The Shrinking Labor Force and Unemployment ... The "Sequester" Has Nothing to Do With It ... Ideas Matter ... Free Lunches are Never Free

Political spinsters are already trying to blame the sequester for yesterday's lousy jobs report. In a word, that's crapola.

Perhaps the recent 2% payroll tax hike isn't crapola though, although it's an example of workers paying for non-working retirees. It's also illustrative of the negative effects that taxation on workers has on consumer demand, the nation's income, economic growth and jobs creating ability.

The same weakening effect is equally true for future tax initiatives which will be implemented to fund the various public sector pension liabilities that are woefully underfunded today.

And the same debilitating impact of taxation is also true for the future consumer spending that won't occur because of the debt servicing obligations, both public and private, which will be required to return many of our private individuals', cities', states', and nation's fiscal affairs to some semblance of sanity and stability.

So the economy is stuck between a rock and a hard place. Only by focusing on private sector investment and sustainable economic growth will we be able to lead ourselves out of the financial mess we've created with the ongoing 'help and leadership' of our government knows best gang, of course.

Making Work Not Pay well describes the myriad of financial problems facing America today:

"In a trend that has defined this weakest of all modern economic recoveries, the jobless rate keeps falling but largely because the labor force keeps shrinking.

The unemployment rate fell to a new four-year low of 7.6%, from 7.7% in February. Good news, except the main reason for the decline was that nearly half a million Americans (496,000) left the civilian labor force. They retired, quit working, went back to school or gave up looking for work.

The economy created a net 88,000 new jobs, 95,000 in private business. This means that for every unemployed American who found a job in March, about five left the labor force. If the Obama Administration can convince another three million or so Americans to leave the job market, the President will be able to hail "full employment.". . .

The average job growth for the last four months is 181,000, and 169,000 over the last year. Nonetheless, in the 45 months since the recession ended, job creation has averaged 113,000 fewer jobs a month than in a normal recovery, according to Congress's Joint Economic Committee.

If job creation had kept pace with a typical expansion, about 4.2 million more Americans would be collecting a paycheck. . . .

Some analysts on the left are blaming this on the modest sequester spending cuts, but you can't find much evidence for that in the March report. Federal civilian employment fell by 2,200 but state and local government jobs climbed by 7,000. The Post Office lost 11,700 jobs in the month, but it also lost $15.9 billion last year.

The sequester certainly can't explain the pullback in private hiring. For that you have to look to Washington's regulatory and tax squeeze that has put a risk premium on hiring. The payroll tax rose by two-percentage points in January, and small business owners were clobbered with an income tax hammer.

Employers also say that new costs and uncertainty about the Affordable Care Act are making them cautious. The rule that small firms with more than 50 employees are subject to new health mandates is capping employment at restaurants, hotels, factories, retailers and the like at 49 workers. Retail trades lost about 24,000 jobs in March.

The deeper concern is the continuing decline in the share of Americans who aren't working or even looking for work. The civilian labor participation rate fell again in March to 63.3%. That's 0.5-percentage points lower than a year ago, and it's a stunning 2.4-points lower than June 2009 when the recovery began. . . .

It's important to understand how striking this job-participation collapse is. Labor participation fell or stayed flat in the recessions of 1973-75, 1981-82 and 1990-91, but then rebounded and kept climbing in the expansions that followed. The bursting of the tech bubble and the minor recession of 2001 knocked about a point off the peak rate of 67.3% in April 2000, but even after the Great Recession ended in June 2009 the rate was 65.7%.

Has the great American work ethic suddenly vanished? Doubtful. A more likely explanation for the shrinking workforce is a failing education system that doesn't give young adults the skills they need to compete in the information economy.

Another probable culprit is the rapid expansion of government payments—jobless insurance, food stamps, Medicaid, disability and various tax credits—that provide millions with an alternative income to getting a job. Research by Casey Mulligan of the University of Chicago and others shows that the generosity of federal benefit programs means that workers face very steep financial disincentives to take a low-wage job. The benefits phase out as they begin to work.

Whatever the causes, this is lost human capital that isn't realizing its full potential or contributing to national well-being. It also means that fewer workers will have to finance the rapidly arriving retirements of the baby boom generation. One of Mr. Obama's favorite talking points is "making work pay," but his tax and welfare policies are shrinking the workforce precisely when we need more workers to pay for the entitlements he doesn't want to reform."

Summing Up

Ideas matter.

And the idea that more government spending is the cure to our nation's financial problems is a terrible one. The Keynesianism based multiplier concept that $1 of additional governement spending will translate into $1.50 of additional economic growth is simply wrong. Politically popular perhaps but wrong.

Free lunches don't exist. Somebody always pays for what we eat. Always.

So as more of us Americans receive an inferior education and then enter the work force later and with fewer skills and fewer opportunities, and as more of us Americans exit the work force earlier with generous retirement payments or "safety net" subsidies, our economic problems will become worse. To repeat, somebody always pays for what we eat. Always.

Look at Europe, Chicago, Detroit, Illinois, California or any number of other "working or not working" situations for clear and convincing examples as to why 'not working' either does or doesn't pay, depending on how we choose to view the picture.

As Pogo said, "We have met the enemy and he is us."

That's my take.

Thanks. Bob.