It’s the Private Sector, Stupid.

By Jun 10, 2012, 5:03 PM Author's Blog  

President Obama recently defended his economic record by stating:

“We’ve created 4.3 million jobs over the past 27 months. The private sector is doing fine. Where we’re seeing problems is with state and local government, often with cuts initiated by governors or mayors who are not getting the kind of help they’re accustomed to from the federal government.”

The left is in full damage control mode. Ezra Klein writes:

“the Obama presidency is net positive on private-sector jobs. Since February of 2009 — remember, Obama wasn’t president for most of January — the economy has added, on net, 780,000 private-sector jobs. Hence the president’s comments: The private sector’s job creation machine is basically working, even if it would be nice to see it working faster. The public sector, conversely, has been losing jobs.”

Obama took over during a period of steep decline, following a recession that officially started in December 2007. From the start of the recession to Obama’s first full months in office, the private sector had already lost 5.3 million jobs, while the public sector had actually gained 0.2 million jobs.

During Obama’s three and half year tenure, the private sector has recovered merely 0.8 million of the 5.3 million lost jobs. This is hardly evidence that “The private sector is doing fine” or that “The private sector’s job creation machine is basically working”. Public sector employment by contrast has not changed much. From the start of the recession 0.4 million net public sector (federal, state and local) jobs have been lost.

This means that during the Great Recession so far, 92% of employment decline has been in the private sector. To some extent this is what we should expect, the private sector represented 84% of employment prior to the crash, that’s where the action is. Public sector employment has declined only half as much in relative terms as the private sector, and public employment is at any case too small a portion of the labor market in the United States to be the driving force.

The President’s defenders prefer to ignore the preceding events and start the baseline when the President took office. Fine. If we start counting at the start of Obama’s first full months of presidency instead of the start of the recession public sector job decline is 0.6 million, not much different. It takes Krugman-levels-of-delusion to convince oneself that this 0.4 or 0.6 million decline explains the disastrous job situation in a country with 133 million workers and 201 million working age adults. (In recent months public sector employment is declining because the temporary Keynesian expansion is being pulled back, as temporary Keynesian expansions must do eventually by definition.)

Because there are lots of numbers flying around, and because you can manipulate results by cherry-picking your baseline or definitions, the level of confusion in the debate is high. Let’s create hard-to-distort graphs.

The first one is simply the employment level, blue private non-farm and red public sector. As you can see, most of the variation is a decline of private sector employment prior to Obama taking office, followed by a slow, partial recovery. The graph is not pretty, since public sector variation is too small to notice when put in the same scale as private sector employment. But the inelegant image reflects an underlying truth: public sector employment has simply not changed that much, and is too small at any case to drive employment in a market economy such as the United States. (Most government activity in America is not directly employing workers, its transfers and subsidies.)

(click to enlarge)

The second graph is public sector employment as a share of total non-farm employment. It was 16.2% percent of employment up until the start of the recession. Since public employment expanded slightly while private sector employment crashed, the share went to 17.0% by the time Obama entered office. The Obama expansion of government and Census hiring pumped public sector employment up to 17.7% in mid-2010, after which it has declined to 16.5%, still higher than pre-crisis levels.

(click to enlarge)

The third and in my view most informative graph gives also incorporates the growth of the potential labor force. In fairness, Ezra Klein admits that population growth makes things even worse for Obama, but we can go further than waving our hands in a general direction. The graph shows private and public sector employment as a share of the adult, working age (16-65) population.

(click to enlarge)

Prior to the recession, 70.2% of working age adults were employed in either the private or public sector. By the time Obama took over this figure had declined to 67.4%. It declined further during the Obama presidency to 66.1% today, as the working age population increased by 4.2 million while net job growth has been around zero.

Prior to the recession, 58.8% of working age adults had a private sector jobs. This number declined to 55.9% in Obama’s first month in office, and declined further to 55.1% today. The U.S private sector successfully absorbed new workers throughout the post-war period. During the Obama Presidency it failed to do so, resulting in an increasing share of people who cannot find employment.

You can argue that this is not the Presidents fault, but caused by events in Europe or the lingering results of the Bush administration. But you cannot claim that “the private sector is doing fine”, or that “The private sector’s job creation machine is basically working”, when the employment share is declining regardless of what starting period you pick. The American private sector “job creation machine” is supposed to absorb new workers, not just maintain already existing employment. It did so for decades prior to the recession, so the fact that it has not been able to do so during the Obama Presidency indicates that something is indeed wrong.

The public sector? Prior to the crisis, 11.4% of working age adults worked in the private sector, holding constant at 11.4 % in Obama’s first months in office, and declining somewhat to 10.9% today. This means that nine tenths of employment share decline since the recession started and sixth tenths of employment share decline since Obama took office was due to a smaller share of workers having job in the private sector.

The left, including the President, genuinely seem to believe that going from $2.9 trillion to $3.8 trillion in annual spending is “austerity” or “fiscal conservatism”, and that the stagnant private sector is “doing fine”. The President and his defenders are very smart people. I suppose this is another paradoxical instance where the smarter someone in denial is, the better will they be at making up dumb rationalizations to shield the ego and avoid the truth.

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