In the first presidential debate, President Obama said that voters should base their choice on the future, not the past. Given the economy’s poor performance over the past four years, it is no surprise that President Obama would favor that view. But what can we expect to see in the economy and especially in the labor market if the president is re-elected? And would electing Governor Romney improve the situation? Although it is impossible to know for sure what a new president would bring, it is unlikely the economy would be strong during a second Obama term.
During the past couple of years, the economy has been muddling along. Friday’s job numbers included the sad news that the unemployment rate stands at 7.9%, which is slightly higher than it was when the president took office in January 2009. Worse, the fraction of Americans working today, called the “employment-to-population ratio,” has fallen throughout his term and is 2 percentage points below where it was when he came in.
There are two reasons for this. First, a large number of workers, discouraged by their inability to find jobs, have given up looking and have dropped out of the workforce altogether. The percentage of the working-age population participating in the labor market was 65.5% when the president took office. Now it is 63.8%. In Ohio alone, about 200,000 workers have dropped out since the recession ended in June 2009.
Second, jobs have not been created fast enough to keep pace with the rising population. To do that, employment would have to have increased nationally by over 5.5 million jobs. Instead, the number of jobs has increased by just 194,000 since January 2009. At this rate, it will take 13 years for the economy to return to full employment.
The all-important data on monthly hires have not improved significantly. As was the case when the president came in, hires are close to 1 million per month below the 2007 average. The job market cannot recover until hiring returns to normal. During the early part of a recovery, the job picture seems to improve because layoffs slow. But the slowdown in layoffs near the trough of employment merely reflects the fact that discretionary labor has already been cut and there are few left to be laid off. In order to see real employment growth, the hiring rate must increase substantially, which has not happened during this recovery.
As for the economy as a whole, we have suffered what appears to be a permanent loss in GDP of about 12%. And the gap between where we are and where we should be is growing, not shrinking. Because GDP growth has been so poor, the economy is moving further away from the long-term trend.
What does all this portend for the future? The president has given no indication that he will alter course in a pro-growth direction if re-elected. A second Obama term would likely mean continued high government spending, full implementation of Obamacare, a heavy emphasis on regulation, a failure to promote an aggressive trade agenda and an unwillingness to reform our tax structure, except of course by increasing rates on the rich. Consequently, the economy would probably remain weak.
Policy changes could benefit the economy. The empirical evidence from our past and from other countries suggests that certain economic policies are more effective than others. Low and efficient taxes, aggressive policies to encourage more trade, well-crafted regulations and low government spending levels are all associated with economic growth.
A change in leadership could move us in this direction. Lower and more efficient taxes are part of the Romney approach. Opening up more trade, particularly with Latin America, is another component of Romney’s five-point plan. The plan also requires cost-benefit analysis of all regulations and caps expenditures at 20% of GDP. Of course, achieving these policies is easier said than done, but at least they’re the right policies, which is a change from the past. If they’re implemented, they could restore a normal recovery and help realize the Romney campaign promise of 12 million new jobs over the next four years. Were GDP growth to average 4% from 2013 through 2016, which, incidentally, is below the 4.8% that followed the 1982 recession, we could expect the creation of 12.2 million jobs. That could make up for the last four years and get us back to trend.
Ed Lazear, who was chairman of the President’s Council of Economic Advisers from 2006-2009, is a professor at Stanford University’s Graduate School of Business and a Hoover Institution fellow. He is an economic adviser to Mitt Romney.