March 14, 2012
by Irwin Stelzer
President Barack Obama probably took a few minutes off his fundraising tour to hum a few bars of Everything's Coming up Roses when the latest jobs report was published.
The private sector added 233,000 jobs in February, and earlier reports for December and January were revised upwards by 61,000. Gains came more or less across all sectors, with the exception of construction.
Better yet: the number of people actively in the labour force -- the so-called labour force participation rate -- recorded the largest increase in two years, and the total of the unemployed, discouraged workers and those involuntarily working part-time dropped to 14.9 per cent, some two percentage points below last year's level.
Economists are increasingly of the view that this improvement is the real, durable thing. Some 82 of the nation's 100 metropolitan areas saw the number of jobs increase in December 2011, up from 71 in December 2010 according to Moody's Analytics. And IHS Global Insight is projecting that all 50 states will see employment increases this year.
There's more to produce the megawatt smiles for which Obama is famous, and account for his continued personal popularity in the face of a generally low opinion of his job performance.
Consumers, increasingly confident of their futures, are borrowing more. Students are availing themselves of the ample supply of loans to stay in school longer. And consumers are buying the cars and trucks they have until now denied themselves.
At the same time as they borrow more, households are improving their balance sheets. This is possible because as they blow the dust off their credit cards, consumers' after-tax incomes are rising faster than their borrowing, as is their net worth (the value of homes, stocks and other investments minus debts). The household debt-to-income ratio now stands at about 113 per cent, still high by historical standards but well below the 2007 peak of 130 per cent.
The President is also getting some bits of good news from the still-troubled housing market. Recall that he recently "persuaded" five large banks to pay $US25 billion ($23.6bn) to some mortgage-holders to compensate for assorted abuses. Now, to avoid a possible $US850 million in penalties, Bank of America has agreed to reduce the mortgage balances of some 200,000 households.
These lucky debtors will see what they owe reduced from the sums now on the bank's books to the much lower current value of their houses. This costs the bank nothing: all it has done is substitute a realistic house value for the fictitious value on its books. And it gives the President something for which he can take credit -- part of his campaign to help the ordinary family that has slipped further behind the "rich".
The housing market does seem to be recovering. The National Association of Home Builders reports that members' confidence improved in February for the fifth consecutive month. Sales of previously owned homes rose in January, the number of homes on the market fell, and the supply of unsold homes is approaching more normal levels. Low mortgage rates and rising rents are making purchase seem a more attractive alternative to renting, reversing a situation that favoured renting and has triggered a rise in the construction of rental properties.
The frosting on the presidential cake comes from a group of leading economists. The panel of luminaries, assembled by the University of Chicago's Booth School of Business, agreed employment would have been lower had the Treasury not injected equity into the banking system. This takes some of the edge off Republicans' criticism that the Obama administration bailed out Wall Street at the expense of Main Street.
The President's Republican opponents chose to base their campaign on claims that the economy was heading ever downwards because of the President's policies. They must now scramble for a substitute theme.
Obama has been shrewder. He did permit himself a victory lap but failed to see the irony of using a visit to a Rolls-Royce aircraft components plant in Virginia to claim that there would be no more outsourcing of American jobs, which is precisely what Rolls is doing. However, he has been careful not to claim too much. He points out that the job figures have their downs as well as ups, and that "there is a lot more work to do", presumably in his second term as president.
That is wise indeed. For we can't yet be certain this recovery is what Frank Sinatra would have called "the good turtle soup" rather than "merely the mock", whether it is "the real McCoy".
For one thing, there are those high oil and petrol prices that have often strangled nascent recoveries in their cribs. It is a sign of the vacuity of campaign rhetoric that Obama blames them on too much demand, and the Republicans on too little supply. Not for these Ivy League graduates (Obama, Columbia and Harvard; Mitt Romney, Harvard) the great 19th-century economist Alfred Marshall's formulation that supply and demand are two blades of a pair of scissors when it comes to setting prices, and that neither alone can determine the price of a commodity.
Obama sees the solution in reducing the demand for petrol by subsidising alternatives, the Republicans in removing the Obama administration's restrictions on the development of domestic oil supplies, and on his refusal to authorise a pipeline that would bring large supplies of crude oil into the US from Canada. The President also knows much of the economy's drive comes from super-low interest rates, and they cannot persist forever.
If the markets come to believe the present political stalemate will persist after the next election, making it impossible for the US to reduce its deficit, they will force borrowing costs up, not only for the Treasury, but for mortgage applicants and the nation's businesses. Recovery, RIP. But that won't happen before November 6, the only date that matters to the President and his foes.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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