Barataria: The GDP doesn’t lie, no job creation soon

Erik Hare: Wednesday, Oct. 6, 2010

When the National Bureau of Economic Research proclaimed that the recession is over, not many people believed them.  After all, unemployment still stands at levels we haven’t seen for many years – and very few businesses predict they will do much hiring in the near future.  But looking only at GDP (the sum of all goods and services made in the economy) it appears that somewhere around June 2009 we started having positive economic growth.

That’s great, as far as it goes, but what does it take to create jobs?  Running a little regression or two can give you a few potential answers – and none of them look all that good right now.

First, the source of today’s perspective:  John Mauldin’s excellent “Thoughts from the Frontline”.  Mauldin is an excellent analyst who has the guts to give his column over to people who have unique perspectives, even if he doesn’t always agree with them.  The result is just about the deepest and most enlightening conversation you’ll find on the internet.

In a recent piece, he offered a simple graph from his friend Gary Shilling.  The plot was designed to answer a simple question: what level of economic growth has been necessary in postwar USofA to drop the unemployment rate?  Below is exactly what Shilling produced, showing change in GDP year-over-year on the x axis and change in unemployment rate year-over-year on the y axis.  It’s a bit strange because a positive y means that the unemployment rate went up, so be careful as you read it:

We can see from this that there is a reasonable regression showing that unemployment starts to fall when GDP growth tops about 3.3%.  That’s an interesting figure because we just hit it this year – and we’re not expected to maintain GDP growth higher than that for quite a while.

If that’s not depressing enough, I noticed something in these data right away.  If you look at the big cluster of points from 1949 and you have been staring at recent data far too closely you may notice that recently we’ve been on the high side of the regression line drawn.  After digging through unemployment rate figures from the St Louis Federal Reserve and GDP figures from the Bureau of Economic Analysis, I made my own chart of the same type using using data only from 2000-2010:

We can see from this that, recently, it takes about 5.1% growth in GDP year-over-year to produce a drop in unemployment.  Why would recent data be higher?  If you accept that our economy is different than the manufacturing based economy of the 1960s you can make the case for emphasizing more recent data.  It also is reasonable to assume that companies are more careful about hiring in a Depression – and while we’ve had some positive economic growth in the 2000s it’s important to restate that all of it can be explained by Federal deficits and home equity withdrawals, leaving the rest of the economy in fairly rapid decline over the last 10 years.

There are many reasons for the upward shift, but I think that the real cause is the high overhead cost per employee.  This probably has been constantly creeping upward through increased health care costs, higher pension costs, more employee training (mandated and not) and higher recruitment costs.  I do not have good numbers on where we are today with employee overhead costs (estimates run about 70-80% of salary on average), let alone historical figures, so please take this as supposition.  However, I am certain that reducing employee overhead will make a more fluid labor market with fewer barriers to entry, and thus more jobs.

What does it take to make a good dent in the unemployment rate?  At least 3.3% growth in GDP, which we have seen in 2010.  But it may take as much as 5.1% change in GDP – which we haven’t seen since 2007.  None of this will take place if, as many predict, we slip back into negative growth by early 2011 and have a “double dip” recession.  Fasten your seatbelts.

This post was written by Erik Hare and originally published on Barataria. Follow him on Twitter:@wabbitoid

You can also learn about all our free newsletter options.

Comments (7)

  1. Submitted by Richard Schulze on 10/06/2010 - 07:21 am.

    Consider how much of GDP growth was housing-related before the bubble popped. Those are the primary unemployed, and the rest are consequences of that collapse. We could put lots of construction workers back to work repairing our roads and bridges. Check out what the American Society of Civil Engineers has to say about their condition; even allowing for their self-interest, it’s grim. But no, we cant do that, because Republicans only believe in going into debt to finance tax cuts for the rich. Of course, the real reason is that they want the economy down as long as possible.

  2. Submitted by Bert Perry on 10/06/2010 - 08:11 am.

    Keep in mind here that the GDP “growth” seen in 2009 was more than matched by government spending in the stimulus bill. Otherwise, private sector GDP shrank.

