The big news today is that no new jobs were created in the past month:
Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 65,000.
Why is the jobs picture turning south? Why did the forecasts miss?
I'm here to say that today's news is actually old news, and there's an important piece of the puzzle missing in our discourse about jobs / unemployment and economic growth.
I knew we were going to be heading into a downturn / recession around now. I knew it around the end of last year. But it's not because I have any special knowledge. It's because I've been following those who analyze something more fundamental than the debt ceiling political battle, more fundamental than Japan's Earthquake, more fundamental than GOP intransigence, more fundamental than all the usual things that are blamed for our worsening or stagnant unemployment picture. A bigger stimulus would not have prevented this from happening - I'd like to explain why.
1. We're heading into another rough spot for the global economy, but this was projected in advance - and was known late last year to those watching oil prices:
The price of oil moved above $90 a barrel yesterday. Is it time to become concerned about the possible macroeconomic effects? In the early part of this decade, consumers seemed to be largely ignoring oil prices, in part because energy expenditures had become a smaller part of their budget than they had been in the late 1970s. But as the price of oil rose over the decade, energy expenditures returned to a position of importance in consumer budgets. I'm persuaded that the oil price shock of 2007-2008 made a measurable contribution to the initial downturn of the Great Recession.
2. ECRI, which has been among the best and most sober in analyzing economic trends forecasted this using other metrics (e.g. they correctly said mid last year, when everyone was crowing about double dip that we weren't going to double dip then), are saying that there's basically nothing Obama can do at this point to affect the jobs situation before the election. I agree. These cycles are slow and have to play out:
3. The problem is fundamental:
oil is now the main bottleneck for our economy. (I'm not saying it's the
only bottleneck, just the main one.)
Unfortunately it’s exactly here where the standard progressive argument runs off the rails. Stimulus only works to get a self-sustaining recovery going if there are resources for the economy to self-sustain. Given that oil production has been on a global plateau for 6 years (all the while,
China and India are gobbling up more and more of it), even if we got the economy revved up again it would sputter from high oil prices. Drilling won't solve the problem either. While oil prices don't go only in one direction (they drop down when there's a recession), the long term trend is a steady rise in prices.
4. The only thing Obama could have done is actually tried to make the downturn happen sooner. This would have been politically wise, but wouldn't have really been of much help. One way would have been to initiate a massive oil drilling moratorium - halting existing oil production for safety inspections - immediately after deepwater horizon last year, causing a strong spike in oil prices. This would have made the downturn start earlier - around Q1 of this year - and be done by around now, with a recovery coinciding with the election.
I've written more about how this fundamental dynamic means we're at the end of economic growth:
The graph, from this interesting post from Doug Short, shows inflation-adjusted GDP over time.
The crazy thing that almost nobody talks about is that this may be the first time in the history of modern U.S. economic statistics that a recovery has not gotten us back to the previous peak GDP (inflation adjusted). Given that we’re likely to have at least one if not two negative GDP quarters this year, that means that our recovery was only partial.
Given the oil constraint, we’re likely to see that happen going forward: each recession is followed by a recovery, but that recovery only gets us part of the way back up the hill. By then we have another downturn/recession, and so on. 20 years of that and we may be looking at persistent 15-20% unemployment (U3) and a standard of living far below what we have today.
I should add a bit on how we might get ourselves out of this destructive cycle. The way to respond to this is to design programs that massively increase our energy efficiency and energy independence. These can be stimulus programs, so they’ll create jobs, but they have to be carefully crafted so that they don’t cause much of a rebound effect. Basically we need to decrease our oil-to-GDP ratio.
It’s a multi-year effort that should have been started in 2009. But no such program can be proposed let alone implemented until anyone (anyone!) in Washington understands that this is a key constraint for the economy.
The thing that baffles me is that even the most progressive Dems in congress have no clue how much oil is our achilles heel. I’ve never seen any of the supposed progressive heroes of congress make so much as a speech about how reducing our dependence upon oil is required to ever have the economy grow again. This is a major political challenge that I hope this community will take on going forward.