Tag Archives: economic crisis

Contracting Government Has Hurt Job Growth

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(change, in thousands of jobs) Jan 2001 to Jan 2005 Jan 2005 to Jan 2009 Jan 2001 to Jan 2009 Jan 2009 to Nov 2011
Total Employment -16 +1,110 +1,094 -1,855
Private Sector -916 +263 -653 -1,262
Government Sector +900 +847 +1,747 -593

Obama has repeatedly and emphatically been charged by Republican politicians as fostering  a huge expansion in government job growth, with this a major cause for the weak recovery in private job growth.  The facts do not support this.  The government sector has in fact been contracting sharply during the Obama period, in distinct contrast to the expansion during the Bush presidency, and it is this contraction which indeed can explain a significant share of the drop in overall jobs in the economy.

The table above, drawn from Bureau of Labor Statistics (US Department of Labor) figures on employment levels by the major sectors, shows the change in the number of those employed, for the periods between January 2001 and January 2005 (the first Bush term), between January 2005 and January 2009 (the second Bush term), between January 2001 and January 2009 (the two Bush terms together), and between January 2009 and November 2011 (the most recent figures, for the Obama term so far).

In the first Bush presidential term, overall job growth was basically zero.  But it is striking that it only comes to zero because a decline of 916,000 private jobs is almost fully offset by a nearly identical rise in government jobs of 900,000.  Note that while the time periods we are examining are the presidential terms, government job growth is largely affected by changes at the state and local level, as these account for about 87% of government jobs.

During the second Bush term, private sector job growth became positive, by a modest 263,000 for the period (with growth early on offset by the downturn in his final year), while government job growth continued at a roughly similar positive rate as during his first term.  With both positive, total job growth was then about 1.1 million.

For the Bush presidency as a whole, it is then interesting to note the overall job growth of about 1.1 million (all in his second term), only came about due to a growth in government jobs of about 1.75 million:  Private jobs in fact fell by about 650,000.

During the Obama presidency so far, government job growth went into reverse, with a decline of almost 600,000 jobs.  It is interesting that the pace of the decline for the first 34 months of Obama’s 48 month term (that is, through November 2011), matches almost exactly the pace of the increase during either of the Bush terms.

Suppose government job growth had increased during the Obama period at the pace it had during the Bush terms.  There would then have been a growth in government employment of over 600,000, rather than a decline of almost that amount, for a swing of 1.2 million jobs.  Assuming the same decline as now of over 1.2 million private jobs, overall jobs would have still fallen, but by only about 600,000 rather than over 1.8 million.

Of course, with such a different policy on government job growth, one would not expect private job growth to be the same.  Conservatives might argue that the government job growth would “crowd out” the private sector, leading to even an even larger fall in private jobs.  But there is no evidence to support this, in an environment where unemployment is high and interest rates on government borrowing are close to zero as the economy suffers from a liquidity trap.

Indeed, the basic insight of John Maynard Keynes is that in such a situation, government job growth (and its accompanying spending) will not only not displace private job growth, but will add to it at a multiple of what is spent directly, as the newly employed by the government will add to demand for privately produced goods and services as they spend their wages.  A reasonable estimate of this government employment multiplier would be at least two, and many would argue higher.  At a multiplier of two (that is, each additional government job leads to one additional private job, for two total), the swing in government employment of 1.2 million (that is, a rise of 600,000 rather than a decline of about 600,000), would have led to 1.2 million additional private jobs, and total employment growth would then have been a positive of 600,000 rather than a negative of over 1.8 million.  This is a swing of 2.4 million jobs.  With current unemployment in the US of 13.3 million, and a civilian labor force of 153.9 million, the unemployment rate would then be 7.1% rather than the current 8.6%.  It was 7.8% when Obama took office.

One can quibble with the specific figures, and what multiplier to assume.  But the basic point is that the contraction in government employment in recent years (primarily at the state and local levels) is a major reason why the overall job picture is still so bad.  If government employment had continued to expand at the pace it had during either of the Bush terms, rather than contract at a similar pace, then under quite plausible estimates, unemployment would be less now than when Obama took office.

New Home Sales Remain Abysmal, But The Potential Should Be Recognized

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New home sale figures for October, recently released, remain abysmally low at just 307,000 sales at an annual rate.  They have fluctuated within only a narrow range over the past year, with no clear trend and no signs to be encouraged by.  What is more interesting is the longer term context.

New home sales in the US fluctuate a good deal, but around a rising trend of 1.0% a year (calculated from a regression over the 1980 to 2010 data).  They reached a fairly stable level of approximately 900,000 housing units a year between 1998 and 2001.  But there was then a bubble between 2002 and 2006, reaching a peak of almost 1,300,000 in 2005, and then crashing to a bit over 300,000 in 2010 and 2011, where it now seems to have leveled off.

Only 300,000 new home sales a year is abysmal and a major drag on the economy.  It is only one-third of the 900,000 level of the early part of the last decade, and less than one-quarter of the levels reached in the bubble years.  But it should also be noted that people need homes, and that that need grows over time due to population growth.  The trend 1.0% growth found in the data is consistent with this.  And with new home construction now far below trend, it will be a significant spur to the economy if and when housing construction recovers.  Brad DeLong has made a similar point in his blog a number of times.  Here is one such post.

