There’s little disagreement that the U.S. labor market is struggling to create jobs in what is probably the worst “jobless recovery” in history. From the peak of 115.6 million private-sector jobs in January 2008, private-sector employment today is slightly below 109 million, or about 6.7 million fewer jobs than when the recession started. At the current rate of private job creation over the last year, about 141,000 jobs per month, it will still take roughly four more years just to replace the current 6.7 million job deficit. When you also consider the addition of millions of new entrants every year into the labor market, it will likely be even longer before the U.S. labor market ever approaches anything close to full employment again.
Where there is some disagreement is about what is causing this protracted jobless recovery. AEI fellow Peter Wallison offered one explanation for the sluggish job creation this week in The Atlantic: substantial regulatory uncertainty. Faced with the complexities and uncertainties of pending major health care (Obamacare) and financial (Dodd-Frank) reforms, firms are simply reluctant to hire new workers.
Another regulatory burden that might further explain the anemic job creation is offered this week by e21 in a commentary titled “Why Aren’t Banks Lending?: Credit Growth & Regulatory Micromanagement.” The article outlines what might be called a “creditless recovery,” where the amount of credit being created in the U.S. economy is not sufficient to support robust economic growth and healthy job creation.
The chart above illustrates graphically the current “creditless recovery” by displaying the quarterly ratio of total credit market borrowing to GDP back to 1952. Despite some improvements over the last year, the amount of credit available in the U.S. economy in relation to the size of the economy (GDP) remains at a critically low level, less than half of the historical average. The flow of credit is often described as the “lifeblood of the economy” (even by President Obama), and without that critical ingredient, it’s no wonder that economic and job growth are so anemic.
What explains the “creditless recovery”?
According to the e21 analysis, the credit sclerosis is being caused by a new era of “regulatory overreach” where the “judgment of bankers is being supplanted by the judgment of regulators.” In this oppressive regulatory environment, many lenders have been refusing to make many high-quality loans to creditworthy customers that would normally pass even the most conservative underwriting standards. While a certain amount of conservatism in bank lending is certainly warranted following the financial crisis, it appears that the recent “regulatory micromanagement” has unnecessarily stifled credit creation, and in the process stifled economic and job growth.
To jumpstart job creation, Wallison recommends repealing Obamacare and Dodd-Frank. We might also consider reducing the regulatory overreach and micromanagement in the banking industry that is contributing to both a “jobless and creditless recovery.”