Debunking a Myth

How many jobs will the massive deficit spending bill create? Four million? Three-point-five million? Two million? Three million? What's the number this week?

Quick aside: I asked my D2 football buddies to help me come up with a better acronym for the bill. Some gems: Every Republican Resisted Our Ruin, or ERROR (only true for the House version); When Even Lazy Folks Are Rewarded Evenly, or WELFARE; and Federal Assistance In Leveraging Ourselves Up a Trillion, or FAILOUT. Probably the funniest one was "Economic Rescue Plan," submitted by a Kool-Aid junkie. But the best thus far is one I submitted myself:

Federal Oversized Omnibus Keynesian-Economics Disaster, or FOOKED. Pardon the irreverence, but as a Scotsman, and a member of clan Wallace to boot, Braveheart is my favorite film. And I've always loved the line from Stephen the Irishman:

"God tells me He can get me out of this mess, but He's pretty sure you're fooked."

As are we all, now that the FOOKED has passed.

Anyway, back to the jobs claim, which I've promised I'd get around to debunking for a while now.

The first reason we should be skeptical of this number is that President Obama first threw it out (to the best of my knowledge) during the transition, when he said we needed a plan to create three million jobs. Then it was four million. Then he clarified it to say "create or save" those jobs. All of this without any semblance of a plan. Then, when the plan is thrown together and shoved down our throats with little or no notice, without it having been read by a single lawmaker who voted for or against it, it magically promises to create exactly that many jobs. Miraculous.

Oh, but wait - it was the original version, valued at $838 billion, that would create or save 4 million jobs. Now, after it's been reduced to $787 billion - a reduction of 6% - the job creation/salvation has been pared to 3.5 million - a reduction of 12.5%. Now why would President Obama applaud the reduction of $60 billion in spending when its effect would be to reduce job creation by twice the percentage reduction in spending, when he said in his recent press briefing that the primary metric for whether his plan was working would be the creation of 4 million - okay, now 3.5 million - jobs?

I'll tell you why. Because the job creation line all along has been pure fabrication.

First, if your goal is to create 4 million jobs, step one is to say, "Okay, how do we create those jobs?" Then, you have experts who answer that question. Once you have the answer, you say, "Okay, what's that gonna cost?"

Instead, this is how the current administration and Congress have approached the economic crisis. They asked a bunch of Keynesian economists, "How much government spending do we need to throw at this economy to replace the lack of private investment and consumer demand (more on the GDP equation in my next post)?" Those Keynesians said, "Gee, about $800 billion to $1 trillion." The administration said, "Crap! I don't know if the fiscal conservatives will buy into that. Probably the most we can get passed is $775 billion. But we'll see what we can do."

So, post-election, President Obama told Nancy Pelosi and her band of merry men to figure out how to spend $800 billion-plus. And Nancy went to her cabal and said, "What do you want?" Well, what they wanted was everything they had tried to run past President Bush, but he'd either vetoed or threatened to veto. What they wanted was every spending initiative, every wealth transfer program, every pro-labor and anti-business plan that they'd dreamed of ramming down the collective American throat since 1994, the last time their party had controlled the White House and both houses of Congress. So they porked it up, and hit the magic number. Then, miraculously, they said it would create or save 4 million - er, 3.5 million jobs.

Even their pet economist, neo-Keynesian Mark Zandi, disagrees.

Okay, so much for the seat-of-the-pants view. Without creating an economic model based on this bill - which still boasts a readership of zero, as far as I know - let's break down the job stats from recessions past.

I looked at all recessions in the post-war era, examining what President was in power, the number of jobs lost during the recession, the cause and severity of the recession, and the number of jobs created during the subsequent recovery, paying note to the President in power during that recovery.

Two caveats: first, recessions are typically not caused by a President. To wit, anyone who blames the current recession on Bush is a partisan, economically-ignorant nincompoop. Presidents can ease them or exacerbate them, but they rarely, rarely cause them.

And second, let's not forget orders of magnitude here - growth in population, growth in the labor force due to the growing inclusion of women since the post-war era, etc. None of which I accounted for in terms of presenting the data as a percentage of the labor force, out of sheer laziness. I've looked at the data on a relative basis, but I'm not taking the time to break it down as such. Any thinking person should be able to figure out the validity of the concept.

On to the analysis. Let's do this president-by-president. First up: Good ol' Harry Truman, a local boy.

Harry, a Dem, faced a mild, classic business cycle recession beginning in November 1948 and ending in October 1949, during which 2.3 million jobs were lost. The recovery in jobs began immediately, and lasted through his first term and his second, a span that saw 7.2 million jobs created, or more than 3 times the number lost during the '48-49 recession. Harry's job-creation magic? The continuation of the baby-boom expansion, and the Korean War build-up.

Next up: Ike's post-Korean-War recession of July '53-May '54, another mild one (Ike was a Republican). About 1.6 million jobs were lost - a third fewer than during the previous downturn. But by July 1957 - several months into Ike's second term - some 4.2 million jobs, or about 2.5 times as many as were lost in the preceding recession, had been added. Why? Continuation of the baby boom, primarily, plus natural recovery from a recession. Ike didn't undertake any crazy stimulus plans.

In August 1957, Ike faced another recession, this one brought on by tight monetary policy coming out of the recovery from the prior recession (recall that this was prior to the monetarist Fed era that began with Paul Volcker, and thus tight policy would have been achieved by contracting the money supply). That was a serious recession that resulted in 2.1 million jobs lost in ten months.

Yet, 23 months later, the economy had added 3.4 million jobs, or more than 1.5 times what had been lost in the recession.

