A Hole in the Bucket Drains Recovery
Alan Tonelson, a research fellow at the U.S. Business & Industrial Council Educational Foundation, looked at last week's dismal jobs report and noted something few other economists seem to mind.
When Mr. Tonelson breaks down the numbers, he applies a category he calls "the subsidized private sector." This includes industries such as health care, where the government foots much of the tab, and private educational services, where the government backs many of the student loans.
What he sees is that job creation is slowing even in these heavily subsidized sectors.
Mr. Tonelson said what he calls the subsidized private sector has been responsible for nearly 35% of the private-sector job creation since the recession officially ended in 2009, producing "a grossly distorted picture of the U.S. economy and especially its recovery record."
"When President [Barack] Obama uses this data to say that the private sector is 'doing fine,' that gives us an idea of how misleading this data can actually be," Mr. Tonelson said.
In June, the subsidized private sector grew by only 2,000 jobs, the third-lowest measure since the recession began, Mr. Tonelson said. The overall employment picture grew by 80,000 jobs, which didn't even amount to a dent in the nation's unemployment rate of 8.2%.
"One of the biggest questions...is whether even today's sluggish overall job-creation performance can be sustained if job creation in the subsidized private sector remains this weak," Mr. Tonelson said.
Mr. Tonelson's subsidized private sector includes only industries he easily can break out of the Labor Department's jobs report. It doesn't include defense contractors or medical-device makers, where clearly the government is doing much, if not all, of the buying.
Local, state and federal governments are among the largest customers in many industries, making the task of counting the jobs created from a purely private sector close to impossible, especially in an epoch of wildly increased government spending. So Mr. Tonelson has identified yet another flaw in our regular flow of economic data.
Many economists have long criticized everything from the consumer price index to the gross domestic product for their flaws, too. Almost always, these flaws result in a better economic picture. You never hear an economist say, "wow, that GDP number really understates America's amazing growth," or, "boy, that unemployment report doesn't fully count all the wonderful new jobs we just created."
Mr. Tonelson said he laughed in 2009 when Federal Reserve Chairman Ben Bernanke and others claimed to have spotted "green shoots." "The 'green shoots' have been produced by economic steroids," he said. "That's not growth. That's the creation of artificial muscle mass."
Now, as the recovery appears to have stalled again, we hear renewed cries for steroids. Our leaders don't seem to know of any other solution.
"Politicians in both major parties seem to be talking about different versions of bubble reflation, by either tax cuts or government-spending increases," Mr. Tonelson said.
These bubbles will be easy to blow as money keeps pouring into the U.S. from foreign investors, seeking relative safety in U.S. Treasurys. "Luckily for us, the rest of the world seems to be willing to loan us money for free, so we can keep this high-wire act going," Mr. Tonelson said.
Until one day, when we can't.
Mr. Tonelson has long argued the U.S. can stabilize its economy by getting its trade deficit under control. The reason consecutive stimulus plans haven't worked is simple: When you put more money in consumers' pockets, they use it to buy foreign goods, creating jobs somewhere else. He said he noticed, for instance, that when President Obama launched a stimulus plan of more than $800 billion, the trade deficit soon soared by another $800 billion.
"The bucket," Mr. Tonelson said, "has a big hole."
Meantime, anyone proposing to reel in the trade deficit in an age of globalization gets socked with the political baggage of protectionism. "You also have lobbying power of American importing interests, which include not only Wal-Mart (NYSE:WMT), but all the international companies that produce offshore for the U.S. market," Mr. Tonelson said.
So our destructive spending cycle continues: We get cheap money from foreign investors and use it to buy cheap, foreign consumable goods, and there's no significant economic growth to show for it.
"Arguably, they set us up for an even-more-destructive bubble bursting down the line," Mr. Tonelson said.
Though Mr. Tonelson said he winced at the bailouts and Fed's unprecedented response to a possible "Great Depression," he recognized they were needed to buy time to fix a broken economic system.
"It's valuable to buy time, if you use the time well," he said. "What's troubling is that we have clearly bought this time, and we can probably still buy more time, but I see no sign of us using it well."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. Contact Al at al.lewis@dowjones.com or tellittoal.com)