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Morning Jay: Make No Mistake: the Economy Is Problematic for Obama

6:00 AM, Apr 6, 2011 • By JAY COST
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It’s because of this extraordinary increase in government transfer payments that the income hole that developed after the recession has finally been filled. The following chart tracks this by presenting two lines. The first is nominal per capita income as it has been reported. The second is what it would have been if the government had not stepped in with these huge subsidies, and instead kept them in line with where they were in 2007.

This graph makes it clear that, were it not for unusually large government subsidies, the average American would have less money than he did in 2007. And remember, these are nominal dollars, meaning that we’re not taking into account inflation.

Indeed, the evidence suggests that real wages and salaries – in other words, the actual buying power of a paycheck – have been in a five-year slide:

In terms of purchasing power, today’s average paycheck is performing less strongly than it has at any point since 1998. And this is one area where the (real) unemployment, which is almost triple what it would be at so-called “full employment,” harms everybody, including those who have jobs. Put simply, it’s a buyers' market for labor these days, making it harder for the average worker to negotiate for a larger paycheck.

In fact, the supposedly “good” jobs report that came out last Friday had wages flat in the month-to-month, while nearly half of the jobs came from low paying sectors – retail trade, leisure/hospitality, and temporary services. Meanwhile, construction jobs are at a 15-year low while manufacturing jobs have not been this scarce since World War II.

So basically, here is where we are. Policymakers have spent the last three years tossing not millions, not billions, but trillions of borrowed dollars at the output gap in the American economy. And what is the result? A fair measurement of unemployment comes in higher than anything we’ve seen since the Great Depression. Real wages are in decline. Food stamp enrollment is at an all time high. Jobs are coming back, but at a painfully slow rate and without very good pay. Growth for this year and next are expected to come in below the historical trend. We’ve created a huge budget deficit, as we’ve borrowed from future generations to cover the output gap from the last couple years. And let’s not forget this one (not that we ever could!):

On top of all this, we see policymakers increasingly divided. We are well aware of the policy split in the Congress, and between Congress and President Obama. However, it appears that the Federal Reserve Board is increasingly uncertain of how to approach policy from this point forward:

A quiet day on Wall Street left stock indexes little changed after minutes from the most recent meeting of the Federal Reserve's policy committee showed few signs that the central bank plans on making changes to its stimulus program. Trading volume continued to be light.

The minutes, from the Fed's meeting on March 15, confirmed that members of the central bank are split about whether it needs to tighten credit later this year to ward off inflation. All of the committee's members agreed that the economy is improving.

Is this confusion any surprise, really? Let’s be honest. Most of the so-called experts were caught totally flat-footed by this contraction. Check out, for instance, the prognostications of the Wall Street Journal's experts in August, 2008; on average, they forecast a growth rate of 1.9 percent for 2009 (it finally came in at -2.6 percent). Most of them thought the recession wouldn’t be as bad as it has been; in December, 2008 they forecast that unemployment would be 8.1 percent (it came in at 9.9 percent). Lately, the experts have been revising their latest forecasts downward, sometimes drastically. It is hard to believe that any of them really understand why we're in the shape we're in, or what to do about it.

That includes, the president, whose prescription for "Winning the Future" is eeriely familiar to Lyle Lanley's.

So, for those analysts in the press who think that Obama will win in 2012 if incomes are still being propped up by massive (deficit financed) government spending, real salaries are declining or flat, unemployment is far above the historical trend, good paying jobs are scarce, the deficit is at an all time high, and the president has no real idea about what to do (except, of course, high speed rail), I have only this to say: you might want to think twice before you place that wager. This president is not yet out of the woods on the economy. Not even close.

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