To the extent that John Edwards rode any single issue to his good showing in Iowa, South Carolina, and Wisconsin, that single issue was jobs. And so, not surprisingly, it was the jobs issue that John Kerry seized on to neutralize Edwards this past Tuesday in Georgia, Minnesota, and especially Ohio. Kerry made the state's job losses a theme of his several visits, at one point proclaiming the president a "walking contradiction" on job creation. "I think when you're seven million jobs in the hole, step number one is pretty simple: stop digging," Kerry thundered in Toledo last week.
Now that Edwards has bowed out of the Democratic primary and Kerry is focusing on the general election, the de facto nominee isn't letting the issue die any time soon. "[T]here are also millions of Americans hurt by policies that favor the few," Kerry proclaimed in his victory speech Tuesday night. "Millions more live in fear everyday that they will lose their job."
Listening to Kerry, you almost get the impression that George W. Bush spends his waking hours personally scrolling through corporate payrolls looking for vulnerable people to throw out of work. By this logic, all you'd need was a president more sympathetic to the plight of the common man and you could instantly reverse the American economy's recent hemorrhaging of jobs. Alas, it's not so simple. As incompetent as Bush may be at managing the economy, he deserves little if any responsibility for the millions of jobs lost during his term. Nor is there much Kerry or any other Democrat could have done to reverse the trend had they been in office instead.
Call it cosmic justice for the Florida recount, or a genetic predisposition toward economic bad luck. But, whatever you call it, you have to acknowledge that the deck was pretty much stacked against Bush on the jobs issue from the day he entered office. Just like American businesses over-invested in computers and sophisticated factory machines during the bubble years of the late 1990s, they also over-invested in labor. There is some debate among mainstream economists over the lowest sustainable unemployment rate (known as the NAIRU, or non-accelerating inflation rate of unemployment, for sticklers). But even if you're optimistic and put it slightly below 5 percent, then the economy would have needed to shed between a million and a million-and-a-half jobs from its 2000 unemployment rate of 3.9 percent.
Of course, the economy has actually lost, on net, many more jobs than that since 2000--some 2.2 million according to the Labor Department's payroll survey, historically the most reliable measure of employment. But even blaming Bush for the million or so additional job losses strains economic logic.
At the most abstract level, there are two things that determine employment growth: The rate of growth of the overall economy, and the rate of growth of productivity. (In fact, you can just subtract the latter from the former to arrive at the rate of employment growth.) This, in turn, means there are two ways you could manage to go several years with subpar job growth. First, the economy could be in the tank, in which case companies wouldn't be hiring because there wouldn't be much demand for their products. Second, the economy could be healthy, but companies are managing to get more production out of their existing employees. It turns out that we've seen a bit of both of these scenarios over the last few years.
During the recession, which officially lasted from March of 2001 to November of that year, the economy was shrinking. No need to do much hiring. Then, even after the recession ended, the first year-and-a-half or so of the recovery proved incredibly lackluster, thanks to a range of factors--excess capacity left over from the bubble years, the fallout from September 11 and the corporate scandals, the anxiety over a likely war with Iraq. Not only did these "shocks" act as a drag on economic growth, they acted as a particular drag on hiring. "It's been quite clear from the behavior of the labor market how important these shocks have been," says Ethan Harris, Lehman Brothers' chief economist. Harris notes that the biggest hiccups in hiring over the last three years came after September 11, during the corporate scandals and on the eve of the war.
Now, critics will respond that the Bush administration deserves at least part of the blame for the economy's weakness during this period. Liberals in Congress and at places like the Economic Policy Institute complain that the Bushies should have targeted the bulk of their tax cuts toward the working poor and middle class, who were more likely to spend their tax savings than more affluent beneficiaries were. They also argue that more of the tax cut's benefits should have been delivered in the short-term rather than over five or ten years, and that the administration should have sent more help to the states, who were cutting spending and raising taxes even as the federal government was doing the opposite.
