investors polled by IBD think investment income should be taxed at a lower rate than wages, 63 percent favor the Buffett rule, which puts a 30 percent minimum tax on millionaires. Of course, like everybody else, investors are worried about the stagnant economy, the huge budget deficit, Obamacare, and taxes. But Mitt Romney is going to have to do better with this group if he’s to win in November.

And keep in mind, the stock market has doubled under President Obama. Is that why the investor-class vote is up for grabs?

So while Mr. Romney is out there campaigning on free-enterprise principles to grow the economy, he might pay some attention to specific investor-related issues. In particular, he should pledge to keep the same low 15 percent tax rates on capital gains (which Obama wants to double) and dividends (which Obama wants to triple). Also, tax rates on estates and inheritances will go up if Obama is reelected. Romney might want to mention that, too.

I am not sure what to make of Romney not doing better among investors. Maybe it is, as Larry suggests, a matter of emphasis. Or maybe it’s because the market, at least as measured by the S&P 500, has doubled since its 2009 lows.

While we are on the topic, here is a bit from the letter 19 CEOs have sent to the POTUS on investment taxes with a few stats Romney might want to mention:

A recent study compared the tax rates on dividends and capital gains in the United States to those in other developed nations. The top U.S. integrated tax rate on dividends (which takes into account state and local taxes), according to the Ernst & Young study for the Alliance for Savings and Investment, “will rise to 68.6 percent in 2013, significantly higher than in all other OECD (Organisation for Economic Co-operation and Development)and BRIC (Brazil, Russia, India and China) countries.”

 The top U.S. integrated tax rate on capital gains would reach 56.7 percent — the second highest among countries measured. In the global competition for capital investment, these punishingly high combined U.S. tax rates on dividends and capital gains, when combined with high U.S. corporate tax rates, could put U.S. companies at a competitive disadvantage.

We fail to see the administration’s rationale for making such a major change in its tax policies.

If America is to remain competitive in the global marketplace, we must build a tax code that encourages investment to spur economic growth and help create new jobs. We urge the administration to reconsider and support retaining the current 15 percent tax rate on dividends and capital gains. If we don’t, it could spark a new wave of volatility in our financial markets and give a competitive edge to overseas corporations at a time when we need capital formation here in America to create jobs and expand our economy.

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Here’s what Obama’s ‘handy little to-do list’ should really be

By James Pethokoukis

May 9, 2012, 10:40 am

President Obama, yesterday:

President Barack Obama pressed Congress on Tuesday to act on a modest five-item “to-do list” to fight unemployment, showcasing the tasks on a virtual Post-It note he mockingly said would not “overload” lawmakers.

“I know this is an election year,” Obama said in a speech at the SUNY-Albany Nano-Tech Complex, a science research facility. “But it’s not an excuse for inaction. Six months is plenty of time for Democrats and Republicans to get together and do the right thing.”

Obama’s list included items he’s already unsuccessfully pushed Congress to adopt, such as cutting tax incentives for businesses that ship jobs overseas, enacting new hire tax credits, promoting clean energy and helping homeowners struggling with their mortgages to refinance.

“It’s about the size of a Post-It note, so every member of Congress should have time to read it and they can glance at it every so often,” said the president, who referred to the virtual memo as “a handy little ‘to-do’ list.”

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The European Union … of failed states

By James Pethokoukis

May 9, 2012, 9:36 am

Amid all the nonsense being spewed by Paul Krugman and liberal anti-austerity crowed—which is really just a round-about way of attacking free enterprisers here at home—economic analyst Ed Yardeni makes terrific sense here:

The Europeans have had the best governments money can buy. Their elected leaders have provided them with all sorts of wonderful social welfare benefits. Many Europeans are employed by their governments to provide those benefits to their needy fellow citizens. Those who cannot find a job, or are too depressed to look for one, are provided with extremely generous unemployment benefits. Retirement benefits are great, and early retirement is the norm. Life has been very good in Europe.

Of course, that all costs lots of money. That’s why income tax rates are so high in Europe. On top of those rates, Europeans pay significant value-added taxes on the goods and services they buy. Yet there has been an ever-widening gap between government spending and revenues. That’s partly because Europeans have responded to their exorbitant tax rates with widespread tax avoidance.

