Jobs Report – Good Not Great. And How to Make Next Month Better.

Friday’s jobs report was better than expected. The economy added 163,000 jobs, but unemployment ticked up to 8.3 percent. To be precise the unemployment figures changed very little, going from 8.22 to 8.25 percent. Although these are better numbers than we saw in May and June, they are still not cause for celebration.  163,000 jobs barely keeps up with population growth, and on average, only 151,000 new jobs are being added each month – at this pace it will take over a decade to return to pre-recession levels of employment. So, yes, better than expected, but not great.

And that’s really not all that surprising. Macro-economically speaking very little has changed in the past few months concerning economic policy. So it follows very little is going to change in the macro economy. Gridlock has paralyzed Washington into doing absolutely nothing. Republicans in the House are passing bills they know will not pass the Senate, and any bill with a chance to pass in the Senate is filibustered. Effectively, the President and Congress are writing legislation merely to make a political point. So, it’s not surprising we have seen weak growth these past couple of months, and it’s unrealistic to expect anything different when our lawmakers continue to play politics.

The shame in all this is much can be done to improve the country’s economic outlook.  I’m not asking for drastic steps, but rather simple, historically backed measures proven to lead to a strong recovery.

For one thing, the Fed has to start doing more. The Fed, headed by Chairman Ben Bernanke, has a dual mandate: promote stable prices (inflation/deflation control) and work toward maximum employment. Well, the Fed is keeping inflation under control (too under control), but it is not using all its tools to ensure maximum employment. One thing it could do is raise the target inflation rate. It currently is aiming at and achieving a 2 percent inflation rate. A modest increase in that number, not so great as to go against its mandate, could help with unemployment. I’m not asking for hyperinflation, but a target rate of 3-4 percent would help with debt relief as well as encourage investment. Both of which would help alleviate the high unemployment. This idea is not foreign to Mr. Bernanke.  As a professor at Princeton he echoed the same advice to Japan in the 90’s when they faced a similar crisis to ours. As Paul Krugman writes, “Chairman Bernanke should listen to Professor Bernanke.”

Of the available options to help the economy this should be the easiest to accomplish. The Federal Reserve is not supposed to be influenced by the politics of Washington – although this may not be the case anymore.

Moving onto things Congress should do… but will most likely not, even though many of these options have garnered bi-partisan support in the past.

Both parties are aware our infrastructure is in desperate need of repair – let’s fix that. Besides the fact infrastructure investment is smart productive government spending, and it helps keep us competitive with China, it also provides a boost to one of the weakest sectors of the economy – construction.

Congress also has to bring public sector employment back to historic trends. The chart below shows that if government payrolls had increased at the same rate as they did during the Bush years, there would be 1.7 million more people with a job.

I know conservatives want to cut government jobs because “government can’t create jobs!” Well, it can.  An economy operates by people spending dollars. It doesn’t matter if those dollars come from a government paycheck or a private sector paycheck – a dollar is a dollar. So in effect, a government job is no different from a private sector job. Increasing government payrolls will not only give people a paycheck, but it will boost demand, which in turn will help return the economy to normal.

Finally, Congress has to bring some certainty to the market.  I don’t always buy this argument because I think for the most part businesses know they have to pay taxes, and deal with regulations – that’s just part of doing business. With that said, settling the fiscal cliff issue would provide some extra certainty to the market. Now, the right takes this to mean we have to lower taxes, not necessarily though. If a business knows its taxes are going to be higher that still gives them certainty. It’s the not knowing that’s the problem.

Congress is going to have to compromise and just put an end to the fiscal cliff debate. There are so many things in the economy we can’t control; natural disasters, droughts, the Euro zone etc. we don’t need to shoot ourselves in the foot by creating uncertainty with something with which we do have control.

It’s doubtful any of this will get accomplished, which is disheartening. But knowing that this economy is fixable makes me optimistic. It is a matter of putting the right people in Washington – less than 100 days until the election.


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