Job-cre­ation lessons from the past

The Washington Times Weekly - - Commentary -

The Obama ad­min­is­tra­tion and oth­ers on the left seemed to be stunned when the Bureau of La­bor Sta­tis­tics re­ported no new net jobs last month. When Pres­i­dent Obama makes his “jobs speech,” the Amer­i­can peo­ple will see whether he and his ad­vis­ers have learned any­thing from the three years of Oba­ma­nomics fail­ures.

His­tor­i­cally, the Amer­i­can econ­omy has been a phe­nom­e­nal job-cre­at­ing ma­chine. In a well-func­tion­ing econ­omy, the in­crease in jobs par­al­lels the in­crease in pop­u­la­tion. As can be seen in the ac­com­pa­ny­ing ta­ble, dur­ing eight Rea­gan years, jobs grew at a much faster rate than did the pop­u­la­tion, as many dis­heart­ened work­ers re-en­tered the la­bor force af­ter the Carter eco­nomic fi­asco. Al­most 17 mil­lion new civil­ian jobs were cre­ated from 1981 through 1989, which was 9 mil­lion more than can be ex­plained by pop­u­la­tion growth. Like­wise, dur­ing the Clin­ton years from 1993 through 2001, 7 mil­lion more jobs were cre­ated than can be ex­plained by pop­u­la­tion growth alone.

But dur­ing the pres­i­den­cies of Ge­orge H.W. Bush and Ge­orge W. Bush, job growth did not keep up with pop­u­la­tion growth. If it had, there would have been ap­prox­i­mately 3.7 mil­lion more jobs cre­ated be­tween 1989 and 1993 and 5.9 mil­lion more jobs be­tween 2001 and 2009. The Obama record is far worse. The to­tal num­ber of jobs ac­tu­ally has de­creased by 2.6 mil­lion since Jan­uary 2009; if job growth had merely kept up with pop­u­la­tion growth dur­ing that pe­riod, there would be 4.8 mil­lion additional jobs. At the end of re­ces­sion, the num­ber of jobs nor­mally grows far faster than pop­u­la­tion, but not this time.

The un­em­ploy­ment rate is a flawed mea­sure be­cause dur­ing weak eco­nomic pe­ri­ods, many dis­cour­aged peo­ple drop out of the la­bor force; thus, the la­bor force/pop­u­la­tion ra­tio de­clines and the real un­em­ploy­ment rate is un­der­stated.

As Pres­i­dent Obama searches for so­lu­tions to the jobs prob­lem, he ought to look at the poli­cies that worked suc­cess­fully dur­ing the Rea­gan and Clin­ton ad­min­is­tra­tions.

The Rea­gan ad­min­is­tra­tion sharply re­duced mar­ginal tax rates in both the first and sec­ond terms, but there was only a small re­duc­tion in the tax bur­den as a per­cent­age of gross do­mes­tic prod­uct (GDP) — about 1 per­cent of GDP from 1981 to 1989.

How­ever, the job-cre­at­ing busi­ness­peo­ple knew with great cer­tainty that the tax cost of hir­ing new work­ers and in­vest­ing in new plants and equip­ment would be go­ing down, not up. They also knew that the ad­min­is­tra­tion was se­ri­ous about ap­ply­ing cost-ben­e­fit tests to pro­posed reg­u­la­tions. In spite of all the talk about re­duc­ing govern­ment spend­ing, spend­ing as a per­cent­age of GDP did not fall dur­ing the first Rea­gan ad­min­is­tra­tion be­cause the cost of the mil­i­tary buildup off­set the re­duc­tions in do­mes­tic spend­ing. Spend­ing as a per­cent­age of GDP dropped 2 full per­cent­age points dur­ing Rea­gan’s sec­ond term, which was also the pe­riod of the most rapid job growth.

Govern­ment spend­ing dropped dur­ing both terms of the Clin­ton ad­min­is­tra­tion, from 21.4 per­cent of GDP in 1993 to 18.2 per­cent of GDP in 2001. Pres­i­dent Clin­ton did in­crease taxes dur­ing his first term but signed the re­duc­tion in the cap­i­tal gains tax rate in his sec­ond term. How­ever, most have for­got­ten that the econ­omy had stag­nated at the end of the sec­ond Clin­ton term and the econ­omy was in re­ces­sion in the first quar­ter of 2001, when Ge­orge W. Bush took of­fice — well be­fore Sept. 11, 2001. In ret­ro­spect, Mr. Clin­ton should have cut taxes more sharply in his sec­ond term.

The first Pres­i­dent Bush aban­doned his “flex­i­ble freeze” to con­trol spend­ing shortly af­ter tak­ing of­fice and re­neged on his “no new taxes pledge,” both of which turned out to be mis­takes. The sec­ond Pres­i­dent Bush did cut tax rates but al­lowed spend­ing to rise 2 full per­cent­age points of GDP dur­ing his two terms.

The lessons should be ob­vi­ous to Mr. Obama and his ad­vis­ers. In­creases in govern­ment spend­ing are as­so­ci­ated with lower — not higher — job cre­ation and vice versa. (This has been true for the 100 years for which there are good records.) Job cre­ators do not hire work­ers when they fear higher taxes in the fu­ture. Tem­po­rary tax and spend­ing gim­micks such as in­fra­struc­ture projects also have proved not to cre­ate net new jobs.

The pres­i­dent should have said in his Sept. 8 speech: “I pledge not to pro­pose any in­crease in taxes un­til un­em­ploy­ment is un­der 5 per­cent. I prom­ise to come forth with a bud­get next month that will re­duce spend­ing each year, so within four years, it will be no higher than 19 per­cent of GDP. And I am is­su­ing a freeze on all new reg­u­la­tions, which will re­main in ef­fect un­til each new pro­posed reg­u­la­tion can be shown to be cost-ef­fec­tive.” That would take him about 30 sec­onds to say. Most lis­ten­ers would be happy to turn to the foot­ball game, the mar­kets would have soared on Fri­day, busi­ness­peo­ple would start hir­ing, and the pres­i­dent might even be re-elected.

Richard W. Rahn is a se­nior fel­low at the Cato In­sti­tute and chair­man of the In­sti­tute for Global Eco­nomic Growth.

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