  3. Submitted by Erik Hare on 10/06/2010 - 09:29 am.

    Richard: I agree with you, and in fact I’d like to double that bet. I think it’s becoming obvious that we’re in a kind of Depression, allbeit a heavily managed one, so we have to be ready to try a lot of carefully targeted things the way FDR did in the New Deal if we want to get things going. Infrastructure is definitely a good way to go, but there are others that I’ve outlined on my blog as well.

    http://erikhare.wordpress.com/2010/09/27/next-generations-economy/
    http://erikhare.wordpress.com/2009/08/24/platform/

    Bert: I also agree with you, but the situation is even more complicated than that.

    http://erikhare.wordpress.com/2010/09/29/what-happened/

    Kick-starting the economy has proved very difficult at best.

  4. Submitted by Bert Perry on 10/06/2010 - 11:32 am.

    Erik, I’d argue, per Rothbard’s history of the Great Depression (available free online from http://www.mises.org), that the original Great Depression was heavily managed as well–and efforts by both parties to “jump start” things have–as in 1929-1945–made things far, far worse than they needed to be.

    Put gently, why does government spending get a Keynesian multiplier, while private sector does not–especially when many of the stimulus jobs cost millions apiece, about 10x what a private sector job costs? Are we to seriously argue that it’s economically more beneficial when goverment buys one $600 hammer than when private citizens buy 30 $20 hammers? Certainly Iron Range miners and steelworkers would disagree with us if we did!

    Never mind the fact that if you can borrow a bazillion bucks from the Chinese to goose GDP, you’ve effectively cheated on the statistics.

  5. Submitted by Erik Hare on 10/06/2010 - 11:57 am.

    Bert, I think you’re far off the mark when it comes to the actions taken in the Great Depression. We had recovered back to 1929 GDP by 1937 – it slumped back a bit once the stimulus was scaled back, however. I think there is a great case to be made for carefully targeted (and not deficit busting!) stimulus like we had at that time. “The only thing we have to fear is fear itself” after all – there is a psychology to Depressions that has to be dealt with in the short term.

    I do agree that we’ve been “painting the tape” on our own GDP for a decade now. And that private sector growth is always critical over the long haul. Keep in mind that nearly all focus on the economy – personally, socially, and poltiically – is very short term. That has to be dealt with in that moment when everything stops and we all stand around staring at each other.

  6. Submitted by Richard Schulze on 10/06/2010 - 01:13 pm.

    I’m usually a pretty wordy guy on these topics, so I’ll keep this one to two brief points.

    First, everything that makes the current economic situation look like nominal “growth” rather than “recession” is unsustainable artificial manipulation via government and private (e.g. banking) policies designed to hide serious structural problems. Until the underlying problems are solved, by the financiers writing off bad debt and by the government getting out of the way of real job creation, we’re just spraying another coat of paint over a rusted-out car.

    Second, all the newly-fashionable comparisons between this recession and the 1930s are conveniently leaving out the fact that although FDRs “alphabet soup” programs did take the edge off of some of the worst of what would have been utterly abject poverty, it took WWII to actually restore the economy. Only massive war mobilization, paid for with a dollar recently cut loose from the gold standard, really ended the Depression.

    If the current stagnation remains, or slips back into chronic, if not acutely painful, recession, the President in 2020 may end up deciding that what this country needs is a war. A wounded bear is a dangerous beast, and I don’t think the USA will shuffle off quietly into retirement like Britain did and Japan is doing. If only to avoid being nuked, the rest of the world has good reason to see the US avoid a complete repeat of the 1930s.

    Sometimes reality conflicts with religion or ideology and when it does, we really do need to pay attention, regardless of whose ox gets gored. Not all ideas and beliefs deserve to be treated with respect. Some should be encouraged to go away.

  7. Submitted by Bert Perry on 10/06/2010 - 05:14 pm.

    Erik; well, Rothbard’s book makes it pretty clear that throughout the Depression, government interaction in the economy was pretty strong. Fiscal policy was relentlessly inflationary, for example–though some degree of price reduction was experienced nonetheless.

    Moreover, there was something else in 1937 besides a reduction in stimulus; a massive increase in taxes on those who were hiring. Gotta look at both sides of that equation.

Leave a Reply