Once more, in April 1960, Ike faced another challenging recession, again of the classic business cycle variety, that saw some 900,000 jobs lost in 11 months, by which time JFK was our President.

Tragically, JFK would not live to see our next recession. By the time of his assassination, the total jobs gained would be 3.7 million, or nearly four times those lost in the prior recession. The next recession wouldn't even start on his successor's watch, but did begin shortly thereafter, due in part to Johnson's policies.

That recession would begin in December 1969, under President Nixon, again due primarily to tight monetary policy in the pre-monetarist era. It lasted exactly one year, and was relatively mild, with job losses totaling 680,000. By October 1972, we had replaced 4.3 million jobs - 4-5 times the number of jobs lost.

The early '70s oil shock brought another serious downturn, commencing during Nixon's second term, in November 1973, and ending 17 months later, after his fall from grace, during Ford's ill-fated partial term. Just under a million jobs were shed, and even though four million were added in the remaining 22 months of Ford's term, hyperinflation from continued stresses in the price of oil resulted in his defeat at the hands of Jimmy Carter.

Carter appointed Paul Volcker as Fed Chair, and the crusty monetarist changed the face of Fed policy. In doing so, he applied significant, harsh discipline to the economy in his successful bid to thwart inflation. Partly as a result of that, partly due to the Iranian hostage crisis and another oil shock, the economy entered a severe recession in 1980 that lasted 35 months and saw 1.9 million jobs lost. By the recession's end, Ronald Reagan would be president.

In the 23 months from the end of that deep recession to Reagan's re-election, some 6.8 million jobs were created. Again, Reagan didn't undertake any massive stimulus. He did ratchet up military spending in the wake of the Iranian hostage crisis and in the face of an escalating Cold War, but that wasn't a huge job creator. He did cut taxes, which may have contributed to job growth. During his second term, another 11.5 million jobs were added, and there were no recessions.

That helped his veep, Poppy Bush, succeed him. But the S&L crisis would bring another serious downturn on Bush's watch, and 1.3 million jobs were lost in nine months. The "jobless recovery" that ensued, with job growth lagging economic recovery, led to Bush's defeat by Bill Clinton. By the time of the election, job growth was just 1.2 million, or less than the job losses of the credit-driven recession.

During Clinton's first term, 11.5 million jobs were added, a similar result to Reagan's second term. But once more, Clinton didn't undertake any huge stimulus effort - he didn't have to; economic recovery and job growth were already underway when he took the reins. His advisers - particularly George Stephanopolous, who authored the campaign mantra of "It's the economy, stupid" - wisely steered him to pro-business policies that would avoid tilting the US economy back into recession. He balanced the budget, largely through military spending cuts enabled by the ending of the Cold War, and aided by then-historically-low interest rates. He did hike taxes, but that didn't turn out to be a job-killer.

Clinton's second term almost paralleled his first: 11.3 million jobs created, and no recession. But there were cracks in the foundation. Much of the job creation came in the first three years of his second term, fueled by the dot-com bubble. Those jobs were added by companies that would ultimately fail. In the final year of his second term, the bubble had burst, and only 1.7 million jobs were added - about half or less the number created in each of the previous three years.

Again, Clinton had little to do with this period of job growth - no massive stimulus spending, etc. One could argue that his impact came in reversing his original decision to replace Alan Greenspan as Fed Chairman with Keynesian Alan Blinder, whom Clinton had appointed as vice-chair with the promise of the chairmanship when Greenspan's current term ended. But, not wanting to rock the economic boat, Clinton broke his promise to Blinder, who left the Fed and returned to academia.

Greenspan, of course, made the first of his major policy blunders in 1998, fueling the dot-com bubble with too-easy money. By this time, he had come full circle from his disciplined, conservative days. He had become a political animal, and owed Clinton a favor. He also had become afraid of his own shadow, and was thus prone to knee-jerk reactions.

In any event, Clinton left office on the dawn of a new recession, one that "W" would inherit. It was a mild one, lasting nine months - exacerbated in the latter portion by the 9/11 terror attacks - during which 1.6 million jobs were lost. By the end of his first term, a little less than that had been added, but he still managed to win re-election. During the first three years of his second term, 5.6 million more jobs would be added, once again due to a Greenspan-created asset bubble, this time in housing.

The NBER's official start date for the current recession is December 2007, and since then 3.5 million jobs have been lost - the most in the post-war era in a single year, but let's remember that the labor force has grown tremendously since then; on a percentage basis, thus far this downturn is less severe in terms of the labor market impact than the early '80s recession.

Yet, the fear-mongers in Washington led us to believe that this was going to be the next Great Depression if they didn't throw a trillion dollars of non-stimulative spending at it - spending laid out in a bill that nobody even read before voting to pass it.

What, then, does our little trip down memory lane tell us?

Not much.

And that's the point. There's little evidence that huge stimulus programs create permanent, viable private-sector jobs. There is evidence that tax cuts do, but Clinton's tax hikes didn't prevent job growth during his first term on the order of Reagan's second, even though Reagan cut taxes. True, FDR's 1937 tax hike proved a job-killer, but it isn't always the case - it depends on prevailing economic circumstances at the time.

The bottom line is this: if 4 million jobs are added to the US economy during President Obama's first term, it will be a happy coincidence, not part of a grand design, because there is no grand design. Once more, hope is not a plan.

And not only will it be a happy coincidence, it will be a complete shock. It's not likely to happen. In fact, by the time this recession ends, I will be surprised if we can add enough jobs in the next eight years to replace those lost.