The spending of European governments has ranged between 40% and 60% of GDP for many years. The revenues collected by these governments have ranged between 30% and 50%. The resulting deficits have led to rapidly rising ratios of government debt to GDP.

Attempts to bring back some fiscal sanity, led by Germany’s Chancellor Angela Merkel, are now widely caricatured as fiscal “austerity.” In my opinion, the only way to fix Europe is to slash government spending, reduce tax rates, enforce tax collection, and deregulate labor markets. Instead, enraged European voters are rising up against austerity and voting for the status quo. They haven’t indicated who they expect will pay the bills. However, they must be counting on either the Germans to pick up the tab or the ECB to implement more rounds of the LTRO.

European politicians who signed on to the “fiscal pact” promoted by Germany late last year are losing their jobs. Those favoring a “growth pact” are winning support, though they have no specific plan yet and certainly no way to finance it once it is specified. Also gaining support are various left- and right-wing fringe groups that tend to promote anarchy as the most effective way of overthrowing the established order and replacing it with their disorder.

Europe is at risk of devolving from an economic and monetary union into a disunion of failed states.

There is no secret formula to success here. Just less statism—meaning less regulation and lower tax rates—and more freedom. Of course, the current American government wants to follow the EU formula of raising taxes on investment, innovation, and entrepreneurship while increasing regulation on vast swaths of the economy. Europe’s present … our (near) future?

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Categories:  Economic Policy, Europe and Russia, Fiscal Policy and Taxes, U.S. Economy   |   Tags: ,

Andrew Biggs

Public employee pensions don’t stimulate the economy

By Andrew Biggs

May 8, 2012, 11:25 am

Over at Real Clear Markets, I debunked the National Institute for Retirement Security’s claim that generous pension benefits for public employees stimulate the economy to the tune of hundreds of billions of dollars. NIRS represents plan managers, pension actuaries, investment advisers, and public employee unions—all the folks who have an interest in keeping the current system going, even if it has generated trillions of dollars in unfunded liabilities for state and local governments.

My argument was simple: Even if pension benefits have a “multiplier effect,” those don’t come out of thin air. So we also need to count the depressive economic effects of taking money away from taxpayers to give to public employees. When you count both sides of the equation, pensions’ effect on the economy is at best a wash and very possibly negative.

As if on cue, NIRS executive director Diane Oakley writes that their arguments “make perfect sense”—but again, only if you assume that pension benefits come out of thin air.

Oakley makes another common economic error when she says, “Because these pensions are pre-funded rather than pay-as-you-go, the contributions generate investment earnings. As a result, government employers contribute only about 25 percent of the cost of the pension checks their retirees receive each month. This makes the economic impact of public pensions all the more powerful.”

In fact, interest earned on taxpayer contributions is compensation for the time value of money, for funding pensions years or decades earlier than the benefits are actually paid. Both principle and interest are costs, since they otherwise could be enjoyed by taxpayers.

Oakley also claims that the steady income provided by public pensions stimulates the economy during a recession. But she ignores falling pension assets, which have pushed up required taxpayer contributions by 30 percent since 2007, costing Americans $20 billion that they otherwise would be able to spend during a recession.

Public employees receive far more generous pension benefits than the taxpayers who fund them. It’s understandable that interest groups would focus only on these benefits. But the costs to taxpayers are just as large.

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America’s choice: The road to freedom or the road to serfdom

By James Pethokoukis

May 8, 2012, 9:13 am

When I glance over at the two sturdy Ikea bookcases in my home office, it’s easy for me to find the volumes that have most influenced me throughout my life; They’re the most beat-up looking ones, having been read and referred to countless times: A Conflict of Visions by Thomas Sowell, The Way the World Works by Jude Wanniski, The Seven Fat Years by Robert Bartley, Disturbing the Universe by Freeman Dyson, 1984 by George Orwell, and Mere Christianity by C. S. Lewis to name but a few.

Among the newer books sure to suffer plenty of similar abuse: Bourgeois Dignity by Deirdre McCloskey, The Rational Optimist by Matt Ridley, and The Enlightened Economy by Joel Mokyr.

