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Nothing new on the jobs front, but some optimism is warranted

This post comes late in the day, because this morning I attended the birth of my fifth grandchild and first granddaughter (mother and child both doing great). It marked the 8th time that I have been a part of the delivery of my children and their children—all great moments that I will treasure. 

It's a short post, because the jobs report was quite unremarkable.


Although the gain in jobs was above expectations, the trend has not changed at all. Private sector jobs have been growing at about a 2% annual pace for almost three years—sometimes a little faster, sometimes a little slower. It's the same pace as we saw in the mid-2000s.

It should be a lot stronger given the depths of the last recession, but it's not, and for a variety of reasons. The market has worried for almost two years that the economy would suffer a "double-dip" recession, but it's just not happening. The economy has managed to grow despite awful fiscal policy: way too much spending, which squanders the economy's scarce resources; way too much in the way of transfer payments, which create perverse incentives; a huge increase in regulatory burdens and uncertainty, which saps business confidence and chills investment; and more recently higher marginal tax rates, which reduce the incentives to work and invest. 

The economy has managed to keep growing this year despite the expiration of the payroll tax cut and higher marginal rates on upper income earners. It's managed to growth despite two years of recession in the Eurozone, and a slowdown in the growth of the Chinese economy. And it's managed to grow despite the enormous monetary uncertainty created by the Fed's unprecedented Quantitative Easing.



It's been a disappointing recovery, and a reluctant recovery, but it has nevertheless been a recovery, and it shows every sign of continuing at a modest/moderate pace. The private sector has managed to create about 7 million new jobs in the past three and a half years. The public sector, meanwhile, has lost about 750,000 jobs, and job losses there appear to be coming to an end. The economy is getting back on its feet, slowly but surely, but it could use some help. 

There are new reasons to be optimistic about the future. Regulatory burdens may ease now that Obamacare has effectively been put on hold for the next 18 months (see my earlier post on this subject), and the odds are rising that it might even be repealed. If we get lucky, Congress may replace Obamacare with more sensible reform, and that could prove to be a huge boon to the economy. It's doubtful we'll see any further rise in tax rates, thanks to the huge improvement in the fiscal outlook; tax uncertainty has been reduced significantly. Finally, the outlook for monetary policy is improving, as evidenced by the recent sharp rise in interest rates. Higher rates are a sign that the market is becoming less pessimistic about the economy, while at the same time gearing up for the tapering of Fed bond purchases and the inevitable moment when the Fed starts raising short-term interest rates.

In the absence of recession, and with prospects for improvement in fiscal and monetary policy, risk assets continue to look attractive, with the notable exception of gold, which is suffering because the outlook for the economy and monetary policy is improving.

Obamacare begins to unravel

I've written a whole series of posts over the past several years on the fatal flaws of Obamacare. I'm standing by what I've said before: "the defects of this legislation are so massive and pervasive that it will never see the light of day."

Today we learn that the Obama administration is going to delay enforcing the penalty ($2000 per employee) on businesses with 50 or more employees that fail to provide them with healthcare insurance. This will presumably give businesses time to adjust, but it also conveniently postpones a key and controversial portion of the law until after the 2014 elections.

This delay shows that there were even more fatal flaws to Obamacare than I thought. How could I—or any congressional staffer writing the original law, for that matter—have failed to realize that exempting businesses with fewer than 50 full-time employees from the penalty, but imposing the full penalty (which would start at $100,000 per year) on any business that goes from 49 to 50 employees, would do anything but create havoc among small businesses, the biggest source of new job creation? For small businesses that currently do not offer health insurance, the effective cost of adding a 50th employee would be not only that employee's benefit package, but also $100,000 in annual penalties, or the cost of providing health insurance to everyone, which could be upwards of $6,000 per employee, or $300,000 for a business with 50 employees. Not many businesses are profitable enough to survive that, no matter how much time they have to "adjust." This is a huge anti-business and anti-jobs defect in the law.

Delaying this penalty on small businesses that want to grow is not going to fix the problem. Small businesses will continue to eye the magic "50," keeping employee counts low, postponing expansion plans, and relying as much as possible on temporary or part-time employees. Many employers may simply decide to downsize. This is not good for business and it is not good for new job formation. It creates a huge "wedge" between the cost of hiring additional workers and their marginal contribution to the business. It also interferes with individuals' right to contract freely.

