Uncertainty about government creates sluggishness

The economy shed 85,000 jobs in December, to the surprise of most analysts. Meanwhile, the Obama administration continues to push for health care reform and other measures that will require higher taxes. But such activism is largely to blame for the prolonged economic slump.

Some politicians speak of “creating jobs” as if they were growing fruit, but job creation is actually the cumulative result of millions of decisions by entrepreneurs and business managers. The official tallies reported each month are net figures.

In October 2009, for example, 3.7 million people were hired in the private sector. The same month, there were 3.9 million private-sector job “separations,” which include resignations, layoffs, discharges and retirements. So on net, the private sector shed jobs in October, as employers eliminated more positions than they created.

Such monthly losses had been steadily shrinking. In early 2009, net monthly job losses exceeded 600,000, but the figures gradually fell until the gross gains and losses virtually balanced by November. It was only natural, then, to assume we’d see decent net job creation in December, as these trends continued.

That didn’t happen. Many analysts were taken by surprise that employers remained skittish about adding new employees, even though conventional measures suggested that the recession had officially ended. What’s going on?

There’s no single explanation, but economics can shed some light on general trends.

One factor was the changing fortune of health care reform. As it became apparent that the Senate would pass a health care bill — before the election of Scott Brown in Massachusetts — many business owners calculated a rising cost per employee. Facing a new set of incentives, the predictable reaction for such businesses was to hire fewer workers or to lay off more of them.

That doesn’t mean health care legislation is necessarily bad. Many proponents of the legislation are disingenuous, however, when they say that raising the cost of employing someone won’t influence a business owner’s decision over how many employees to carry.

Regardless of the merits of President Obama’s policy initiatives, it is undeniable that he is casting certain industries as enemies. In such an environment, where no owner can know who will next face a public dressing down — and a massive tax hike—it would be foolish to add employees as if this were a normal economic recovery.

The private economy has historically recovered from recessions. What distinguishes our present recovery is the incredible amount of government “help.” Not since the Great Depression have the federal government and Federal Reserve meddled so much in the private sector. So it shouldn’t surprise us if this turns out to be the most sluggish economic recovery since the 1930s.

Robert P. Murphy is senior fellow in Business and Economic Studies at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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