Liberal pundits and economists such as Paul Krugman have no use for the White House “Summer Recovery” PR tour. (Note that it isn’t called the “Prosperity Tour.”) They continue to attack the Obama administration for worrying too much about the budget deficit and too little about high unemployment. The White House response has been three-fold.
1) We’re not obsessed with the deficit. “That’s obvious,” Republicans would undoubtedly and snarkily reply, pointing out that under President Barack Obama budget’s plan, deficits would average $1.2 trillion a year for the rest of his term. But the serious White House point is that deficits are only an economic problem in the intermediate and long run. Certainly, both Obama administration and Federal Reserve officials argue, financial markets don’t seem too concerned at the moment given the continued low level of U.S. bond yields. That is why Obama hasn’t rushed to propose some immediate austerity program such as deep cuts in entitlements or a broad-based tax increase. America isn’t Greece. At least not yet.
2) There is no appetite in Congress to pass a pricey jobs bill. As the difficulty in getting the Senate to pass the deficit-expanding “jobs bill” reveals, debt fears are starting to take hold on Capitol Hill. (Or at least fears that voters are starting to worry about all the red ink.) Consider these failed Senate votes a reality check for liberal groups clamoring for a “New New Deal.” The union-backed Economic Policy Institute, for example, wants to spend $400 billion to create nearly 5 million jobs this year. The think tank would try and pay for it with a tax on stock, bond and currency trading. But there is little support for that in Congress, and even the Treasury Department thinks it a bad idea.
3) The labor market may just surprise you — and in a good way! There is a statistical relationship called Okun’s Law (really more of a rule of thumb) between GDP growth and job growth. A simple Okun analysis leads to the conclusion that the unemployment rate rose higher than was warranted given the severity of the Great Recession Why? Perhaps businesses, fearing another Great Depression, panicked and just hacked their workforces to bits. Okun’s Law was suspended, but only temporarily perhaps.
If one buys this theory, then eventually there should be some payback for that psychological overreaction. At some point soon, unemployment should fall way faster than what the rate of economic growth would indicate according to Okun’s Law. At least this is what the White House — and congressional Democrats hope. And if they are right, the job market might well unexpectedly strengthen right into the November midterm elections, helping avert the worst for Democratic House and Senate incumbents. No Republican tsunami.
But a brand new study from the economics team at Goldman Sachs throws cold water on all this. Their analysis is that the deviations from Okun’s Law were within the historical norm, so no sharp rebound (bold is mine):
It is a common belief that employment and hours worked fell more sharply during and after the 2007-2009 recession than can be explained by moves in real GDP, or in more technical terms, that “Okun’s law”—the empirical relationship between jobs and GDP—broke down during and after the recession. Many forecasters believe that this implies a large amount of pent-up hiring, as the “error” in Okun’s law proves temporary and firms hire aggressively in order to return staffing levels to more normal levels relative to production.
In contrast, we have argued that the relationship between employment and GDP remains quite similar to past cyclical norms, and that employment growth will therefore follow GDP growth without a “special hiring dividend.” … The bottom line is that there is no convincing evidence for a breakdown in Okun’s law, and hence no particular reason to expect a large amount of pent-up hiring during the recovery. … Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.”
And here is a chart to help visualize the point:
Bottom Line: Unemployment of 9.5 percent or so for the rest of the year seems baked into the cake (this is what the Fed and the economic consensus see) unless GDP growth starts to boom. And good luck finding forecasters who believe that. So far, this recovery has fit into the slow-growth, New Normal paradigm. Although it was a deep recession just like in 1981-82, the recovery has only been half as robust. Voters may not blame Democrats for the Great Recession, but they will likely hold them accountable for the Not-So-Great Recovery.