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Morning Jay: 'Known Unknowns' for 2012

6:00 AM, Mar 4, 2011 • By JAY COST
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This item from Reuters caught my eye:

With a leading Republican candidate yet to emerge, the biggest risk to President Barack Obama's quest for a second term next year is a jobless rate that has hovered between 9 and 10 percent for months.

Friday's jobless report is expected to show nonfarm payrolls soared in February by 185,000 jobs, but the overall unemployment rate is nonetheless expected to edge up to 9.1 percent...

Analysts say the jobless rate needs to drop below 8 percent by autumn 2012 for voters to feel optimistic about the economy -- and Obama's handling of it -- when they go to the polls that November.

This notion -- that 8 percent is a magic threshold -- has been making the rounds of late. It has absolutely no basis in established fact. None whatsoever. It is pure speculation. Here's why:

I put this graph up a few months ago. The implication of it is simple. Forget 8 percent. In the 16 presidential elections since 1948, unemployment has been around or above 7 percent on Election Day five times. The incumbent party's success rate in those contests is just 20 percent. And even that victory, in 1984, depended mightily upon 7.2 percent economic growth that year (as well as a 5.6 percent annual jump in real disposable income per capita, more than anything we've seen since).

Look carefully and you'll see that there are precisely zero elections held since 1948 that have had unemployment at 8 percent or higher. So why 8 percent is any kind of threshold is beyond me.

Some might want to take this as an indication that Obama is doomed. He can't get the joblessness rate down below 7 percent, and 1984-style growth is not on the horizon. So, the election is the GOP's to lose, right?

No. In fact, I think that is exactly the wrong lesson to draw here. Instead, I think our political process has gone "through the looking glass." Nothing in recent history serves as a guidepost to help us anticipate what to expect next year.

The reality is that Obama was elected after the crash, not before it. This gives him an enormous amount of political cover regarding the unemployment rate and the general state of the economy. He can always claim, correctly, that he didn't cause the mess. Ultimately, he is going to be judged on whether the public is satisfied with the pace of the clean-up.

Herein lies the problem in estimating the threshold for public satisfaction: the only other postwar president who has been elected at the point of the business cycle where Obama was elected is John F. Kennedy. But the recession of 1960 was comparatively milder and shorter, the recovery was substantially stronger, and JFK tragically was not able stand for reelection. So, that is not a helpful comparison at all.

Indeed, there is really nothing in the record books that correlates with the current situation. If you look at the percentage of the total adult population employed, you might wish to conclude that we are actually in the second phase of a double-dip jobs recession.

This often overlooked trend is something that the unemployment rate is not going to pick up when large numbers of workers become discouraged and drop out of the labor force. This graph helps explain why George W. Bush was hounded by criticism of a "jobless recovery" in 2004 despite the fact that the unemployment rate was low. You will also see that, though the country added jobs last year, those have basically just kept up with population growth, meaning that we're still at the bottom of a huge crater.

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