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Job Growth Tapers Despite Summers' Growth

12:00 AM, Sep 7, 2013 • By IRWIN M. STELZER
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The Labor Market: The jobs situation is less healthy than the economy. On Friday the Labor Department reported that the economy added a disappointing 169,000 jobs in August -- only 152,000 in the private sector -- and revised its estimate of job growth in June and July downward by 74,000 jobs. The unemployment rate fell from 7.4 percent in July to 7.3 percent, the lowest rate in 4.5 years, but only because some 300,000 more people dropped out of the work force. Some of those were ageing baby-boomers who retired, but many were discouraged workers. The labor force participation rate is now at its lowest level since August 1978, and the total of those out of work but still in the hunt, and workers too discouraged to look for jobs or involuntarily working short hours exceeds 20 million, or 13.7 percent of the work force. The Lindsey Group estimates that if the labor force participation rate had remained at its pre-recession levels, the unemployment rate would be 11.2 percent rather than 7.3 percent, or 9.5 percent if we allow for age-related retirements from the work force.

The Taper: Some observers believe that the weak jobs report will prompt the Fed to postpone the “taper”—a reduction in its $85 billion per month bond-buying program—it has reportedly been planning to announce later this month. Others think the Fed will taper, but rein in its purchases by $10 billion rather than the $20 billion it had been considering. Bernanke is being pressured by Brazil, India, Indonesia, and other emerging countries not to taper. They fear such a move will drive up U.S. interest rates, causing investors to pull funds out of these countries and redirect them to the U.S., with dire consequences for global growth.

A New Fed Chairman: This is the most important economic policy decision President Obama will make during the remainder of his term. The difficulties in the job market might well tip the scales in favor of Larry Summers, along with Fed vice chair Janet Yellen the leading candidate. Yellen is believed to think that continuing easy money policies will solve many of the problems in the job market, while Summers is thought to favor a broader range of policies to drive up the labor force participation rate and drive down long-term unemployment. That is more in line with Obama’s thinking. Summers has strong support from past and present Obama officials, who argue that his intelligence makes him the person best suited to solve the inevitable crises to come. But his detractors are rallying to derail his appointment. These anti-Summers campaigners include feminist groups unhappy with his performance when president of Harvard, liberals who opposed his deregulation of the financial sector, and many who crossed swords with Summers over the years and were among the fools he did not suffer gladly.

Betting odds favor continued growth, no taper if the Fed looks beyond the headline 7.3 percent unemployment rate, a modest taper if it occurs underlying labor market trends, and Larry Summers.

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