Three graphs to ponder before (and on) election day

I know what you’re thinking: “Just three?”

I love graphs as much as the next guy, but I’ve squished what you need to know about the labor market into three graphs, courtesy of the St. Louis Fed’s FRED database.

I’ve said before that it annoys me when the single piece of data the news media uses to assess the economy is the unemployment rate, which is subject to misinterpretation, misunderstanding, and survey error. Much better to look at real (and per capita) GDP, net private investment, the inventory-to-sales ratio, or even basic indicators like the Conference Board’s Leading Economic Index. These all reflect actual business activity of production and sales.

It needs to be constantly stressed that jobs are the result of economic activity, not the cause. If we wanted to put people to work it would be extraordinarily easy: instead of yard guys using riding mowers, string trimmers, and blowers, use scissors and brooms. “But,” you say, “they wouldn’t get as much done!” Ah, true, but to maintain the same amount of business the company would have to hire a lot more workers, right?

So, our priority should not be on whatever policy or program will increase jobs, but on what will increase economic activity and entrepreneurship. Do that, and the jobs will come.

But, it’s useful to watch the labor market as a lagging indicator of the economy, so here are my promised three graphs:

1: Population & Labor Force. Over the past decade, the US population (blue line, left axis) has steadily increased as expected. In an economy operating normally, the number of people willing and able to work (the labor force, red line/right axis) would increase at a similar rate. But, as you can see, since the recession (gray area) began around 2008 the number in the labor force has stalled. In other words, an increasing number of people in the population are deciding (whether they want to or not) to not look for work. (It is possible that an increasing number of people in the population are not able to work too.) This is verified by

2: Labor Force Participation Rate & Not in the Labor Force. The participation rate (green line, right axis) is the percent of the civilian noninstitutional population that is in the labor force. It has tumbled about three percentage points and doesn’t appear to be turning up. This means that more people are out of the labor force (red=men, blue=women, left axis; FRED doesn’t have total not in the labor force), which can be seen by the increased rates of the red and blue lines. Why are people leaving the labor force? They could be retiring, they could be choosing not to work because a spouse has a steady job and they are satisfied with a single income, or (as is more likely) they could have given up looking for a job. In which case, they drop out of the labor force.

Be aware that the unemployment rate only reflects people in the labor force; it is the percent of people in the labor force who are not working for pay at least one hour a week. If a bunch of people decide that their job prospects are so crummy that they stop looking, they stop being unemployed and they stop being in the labor force. So what about the number of people remaining in the labor force? Graph #3 tells the story:

3: Total Nonfarm Employees & Total Unemployed. In my above example where unemployed people leave the labor force, the unemployment rate would actually decrease (usually indicating good times) since the drop in the numerator (# unemployed) would be relatively larger than the drop in the denominator (# in labor force). So, this percentage can move in unusual ways and should be interpreted with caution. For a clearer picture, we can look at the actual numbers of people employed and unemployed.

Doing that, we see that the number of employees (blue line, left axis) is about 4.5 million below the 2008 peak. While it took two years for employment to fall 9 million, the following two years have only made up half of the drop. The total number of unemployed people (red line, right axis) has risen from its past-decade low of about 6.7 million in Oct. 2006 (and stayed around 7 million until Dec. 2007) to about 15.4 million three years later, and stands at about 12 million in Sep. 2012. While it took three years for the number of unemployed to increase about 8.7 million, in the following three years it only dropped about 3.4 million.

Say what you will about the present administration inheriting a recession (one fueled in part by government policies strong-arming banks to increase homeownership rates, hence loosening lending requirements) of which it had no part; the evidence strongly suggests that it has done little to boost the labor market even after the recession bottomed out. You might cut a President some slack in letting unwise investments get liquidated and the recession to run its course, but the test of an administration’s economic policies should then be judged by the pace of the recovery.

Let me be clear: there is precious little that President Obama or a President Romney can do to “fix” the economy other than to get out of the way. Programs, special favors, cheap shots at China, none of those things accomplish anything of substance other than to shuffle jobs around. Jobs are created after business activity is encouraged, which itself is done by reforming institutions to better favor economic growth. The recipe for success isn’t difficult, either:

In the last 10 years, both African and formerly Communist nations—such as Rwanda, Malawi, and Ghana, and Romania, Bulgaria, and Albania—show the largest increases in economic freedom. Countries showing the biggest declines since 2000 include Venezuela, Argentina, Iceland, and the United States.

Economic Freedom falling in the US

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28 thoughts on “Three graphs to ponder before (and on) election day

  1. STUPID STUPID says:

    I trust The Daily Kos to tell me the truth. I have no need to research any topics because the Kos sums everything up for me.

  2. More RoMoney says:

    I get all my information from the Democratic Underground and Rachael Maddow. Both sources I can trust.

  3. ROMNESIA says:

    The reason I say such stupid things is because I have Obamnesia. Please forgive me.

  4. This OP clearly comes from the Libertarian School of economics. Any time you here someone call for government to “stay out of the way” you are dealing with an Austrian school “free marketer”. This guy probably listens to Peter Schiff and went all in on gold, like Ron Paul he wants to go back to the gold standard and eliminate the Fed.

    It is dangerous to allow the free market to operate free from regulation and oversight. His classic opinion that our Great Recession was simply the result of a government policy of home ownership for all is misrepresenting the facts.

    Our recession was caused buy many things; the rigging of Libor (bank collusion), securization of mortgage backed securities, and faulty regulation. To this day no banker has been thrown in jail with the exception of ponzi scam artist Bernie Madoff.

    1. Joe M says:

      Randy. Government staying out of the way is part of the definition of free market. You know, the free market that Obama pretended to endorse in the last debate.

