POLITICS FEBRUARY 6, 2012
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Some time ago, I suggested that the 2012 election would hinge on three variables: the identity of the Republican nominee, the thrust of the Obama campaign’s reelection strategy, and the progress of the economy. While the first two have come into focus, the third presents a puzzle, because recent economic reports are not consistent with the forecasts for 2012. This is an analytical distinction that makes a political difference: If the forecasts are right, history suggests that the president’s reelection prospects are dicey at best. But if recent economic progress is sustained through the remainder of 2012, he’s an odds-on favorite to win a second term.
The January 2012 employment report highlighted this contradiction. Just last week, the Federal Reserve Board lowered its estimate of real GDP growth for 2012 to a range of 2.2 to 2.7 percent, and it raised its estimate of unemployment to a range of 8.2 to 8.5 percent. But according to the January BLS report, the economy generated 243,000 jobs last month alone, lowering the official unemployment rate to 8.3 percent.
A single month can be an aberration, of course. But the pace of job generation over the past few months is not consistent with the tepid growth the Fed is predicting. If the Fed turns out to be right, monthly job growth should fall below 150,000 and stay there, and unemployment will be no lower at the end of the year than it is today.
From one perspective, it’s not hard to understand the trend. As often happens, productivity rose sharply as soon as the Great Recession bottomed out—from 0.6 percent in 2008 to 2.3 percent in 2009 and 4.1 percent in 2010. But in the year just ended, productivity fell sharply, to only 0.7 percent. At that pace, even modest growth will generate substantial increases in total hours worked and net job creation. Still, productivity would have to fall even farther for the recent pace of employment growth to be sustained—that it, unless the Fed, the IMF, and the OECD are all too pessimistic about the next twelve months.
There’s something else going on: The labor force participation rate, which stood at 66.2 percent as the recession began four years ago, has declined by two and one half percentage points, to only 63.7 percent in the most recent report. If Americans were still working or looking for work at the rate of four years ago, 6 million more would be in the labor force, and unemployment would be much higher. Even a year ago, the rate was a point higher, suggesting that today’s labor force is about 750 thousand persons smaller than it would be if last year’s modest participation rate had remained unchanged.
Politically, though, these analytical details probably don’t make much difference. If the labor market continues to move forward at anything close to last month’s pace, the fourth quarter of 2011 may go down as the key inflection point of Obama’s presidency. If the Fed is right—if headwinds from housing, high debt, a weakened Europe, and slowdowns in the developing world restrain U.S. growth—it will turn out to be yet another false dawn. Either way, if the time you can devote to political news between now and November is limited, focus more on economic reports than on public opinion surveys.
William Galston is a senior fellow at the Brookings Institution and a contributing editor at The New Republic.
8 comments
As long as the leading Republican presidential candidates continue to alienate even some Republican voters with their often mean-spirited statements, I think the public images of the candidates of the 2 parties will determine the election results in November. Reagan was known as a "nice guy," as is Obama. And the unemployment rate going into the Gipper's second term was over 7 percent. Reagan tamped down inflation and Obama tamped down a possible depression. And the latter is bringing back our manufacturing base that Reagan obviously didn't care about, or he would have done something to stop its exodus from America, which began in the Eighties. Obama appears to care more about everyday Americans than Romney or any other Republican does. If America puts Mitt "I Like to Fire People" Romney in the Oval Office in November, the verdict is in. We are a suicidal people. And we deserve what we get.
- magboy47.
February 6, 2012 at 1:01am
I have no idea whether or not Galston's pessimism is correct. But I hope he's wrong, just so I can stop seeing these Obama's-prospects-are-dicey articles on TNR.
- maxhencke
February 6, 2012 at 9:13am
The good news galvanizes opponents of further Fed action to stimulate the economy, increasing the likelihood of the (forecasted) downturn in 2012, thereby increasing the likelihood of further Fed action later (or is it late) in the year. In politics as in most things in life, timing is everything. The good news also presents Republicans with a dilemma: how to downplay the good news without appearing to prefer bad news. Those who watched any Fox News this weekend know their play: to give a nod to the good news (and express much hope for more) but warn of impending doom from "the debt", which they attribute to all that entitlement spending, and the only answer to which is immediate and large entitlement cuts. That current debt has nothing to do with entitlements is beside the point; rather, "the debt", and public concerns about "the debt", is used as the rationale for immediate entitlement cuts. It's an interesting play, made entertaining by Fox journalists such as Chris Wallace, who share their viewers' concerns about the impending doom without ever questioning the premise about the cause of "the debt". The good news is welcomed, and more is hoped for, but unless entitlements are immediately cut, all will be lost.
- rayward
February 6, 2012 at 9:20am
And of course, if "entitlements" are immediately cut, the resulting impact of all those dollars not being spent in the economy will be an immediate downturn. To keep the downturn going, I guess all those Republican Governors will have to continue firing state workers.
- AllanL5
February 6, 2012 at 1:14pm
I have good news and bad news. Which do you want first?
- skahn
February 6, 2012 at 1:59pm
Ray, I think that much of the concern about "the debt" is actually concern about economic decline or stagnation -- the same way that in the 1980's and early 1990's, much of the concern about "the deficit" was really just another way of registering disaffection with the general state of the economy. The average voter doesn't have a sophisticated enough understanding of how national debt or deficits affect the economy but can pick up buzzwords like "debt", "inflation" and "unemployment" to signal generalized disaffection with the overall economy. What this means that, if the economic picture is dismal (as it was in 2009-10), average voters who heard criticism of the national debt or high deficits used it as shorthand for telling pollsters that they disapproved of economic conditions. At other times and other places, voters said the same things about inflation, unemployment, foreign trade or other things. On the other hand, average voters who feel good about the direction of the economy don't tend to raise concerns about debt, deficits, unemployment, inflation or anything else, since all those things are just proxies for economic misgivings. One other thing to note is that, increasingly since the 1980s until 2008, partisans saw the economy in different ways in good times and bad. So, during the Clinton years, Democrats saw the economy as performing as well or better than it did and Republicans worse it did; in the Bush years, the pattern was reversed. The economic collapse of 2008-2009 was so bad that everyone agreed that the economy was doing poorly and this persisted, though obviously Democrats and Republicans have told pollsters different reasons for why the economy was doing badly. As we may be returning to better, or at least less dismal, economic times, the partisan perceptions may be returning as well, where Democrats will see things improving and will care less about "debt", "unemployment" or "economic growth" while Republicans will see things as getting worse or staying bad and continue to tell pollsters that they are concerned about "debt" and "deficits".
- wildboy
February 6, 2012 at 4:29pm
"If the Fed is right—if headwinds from housing, high debt, a weakened Europe, and slowdowns in the developing world restrain U.S. growth—it will turn out to be yet another false dawn. " Another pet peeve that I just noticed -- WHAT headwinds from high debt?? We've been hearing about these headwinds for the last four years from the usual suspects, and somehow the flood tide of debt has not managed to result in a demand for higher yields on US Treasury bonds, drops in the stock market, increased interest rates or government spending crowding out private-sector spending (the private sector always responding to Fed surveys by claiming the problem to be insufficient consumer demand). Rather than just parrot incorrect statements, how about finding even some evidence that America's high debt is somehow holding back economic growth today?
- wildboy
February 6, 2012 at 5:36pm
Here's the good news/bad news. http://www.csmonitor.com/USA/Elections/President/2012/0205/Are-new-unemployment-figures-a-boost-for-Obama
- skahn
February 6, 2012 at 10:26pm