And to that list you can now add The Road to Freedom: How to Win the Fight for Free Enterprise by Arthur Brooks, the president of the American Enterprise Institute. The slender, highly readable book–just out today!–provides an invaluable guide on how to make the argument that economic freedom makes us better morally, not just better off materially. As Brooks writes:

Materialistic arguments for free enterprise have been tried again and again. They have failed to stem the tide of big government.

There’s only one kind of argument that will shake people awake: a moral one. Free enterprise advocates need to build the moral case to remind Americans why the future of the nation is worth more to each of us than a few short-term government benefits. To get off the path to social democracy or long-term austerity, all of us who love freedom must be able to express what is written on our hearts about what our Founders struggled to give us, what the culture of free enterprise has brought to our lives, and about the opportunity society we want to leave our children.

One side has been making just the opposite argument, of course, and has had the field pretty much to itself. With The Road to Freedom, the battle is joined.

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Kenneth P. Green

Sierra Club goes after natural gas

By Kenneth P. Green

May 7, 2012, 11:16 am

It is a mistake to take the green energy agenda at face value. While claiming that what they really want is simply to replace “dirty” energy with “clean” energy, the real agenda is to leave people with less abundant, less reliable, and vastly more expensive energy.

Hence, it is no surprise to see that Sierra Club, having demonized oil-driven transport, coal-powered electricity, and nuclear power, now has its sights set on preventing a transition to the fuel formerly portrayed as “clean-burning”: natural gas.

As we push to retire coal plants, we’re going to work to make sure we’re not simultaneously switching to natural-gas infrastructure,” Sierra Club Executive Director Michael Brune told National Journal in an interview on Wednesday. “And we’re going to be preventing new gas plants from being built wherever we can.

As with coal, Sierra Club and their allies are also against allowing trade in natural gas: They seek to prevent our exporting of either coal, or the new natural gas supplies changing global energy perceptions. Forget about that whole exports-help-the-economy thing.

Instead, the greens tell us, we’re to go for renewable forms of energy such as wind and solar power, which are “much more available.” Except, of course, when you actually try to build them. Then…

Groups sue solar company over San Luis Obispo County project.

Environmental groups sue solar project to protect wildlife habitat.

Conservation groups challenge North Sky River wind project.

The green energy-agenda isn’t about swapping dirty for clean. It’s about bait and switch.

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Occupy France

By James Pethokoukis

May 7, 2012, 10:17 am

Looks like the Occupy agenda just landed at Charles de Gaulle. As someone interested in economic policy, it will be fascinating to watch the natural economic experiment apparently about to be tried in France. Socialist Francois Hollande says he wants to crank up marginal tax rates, make public pensions more generous, and go after the banks. Non to austerity and non to neoliberalism, at least to the extent that France tried to embrace market-friendly policies under Nicolas Sarkozy.

Reminder: In 1980, France’s per capita GDP was 78% of America’s vs. 69% for the UK. In 2008, France was down to 71% vs. 77% for the UK. Hollande bills himself as a sort of Mr. Normal, promising the French version of a “return to normalcy.” Well, the normal way of doing things in France hasn’t work in a long, long time.

My guess is that if France really goes back down the Grand Delusion path Hollande has outlined, the French economy will be punished severely by global markets and economic reality.

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Categories:  Economic Policy, Europe and Russia, Fiscal Policy and Taxes, Foreign and Defense   |   Tags:

How more and more ‘disabled’ Americans affects the shrinking U.S. labor force

By James Pethokoukis

May 4, 2012, 2:36 pm

Now that the labor force participation rate is at its lowest level since 1981, it’s a good time to take another look at how the rising number of disabled Americans affects the official size of the workforce. Here are disturbing facts from Bloomberg:

– The number of workers receiving Social Security Disability Insurance jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show.

– That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

– Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year.

– More than 99 percent of all SSDI beneficiaries remain in the program until retirement age, David Greenlaw, a managing director in New York at Morgan Stanley, wrote in a March research note, citing government data. The program provides an average of $1,111 in monthly income to eligible workers with a physical or mental impairment that will last at least 12 months or result in death, according to Social Security.