    2. Joe M says:

      PS: The recession was caused by GOVERNMENT manipulation of the home lending industry. Primarily via Fannie and Freddie.

  5. ROMNESIA says:

    No, ROMNEY said he would eliminate capital gains taxes entirely. Do yo have Romnesia?

    1. Joe M says:

      Romney’s quote: “because there’ll be no taxes for anybody making $200,000.00 per year and less, on your interest, dividends and capital gains.”

      http://abcnews.go.com/Politics/OTUS/2012-presidential-debate-full-transcript-oct-16/story?id=17493848&page=4#.UILBXMWHJ8E

      Any questions?

  6. More RoMoney says:

    True dat! Now, tell me how giving MORE tax breaks to people that are ALREADY Millionaires is going to help economic freedom for the rest of America? ***Crickets****

    1. Gallatin says:

      No tell me how handing over more of my money to a wasteful government is going to create more economic freedom? ***chirp chirp chirp****

      1. STUPID STUPID says:

        Obama wants to give working class Americans tax breaks. Romney wants to give millionaire investors a tax rate of ZERO by ending capital gains taxes. Geez. It’s like you don’t even understand what he said during the debate.

        1. Open Your Eyes says:

          Perhaps you should go read Romney’s transcript from the debate instead of blindly following your partisan preconceptions.

          1. Randy N says:

            Indeed. It seems that Romney did say he would end capital gains taxes. That would give him and his millionaire friends an effective tax rate of NOTHING and stick working class families to make up the difference. This is wrong for America.

          2. Shawn says:

            If you keep taxing investment, then people will simply invest else where and the result will cause a decrease in economic activity. If we cut government spending and reform wasteful government policy, then the government won’t need the extra tax revenue. That is what is right for America.

          3. Joe M says:

            He would end capital gains FOR PEOPLE MAKING LESS THAN $200k.

            Read, listen and learn!

          4. ROMNEY Tomney says:

            ROMNEY never said that. He said “eliminate capital gains taxes”. That means for his rich investor friends.

          5. Julie T. says:

            R.T., Mr. Romney did indeed say he would eliminate capital gains taxes for those earning less than $200k. *You* need to go back and view the video.

          6. Joe M says:

            Oh? He never said that? What is this:

            “because there’ll be no taxes for anybody making $200,000.00 per year and less, on your interest, dividends and capital gains.”

            http://abcnews.go.com/Politics/OTUS/2012-presidential-debate-full-transcript-oct-16/story?id=17493848&page=4#.UILBXMWHJ8E

            Read, listen and learn!

        2. Joe M says:

          STUPID STUPID. You are either lying or have been misinformed. Romney has not offered to make rates on capital gains zero for everyone. He offered to make them zero for people making less than $200k per year.

          I’m sorry. But, I have to admit that I’m laughing at your statement that other people don’t understand the debate when you have clearly misrepresented it yourself. Way to go!

          1. ROMNESIA says:

            No, he said he said he would eliminate capital gains taxes entirely. Perhaps you have ROMNESIA, and forgot where he stands on these issues. Eliminate taxes for millionaires. Eliminate tax deductions for working class families.

          2. Joe M says:

            Let’s see how long it takes you to erase this from your memory:

            “because there’ll be no taxes for anybody making $200,000.00 per year and less, on your interest, dividends and capital gains.”

            http://abcnews.go.com/Politics/OTUS/2012-presidential-debate-full-transcript-oct-16/story?id=17493848&page=4#.UILBXMWHJ8E

          3. ACTUAL QUOTE says:

            ROMNEY’S TAX PLAN: “eliminating taxation of investment income of most individual taxpayers”

            It looks like Joe M Is the one who is lying. ROMNEY’S tax plan will increase taxes on the working class while giving rich investors a ZERO TAX liability.

          4. Joe M says:

            “Most” taxpayers is not all taxpayers. Romney clarifies that those making more than $200k per year will still be taxed on capital gains, etc.

            “because there’ll be no taxes for anybody making $200,000.00 per year and less, on your interest, dividends and capital gains.”

            http://abcnews.go.com/Politics/OTUS/2012-presidential-debate-full-transcript-oct-16/story?id=17493848&page=4#.UILBXMWHJ8E

            Thank you for providing a citation that further reveals your claim to be false!

        3. Gallatin says:

          Are you serious? What planet have you been living on the last 4 years? Great I’ll take Obowmao’s tax breaks and figure out what to spend it on. The gas I can’t afford? The food I can’t afford? No thank you I don’t need any more of Obowmao’s help for “middle class” families. Joe Biteme spoke no truer words when he said; “The middle class has been buried the last 4 years.” Oh and by the way, I have no problem with Romney giving millionaire investors a tax rate of ZERO on CAPITAL GAINS.

    2. An accountant says:

      Because the millionaires have the businesses who employ the rest of America.
      Because increasing the costs of running their businesses is only going to cause layoffs or business closures.
      Because jobs don’t fall from the sky, they happen when someone has work they need done and have enough money to pay someone to do it.
      Really, stick to commenting on the touchy feelingsy stuff. You just dont demonstrate an ability to speak knowledgeably about the financial systems of the country.

      1. Randy N says:

        Yay! More trickle down economics. If we stop charging the wealthy any taxes, maybe they’ll love us workers enough to give us some of their fortune. Why don’t you just go out into the street and beg. I suspect it will be more effective.

        1. Joe M says:

          Randy N.

          Even you would probably agree that businesses and investors want to increase their success, right?

          Businesses don’t typically hire out of love. They do it because they want to grow their business and they need workers to do that. Lowering taxes is an effective way to give them a greater ability to hire and grow.

    3. Joe M says:

      More RoMoney. Your reply is embarrassingly short on substance compared to Tim’s post.

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