This is not the first delay in the implementation of Obamacare, and it is likely not the last. The fact that some 30 states have not set up health insurance exchanges may well precipitate yet another delay which could expand to the entire program, not just the employer mandate. A few more such delays and Congress may finally realize that Obamacare is bad public policy and that the only solution is to repeal it and rely instead of market-oriented reforms to healthcare. With one simple change to the tax code—for example, allowing everyone, not just employers, to deduct health insurance costs—Congress could make a huge difference that would end up being a positive for everyone.

I'm always looking for the silver lining to clouds such as Obamacare, and so I welcome today's news. The more time passes, the more fatal flaws we are likely to discover in Obamacare, and the greater its chances of further delays, and eventually its repeal.

UPDATE: I highly recommend reading Michael Cannon's analysis of this delay action. "Congress gave neither the IRS nor the president any authority to delay the imposition of the Patient Protection and Affordable Care Act’s employer mandate." The administration and the IRS are doing an end-run around Congress by refusing to enforce the penalties. That's one more in a series of legal abuses, which include the Obama administration's decision to keep providing federal health benefits to members of Congress in violation of the ACA law; HHS's granting of waivers for select companies and unions; and the IRS' decision to "implement the law's tax credits, subsidies, and taxes in states with federal fallback exchanges—even though Obamacare ... prohibits the IRS from doing so. The IRS has literally asserted the authority to tax, borrow, and spend more than $1 trillion contrary to the express will of Congress."

More importantly, if employers do not report to the IRS whether they are providing acceptable coverage to their employees, "the federal government simply cannot determine who will be eligible for credits and subsidies." It's not hard to see that this will effectively require that the enforcement of the individual mandate (err, "tax") be delayed as well.

Pretty soon Congress is going to realize that the whole law should be delayed, if not repealed. Good riddance!

UPDATE 2: Late last Friday, HHS addressed this issue (the one-year delay in the employer mandate and its reporting requirement) by saying that it will rely on self-reporting to determine people's eligibility for subsidies rather than postpone the individual mandate. This is an open invitation for massive fraud, not to mention another case in which the administration has arbitrarily re-written the law in an attempt to overcome its massive deficiencies and defects. Will Congress allow this to stand? Obamacare, a daring, massive, and very poorly-designed attempt to re-engineer how one-sixth of the U.S. economy functions, is on such shaky ground that it is destined to fail if it is not repealed. As Sen. Max Baucus said, it is a trainwreck.

UPDATE 3: Senate Republicans are recommending that Obamacare be permanently delayed. It would be shocking at this point for the law to proceed as intended—way too many problems have surfaced, with one of the most troubling, but least-noted, being the Obama administration's unilateral actions to change the implementation of the law. This is a dangerous and unconstitutional expansion of executive power.

UPDATE 4: James Capretta's testimony today to the House Ways and Means Committee is a must-read. He clarifies the many legal and administrative problems that are surfacing and offers potential solutions. His arguments for delaying most if not all of the ACA for at least a year are compelling.

Strong vehicle sales



June light vehicle sales handily beat expectations (15.9M vs. 15.5M), providing yet more evidence that the economy continues to recover. Since the low point in early 2009, vehicle sales have risen by an impressive annualized rate of 14%: over four years of strong double-digit growth


Sales of domestic cars and light trucks are up at a 16.6% annualized pace since their low in early 2009.

What's good for the auto industry is good for the whole economy, especially when sales and production exceed expectations for four years running—lots of trickle-down effects.

This is unambiguously good news.

Manufacturing & construction update

Today's releases on manufacturing activity and construction were unimpressive, and point to a continuation of the modest growth conditions that have prevailed for some time now.


As the above chart suggests, the June ISM manufacturing index was consistent with GDP growth of 2-3%.


The export orders subindex has risen in recent months, suggesting that conditions overseas have improved on the margin.


The employment subindex was weak, reflecting a lack of business confidence in the future.


U.S. manufacturing activity has not improved significantly over the past year, but Eurozone manufacturing activity has become substantially less weak.


Construction spending conditions to improve at a modest pace overall, with the residential construction sector leading the way.

Reynolds' Law

Politicians of all stripes are too often persuaded that helping people is good for them. They forget that the Law of Unintended Consequences is always lurking in the shadows, eager to convert the best intentions into worse outcomes. Reynolds' Law helps explain why this is so. From Mark Perry, whose blog is an endless source of free market facts and common sense, comes this gem:

In 2010, Philo of Alexandria coined the term Reynolds’ Law: “Subsidizing the markers of status doesn’t produce the character traits that result in that status; it undermines them.”

Reynolds’ Law was based on this remark by Instapundit’s Glenn Reynolds:

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.
Read the whole thing.