– The number of people collecting disability surged as the economy contracted, with the share of the U.S. population between the ages of 25 and 64 on SSDI climbing to a record-high 5.3 percent in March from 4.5 percent in 2007. Applications per 1,000 working-age people rose to 18 last year from 8 in 1990.

– The program spent $132 billion last year, more than twice as much as in 2000. Once the trust fund dries up, the program’s incoming revenue will be enough to cover only about 80 percent of scheduled benefits, the trustees said.

So more people are disabled and can’t work even as a) the overall health of Americans improves, and b) fewer and fewer jobs require a great deal of physical exertion?

Economists David Autor at the Massachusetts Institute of Technology in Cambridge and Mark Duggan at the University of Pennsylvania’s Wharton School in Philadelphia says SSDI “appears in practice to function like a nonemployability insurance program for a subset of beneficiaries. Also, less-stringent screening procedures, more attractive benefits and a waning need for less-skilled workers have bolstered SSDI rolls, they said. In addition, “difficult-to-verify disorders,” including muscle pain and mental illness, more easily qualify for SSDI under program reforms, Autor wrote in a 2011 paper.

Hmmmm …

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The awful April jobs report: Is the ‘real’ unemployment rate 11.1%?

By James Pethokoukis

May 4, 2012, 10:34 am

Any way you slice or dice it, the April jobs report was terrible—and terribly disappointing. Employers added just 115,000 workers to their payrolls last month, way below the 180,000 Wall Street economists were expecting. Hiring has now slowed in three straight months. Job growth in March and April averaged 135,000, down from an average 252,000 per month in the three months to February. As IHS Global Insight explains: “Prior job gains at over 200,000 per month were inconsistent with the modest pace of recovery in overall output – GDP was up only 2.2% in the first quarter. It now appears that jobs have decelerated into line with GDP, rather than GDP accelerating to catch up with jobs.”

And JPMorgan put it this way: “The April employment report was softer than expected and signaled a downshift in labor market momentum.”

Sure, the official unemployment rate dipped a tenth of a point lower to 8.1%, but that’s only because people continue to drop out of the workforce at an alarming pace. That workforce shrinkage, as measured by the labor force participation rate, totally distorts the true unemployment picture. In fact, the participation rate is now at its lowest level since 1981! (For comparison purposes, the economy added 480,000 jobs back in April 1984, during the Reagan recovery.)

So what is the true state of the labor market?

1. If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7% then vs. 63.6% today—the U-3 unemployment rate would be 11.1%.

Now, this doesn’t take into account the aging of the Baby Boomers, which should lower the participation due to rising retirements. But is that still a valid assumption given the drop in wealth since 2006?

2. If you take into account the aging of the Baby Boomers, the participation rate should be trending lower. Indeed, it has been doing just that since 2000. Before the Great Recession, the Congressional Budget Office predicted what the partipation rate would be in 2012, assuming such demographic changes. Using that number, the real unemployment rate would be 10.7%.

3. Of course, the participation rate usually falls during recessions. Yet even if you discount for that and the aging issue, the real unemployment rate would be 9.3%.

4. If the participation rate just stayed where it was last month, the unemployment rate would have risen to 8.4%.

5. Then there’s the broader, U-6 measure of unemployment which includes the discouraged plus part-timers who wish they had full time work. That unemployment rate, perhaps the truest measure of the labor market’s health, is still a sky-high 14.5%.

6. The employment-population ratio dipped to 58.4% vs. 61% in December 2008. An historically and alarmingly low level of the U.S. population is actually working.

7. And given that real disposable income has been flat the past two years, it stands to reason that many of the jobs being created are in low-wage sectors. Indeed, hiring in sectors such as retail and leisure has accounted for a whopping 40 percent of the jobs added over the past two years.

The labor market remains in sad shape—despite Obama White House claims that it’s “continuing to heal”—and it is unlikely to improve much if the economy continues to grow around 2% or so.

James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

 Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor’s Business Daily.

 Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.

Pethokoukis can be reached james.pethokoukis@aei.org or follow him on Twitter @JimPethokoukis

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