Keeping things simple and conservative, let’s assume that new home sales will, for the purposes here and over periods of time, on average equal the number of new homes constructed.  All are eventually sold, with very few exceptions.  And while there are figures available for new housing starts, these are consistently higher than sales for reasons that are not clear, but may reflect homes never completed.  Using the 900,000 units sold a year between 1998 and 2001 as a reasonable norm, and for simplicity not even allow for a rising trend in this figure, one can calculate the excess over the bubble years 2002 to 2006 (the area in blue in the graph) and then the shortfall that has developed over 2007 to 2011 and continues (the area in red).  Based on the figures underlying the graph, the excess during the bubble was 1.1 million units, while the shortfall in the subsequent bust through 2011 was 2.2 million units.  There is therefore now a net shortfall in housing supply of 1.1 million, as the excess over 2002 to 2006 has been more than worked off.  And as long as new home sales and construction remain at only 300,000 a year, that shortfall (relative to a 900,000 per year norm) will be growing by 600,000 housing units a year.

This suggests that a major pent-up demand for homes has built up.  It has not been resolved due to continued problems in the housing market and especially in the housing finance market, with many mortgages underwater and hence do not move, mortgages that remain hard to get by potential new buyers, an overhang of houses not sold, and a foreclosure process that has not worked well.  The market remains close to frozen.

But if these housing market problems could be resolved, so that construction could revert to its previous norms, the stimulus to the economy would be huge.  Assuming simply a return to construction of 900,000 units a year (and hence ignoring what would likely be an overshooting of this for a few years to make up for the net shortfall of recent years), implies construction of an additional 600,000 units a year.  At the average new home price of $221,800 in 2010, the aggregate value of such homes would be $133 billion per year.  This is just short of 1% of GDP.  Most of this would add to GDP as there is some, but only limited, “leakage” through some inputs that are imported (housing lumber, fuel for trucks, etc.).

But there will also be indirect multiplier effects, especially in the current depressed economy.  A reasonable estimate of the multiplier on housing construction would be 2 to 3.  A return of new home construction to previous levels would therefore add 2 to 3% of GDP. With actual GDP currently about 5% below potential GDP (estimate for end 2011 by the Congressional Budget Office, page 12), such an addition from housing construction would bring the economy about half-way back to where it needs to be.  But this will not happen until the market for homes and for home mortgage financing begins to function reasonably well.

Profits Are Up, While Employee Compensation Stagnates

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Aggregate profits in the national economy, while volatile, have grown rapidly over the past decade, while employee compensation has been lackluster.  Profits (defined here as including corporate profits [the largest component], proprietor’s income, rental income, net interest income and business transfers) plus Compensation of Employees (along with a smaller third category, for taxes on production and imports less subsidies, plus the net surplus or deficit on government enterprises such as the Post Office), sum up to National Income.  Note that Compensation of Employees is the total compensation for all workers as a group, and is not per worker.  The Bureau of Economic Analysis of the US Department of Commerce provides estimates as part of the National Income and Product Accounts, and the most recent figures were released on November 22.  The graphs and figures shown here come from analysis of that underlying data.

Profits, Employee Compensation, and overall National Income grew at similar (and slow) rates between 2001 and the third quarter of 2003.  Profits then took off, rising rapidly until mid-2006, after which they pulled back some (but with levels relative to 2001 still well above the levels for Employee Compensation; overall National Income will be in between).  Profits then fell rapidly with the 2008 economic collapse, as did Employee Compensation and hence overall National Income, so that by early 2009 they were each only 8% above (in real terms) their level in early 2001, eight years before.  But from that trough, Profits bounced back rapidly, so that by late 2010 they had surpassed their previous mid-2006 peak, and then continued to grow strongly in 2011.  Total Compensation of Employees, in contrast, has grown only modestly from its 2009 trough.  Overall National Income is now almost back to its previous peak, but Compensation of Employees is well below, while Profits are well above, their previous peaks.

One can also look at the changes over the cycle:  from 2001 to the peak in National Income in the first quarter of 2008, from that peak to the trough in the second quarter of 2009, and then from that trough to now (the third quarter of 2011).  In the table below, “Growth” is the growth of that component of National Income (in real terms) over the full period, while “Change” is the change over the period in the aggregate income of that group, in real (2005) dollars, in billions:

change in National Income Components

2001Q1 to Peak

 Peak to Trough

Trough to 2011Q3
2005 prices, % growth and billions of US$ Growth Change Growth Change Growth Change
Employee Compensation 12.6% $839b -5.5% -$415b 1.4% $98b
Profits 20.2% $562b -11.2% -$377b 21.6% $646b
Taxes + Gov’t Firms 19.7% $148b -4.9% -$44b 4.2% $36b
National Income 15.1% $1,549b -7.1% -$836b 7.1% $780b

The contrast in the truly abysmal growth in total Compensation of Employees in the recovery (of just 1.4% in real terms from the mid-2009 trough to now), with the rapid growth in Profits (of 21.6% in real terms over this same period), is stark.  Put another way, Profits obtained 83% of the growth in National Income from the trough in the second quarter of 2009 to now (83% = $646b/$780b), even though it only accounted for 27% of National Income at the trough (and 31% now).  Obama has been loudly blamed by Republican politicians for hurting business profits.  There is no evidence of that here.  There has been a strong growth in Profits in this recovery.  While the data analyzed here cannot allow us to determine the causes of these trends, they do allow us to see whether Profits are depressed in the economic recovery.  They clearly are not.

Finally, the data can be used to calculate the share of National Income going to Profits.  This is shown below.  The Profits share has grown strongly over the past decade, and while it fell in the economic collapse in the last year of the Bush Presidency, it has now bounced back to above its previous peak.