The employment emergency is over
This is the US unemployment rate, from Calculated Risk. Today’s jobs report was a very positive one: not only did job creation exceed all expectations, but unemployment fell too, to 7.7%. For the first time, the unemployment rate is lower than it was when Barack Obama took office, in January 2009.
The employment recovery is now 33 months old, and as strong as it’s ever been. We’re still a long way from achieving pre-recession levels of employment, but the fact is that it’s hard to maintain a sense of crisis and emergency for this much time: if you live with anything for more than a couple of years it becomes normal. (Which is one reason why Europe, which has a structurally much higher unemployment rate than the US, doesn’t consider itself to be in a permanent jobs crisis.)
The levels in the employment report are still scary. 7.7% is high in absolute terms, and both the employment-to-population ratio and the labor force participation rate are much lower than they should be. America should have millions more people at work than it does, and there’s a very strong case, looking at levels alone, for further economic stimulus to help us further in the right direction.
But there’s something oxymoronic about the concept of a permanent state of emergency. And in terms of how strong the recovery feels, first derivatives are just as important as levels: if unemployment has fallen from 8.7% to 7.7% in the past year, that feels better than an economy where unemployment has risen from, say, 6.1% to 7.1%. When the temporary payroll tax cut was passed, unemployment was higher than it is now, and it was rising; clearly we’re in a much better spot now than we were then.
The best-case outcome from the fiscal negotiations now taking place between Barack Obama and John Boehner is that they move us out of the “permanent temporary” tax code and into a world where everybody knows what tax rates are and what they will be. Putting expiry dates on tax cuts is a gimmick, and while there’s a case for doing that kind of thing in the middle of a major crisis, we’re really not in the middle of a major crisis any more. It took far too long for the unemployment rate to start falling, and it has been falling far too slowly. But “unemployment should be falling faster” is not a crisis.
With any luck, then, the resolution to the fiscal-cliff debate will be a set of tax policies that both sides agree on, along with a clear date when they will be fully in force. I’m thinking January 1, 2014. The key number to look at will be total federal taxes as a percentage of GDP: it needs to be high enough to be able to run a mature modern democracy. Then, once you have a clear and permanent tax code as your primed canvas, you can start having a sensible conversation about government expenditures: where they need to come down, and which areas of the economy need some stimulus. Even if spending-related stimulus is no more effective than tax-cut-related stimulus, it’s still a better option, because it allows you to leave the tax code alone.
If Obama’s first term was about doing whatever was necessary to get us out of the biggest crisis in living memory, his second term should be dedicated to building strong and permanent foundations for the economy going forward. America’s fiscal architecture is a key part of that — indeed, it’s the key part. So if the payroll cut disappears, along with all other temporary bells and whistles, that’s fine. What’s good for the economy now will also be good for the economy next year, and the year after, and the year after that. Let’s structure any a deal so that it can work forever. And then, if there are temporary political and economic issues which need addressing, let’s tackle them through means other than the tax code.