Ah, I can’t resist. A topic has come up that lands squarely in my wheel house. Since two people have mentioned the labor force participation rate, Let’s take a minute to explain why since the Clinton years it hasn’t been a meaningful measure of the strength of the economy. (Economics is complicated, so maybe a little longer than a minute )
I’m sure everybody is aware of the old problem of correlation vs causation so I won’t be condescending and go into what that means. So it’s true that the labor force participation rate is declining in the Obama administration so there is definitely a correlation between the two. So does that mean that Obama is responsible? Well no of course not, there is no causation in this case.
Remember how the labor force is calculated and who is included in that base of potential workers (Google it if you don’t know) So what happens to the labor force participation rate when droves of baby boomers are reaching retirement age and retiring? It goes down right? This is exactly what’s happening, and it’s happening on a large scale. So large in fact that despite moving from SHEDDING hundreds of thousands of jobs every single month in 2008/09 and the fact that we are now ADDING hundreds of thousands of jobs every month in the economy, it’s still not enough to offset the demographics of the large number of baby boomers dropping out of the work force. They are still considered labor force, but they are not “participating” anymore. There are several other reasons why despite the improvement in the job market, this participation rate will continue to decline.
Bear in mind, this is not limited to the Obama administration. Bush and Obama directly faced the baby boomer demographic problem which directly caused the decrease in the participation rate so this isn’t partisan. It’s been happening for well over a decade and it will continue for several years in the future.
So since the labor force participation rate is so wildly skewed in the last decade we don’t use it. So what do we use? Well we need statistics that more accurately reflect the CURRENT job situation. What are people doing RIGHT NOW?
As I said, we went from shedding hundreds of thousands of jobs to now adding hundreds of thousands of jobs. That’s one pretty direct reason to think the job market is wildly improved. A second is of course initial jobless claims. This reflects what people are doing RIGHT NOW, and not what the demographics of people born 60 years ago are doing.
Looks pretty good to me
This is why the metrics that I stated are the real metrics we use to measure the strength of the economy. Corporations move to maximize profit. The fact that they are ramping up orders, production, manufacturing, hiring, inventories, and capital investment is a direct and clear sign the economy is becoming far more robust. Consumption, consumer credit, household debt, housing, vehicle purchases, retail, these are all meaningful measures. And like it or not, the stock market, corporate profits, dividend ramp ups, and stock buy backs are also very good indicators. I certainly appreciate the effort by some to come up with all those stats to the contrary, but not a single one of them is a leading indicator or a statistic that is relevant in determining the strength of the economy. Every one of them can be present in both recession and expansion in the economy so they are at best correlations and should not be confused with causation. We can’t just randomly choose what metrics we look at. Economists use the same metrics I posted above because those are the ones that show both correlation and causation, and accurately reflect the CURRENT situation without external and unrelated variables.
No condescension, no insults, no partisanship. Hopefully just a clear explanation of an economic principle. Truth be told, we don’t even need to credit Obama with the massive economic recovery we have seen in the last 4 years. The same thing would have happened under any President who adopted counter cyclical fiscal policy. Spending more when the economy is in the dumps is the best way to stimulate growth and get us over the hump. Now being a little partisan, Republicans have demonstrated time and again a lack of respect for counter cyclical fiscal policy, which is why Economists in general feel the Bush administration was such a monumental fuck up. That and supply side Economics with the Bush tax cuts really crippled the economy and the effects will last for many years. There was no reason for the spending to increase and tax revenues to decline as dramatically as they did. If you spend that much during reasonable good times, it really amplifies the debt issue when you are forced to spend like crazy during the occasional really bad times, like 08/09.
But anyway, that’s for another discussion. The economy is substantially better now than it was then. We all wish it was better, but maybe it will continue to improve who knows? It better hurry because the recession cycle isn’t much longer than 5-7 years so another one is probably just around the corner.
But considering where we were just 4 years ago, and where we are now, like it or not we do have to give a thumbs up to the government and the FED for navigating through a really difficult situation.
so… how about that Obama Care, what a mess that is huh?