In a recent speech on the economy at Carnegie Mellon, President Obama took great pains to remind us that he inherited an economy that was “shrinking at an alarming rate.” Of course his implication was that everything wrong with the economy today is George Bush’s fault. While Bush does deserve considerable blame for current recess, a new working paper by economists at the University of Michigan and the New York and San Francisco Federal Reserve Banks paints a picture of a recession that was on par with previous deep recessions until well into 2009, when the labor market started to deviate, for the worst, from past trends.
For instance the authors find that during the first part of the current recession, labor force participation remained high, despite increasing unemployment, yet starting in May 2009 the labor force participation rate fell at its steepest rate since the 1950s.
The authors also focus on what economists call “Okun’s Law” - which shows a relationship between GDP growth and employment. Historically Okun’s Law has shown that for every 2% GDP falls below trend, unemployment increases about 1 percent. Under the Bush half of this recession, that historical relationship continued to hold. Yet under Obama it broke down, and not in a good way.
The paper also examines the relationship between unemployment and posted job vacancies, called the “Beveridge curve” by economists. They also find that the Obama economy has been far outside of this historical relationship, so there has been growth in vacancies but little improvement in the unemployment numbers.
The paper offers a description of recent labor market trends, without being able to completely explain why current trends have been so different (and worse) than previous recessions. The authors do calculate that the extensions in unemployment insurance have likely increased unemployment by between 0.7 and 1.8 percentage points.
The real story, however, which this working paper misses, is that in the Obama economy, massive uncertainty coming from Washington and the increasingly intrusive nature of government is keeping employers from hiring, even when they are expanding output. President Obama needs to get past the blame game and start moving us back toward a country that rewards private enterprise and values free markets.