The Truth of the Matter Is

"The truth of the matter is," President Obama said, "we've created 4.3 million jobs over the last 27 months, over 800,000 just this year alone. The private sector is doing fine."

According to Peter Ferrara, Forbes magazine contributor,  the truth of the matter is President Obama’s unemployment rate is stuck at 11% in real terms; 23 million Americans are unemployed, underemployed or have dropped out of the labor force; the economy grew at a meager 1.9% in the first quarter; the median household income has dropped 10% over the last four years; and we have experienced record home foreclosures.

To use the President’s own phrase – “Let me be clear” --  the only way one can reconcile the preceding two positions is by solving the problem at a higher level than it was “created.” So let’s do a little engineering analysis … you know … make sure the President’s assertion is in effect not the engineering equivalent of a perpetual motion machine: that is, it does not violate the laws of physics and is mathematically rigorous. Then, we can compare it to the facts.

Here we go!

First, it does not matter how many jobs the President has “created.”   It only matters how many NET jobs exists for those looking for work.  The unemployment rate measures this, with one exception.  As I understand the calculation, it does not count the people who have become so discouraged they have stopped looking for a job.  The effect is to understate the unemployment rate.  So for example, suppose this month you have 3 people who are unemployed out of 10, and next month one person stops looking for work.   The first month, the unemployment rate is 30% (3/10).  The second month it is 22% (2/9), all other things being equal. 

Second, the President claims these jobs have been created over the past 27 months.  Using a standard Gregorian calendar, he has been president since Jan 20, 2009.  That means as of May 20, 2012, he has been President 40 months.  Wow, what happened those first 13 months? The engineer in me wonders if someone is fudging the data.

Third, the President does not provide any historical context of what one should expect when the economy comes out of a recession.  Here are some facts that should be considered in evaluating his rosy conclusion that all is well.

·        The National Bureau of Economic Research, the recognized scorekeeper of when recessions start and end, declared this latest recession over in June, 2009, which would make it the longest recession since the Great Depression.

·        The historical precedent in America is the deeper the recession the stronger the recovery, as the American economy accelerates to return to its long term trendline.

·        Based on that precedent, we should be in the third year of a raging recovery boom by now.  But instead we have suffered the worst economic recovery from a recession since the Great Depression.

So let’s put all this together:

·        In December 2008, the unemployment rate 7.3%; in December 2011 it was 8.5%.  As of April 2012, data shows it is 8.1%.

·        In April 2012, 52 months after the recession started, 115,000 new jobs were created but the labor force shrank by another 342,000 workers, and the unemployment rate reportedly declined from 8.2% (March) to 8.1% (April).  Without the decline in the labor force, unemployment would have risen in April 2012 to 8.3%.

·        The labor force in April 2012 is actually 365,000 workers smaller than it was in June, 2009 when the recession supposedly ended.  Counting population growth since June of 2009, the economy is actually missing 7.7 million workers that would be in the work force if the labor force participation rate had remained the same since the supposed end of the recession three years ago.

Compare and contrast this to the Reagan recovery.  After the Reagan recovery started, millions more people wanted to work than before the recession started.  Despite this large influx of new job seekers, the unemployment rate fell from 10.8 percent at the end of 1982 to 7.2 percent by the presidential election in 1984.  Compare Regan’s second year (September 1983) results to President Obama’s third year (April 2012) results  in which 115,000 new jobs were created: Reagan’s economy created 1.1 million jobs in that one month alone, 10 times as much.

The bottom line is this:  the Wall Street Journal reported in their May 5-6 weekend edition, “Nearly three years into the [Obama] recovery, the U.S. still employs five million fewer workers than before the recession.” 

Now put a spin on that, Mr. President.