But, of these three criticisms, only the last one really holds water if the goal is stimulating the economy. For one thing, there is evidence that affluent people spend a higher proportion of their income than economic models have traditionally predicted. And, Democrats' complaints notwithstanding, the tax cuts provided plenty of stimulus when it counted. In all, according to Stephen Roach, Morgan Stanley's chief global economist, the tax cut provided about 1.5 percentage points of economic growth last year (which amounts to about $150 billion in a $10 trillion economy). Meanwhile, though the states did suck some of the stimulus out of the economy, that effect was probably far overshadowed by the effect of the war, which most liberals opposed. Roach estimates that war-related spending should probably be credited with another 1 percentage point of economic growth last year. (Though, as mentioned above, war-related anxiety probably hurt the economy prior to the invasion.)
The broader point is that almost no serious economist argues that the economy has lacked for stimulus during the last three years. Between the tax cuts, additional spending, the falling dollar (which makes U.S. exports more attractive abroad), and, perhaps most importantly, the Fed's historically low interest-rates, the concern, if anything, was that the Bushies and the Fed have done too much. "I think, combined, it was a Herculean effort," says economist Lakshman Achuthan of the Economic Cycle Research Institute. "We've never seen this kind of stimulus." Even Alan Greenspan, no foe of tax cuts, worried during the winter of 2003 that the latest round of tax-cutting might be overdoing it.
Which brings us to the second way the Bush administration could have failed the American worker: the inability to convert economic growth into jobs. With the war and the corporate scandals behind us, the excesses of the '90s finally getting worked off, and two-and-a-half years worth of stimulus suddenly kicking in, the economy rebounded nicely in the second half of last year, growing at roughly a 6 percent rate. The problem from the standpoint of workers was that large productivity increases -- some of them made possible by technology, some made possible by outsourcing, everybody's favorite bogeyman--were making new hires unnecessary. Over the last two years, productivity has increased at a torrid 5 percent rate on average.
But, pace Edwards and Kerry, this is good news not bad news. The only drawback to increased productivity occurs in the very short run, when it slows job growth. In the long run, rising productivity is the only thing that makes it possible to improve our standard of living. As Berkley economist Brad DeLong has pointed out, it takes about 60 years for the income of the average American to double when the productivity of our labor force grows by 1.2 percent per year. It only takes 25 years for incomes to double when productivity grows by 3 percent per year. More income implies more economic growth and, therefore, more jobs. Which is to say, trying to put the kibosh on productivity growth in order to generate a few token jobs today would be utterly self-defeating. As former Federal Reserve Board Governor Laurence Meyer suggests, "We could cut out kindergarten. We could say no more school beyond seven years. I think we could do it if we tried."
Actually, even that's not clear. While we could certainly make American workers less productive, there probably isn't much we can do to prevent American companies from outsourcing or offshoring work to cheaper locales, short of making it against the law. (Outsourcing increases productivity by lowering a company's production costs, which, put differently, means you can produce more for the same amount of money.) Kerry has put forth a series of proposals intended to keep manufacturing work in the United States -- closing tax loopholes that reward offshoring, providing tax credits to encourage domestic manufacturing. But the effect of these proposals would be exceedingly marginal. As long as Mexican autoworkers make about one-fifth what American autoworkers make, saving a few thousand dollars on payroll taxes isn't going to make much difference. (And, please, no letters about trade. Trade is analogous to outsourcing -- over time, if effectively raises productivity. Click here for an explanation.)
None of which should be interpreted as a vindication of the administration's economic agenda. Even though the Bush tax cuts have succeeded at stimulating the economy, they've done so at enormous (and largely unnecessary) long-term cost. The large deficits created by such K-Street goodies as a cut in the tax on dividend income and the lowering of top marginal income tax rates, will almost certainly drive up interest rates once the economy sees a few quarters of growth. That could choke off the expansion not long after it starts. Likewise, even if tax cuts that primarily benefit the affluent don't turn out to be appreciably less effective at stimulating the economy than tax cuts that primarily benefit the working poor, they're certainly more noxious as a moral proposition.
But the idea that correcting any of these deficiencies might have saved a significant number of jobs over the past few years is far-fetched, at best. I have no problem with John Kerry scoring political points on the jobs issue if it helps elect an administration that cares about the long-term consequences of its economic policies. But if Kerry seriously thinks he can influence the pace of short-term job growth any better than George W. Bush, then his view of himself is even more inflated than his detractors suggest.
Noam Scheiber is an associate editor at TNR.