Jobless gap shows how much trouble Obama is in

U.S. troubles are bad news because it is our biggest trading partner

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The Gazette, Wednesday, December 8, 2010

An unemployment gap of historic proportions has opened up between Canada and the United States, and while the numbers are in our favour they work to our disadvantage because the U.S. is by far our biggest customer.

But the numbers are talking loud and clear. Unemployment in Canada was 7.6 per cent last month, down three-tenths of a point, while in the U.S. it rose to 9.8 per cent, up two-tenths of a point.

That's a spread of 2.2 per centage points in Canada's favour, the reverse of the historic norm.

"Over the last 40 years, the Canadian rate has averaged 1.9 percentage points higher than the American rate," says Earl Sweet, senior economist at BMO Financial Group. "So the relationship is now reversed."

There has been only one month in the last 40 years, notes Sweet, when Canada's jobless rate has been this far below the U.S. That was in early 1975, after the first OPEC oil shock, when the differential was 2.3 per cent in Canada's favour. "But that lasted only one month, a highly unusual divergence."

What's going on now is a trend line, and one that is firming up in Canada's favour. It's even more evident when comparing the employment data.

"Canada's employment rate moved above that of the U.S. in 2006," Sweet says, "and is now substantially higher, 61.8 per cent in November, versus 58.2 per cent in the U.S."

That's a spread of 3.6 percentage points, and gives you some idea of the challenges Barack Obama faces in terms of creating jobs.

Again, comparing the jobless data -the unemployment rate in Canada was 6.1 per cent going into the recession in the fall of 2008, and peaked at 8.7 per cent in August 2009.

In the U.S. the unemployment rate was also 6.1 per cent going into the recession in September 2008, but significantly up 4.7 per cent from a year earlier -the moment the housing bubble burst.

So while Canada's unemployment rate is the lowest it has been in nearly two years, unemployment remains persistently close to double digits in the U.S. While Canada's economy has gained back all the jobs lost in the recession, and then some, 8.4 million Americans have lost jobs that aren't coming back. More than 15 million Americans are now out of work.

Unemployment in the U.S. has more than doubled since the housing bubble burst three years ago. Job creation, not health care, should have been Obama's priority when he took office.

What can he do about it now? The normal levers of monetary and fiscal policy aren't available to him. The current U.S. deficit of $1.6 trillion is more than 11 per cent of GDP. (Our deficit of $56 billion is three per cent).

And Obama has just added $80 billion to the deficit over two years in the deal he made with the Republicans to extend the Bush-era tax cuts to the wealthy (those making more than $250,000 a year). In return, the GOP agreed to extend unemployment benefits that were due to expire by six months, while preserving small middle-class tax cuts. Net, Obama just added $80 billion to the deficit over two years.

As for monetary policy, the U.S. Federal Reserve continues to flood the market with cheap liquidity -its overnight lending rate to the banks remains at a historic low, while the Bank of Canada lending rate has quietly increased on inflation fears to one per cent. With a 75-basis point spread between the two central bank rates, Bank of Canada Governor Mark Carney can't complain anymore about exchange-rate parity hurting Canadian exports.

But Fed chairman Ben Bernanke has one more tool in his policy box - quantitative easing. He's putting another $600 billion of liquidity out there by buying back government bonds. This is the second time he has done it, and he says he'll do it again if need be.

In the meantime, Bernanke issued a gloomy forecast on Monday, predicting U.S. unemployment levels won't return to pre-recession levels for another four or five years.

That would be very bad news for Obama. For as Frank Rich pointed out in his New York Times column on Sunday, three out of four first term presidents since 1976 have lost re-election when unemployment was over seven per cent -Gerald Ford, Jimmy Carter and the first-George Bush. Ronald Reagan won a landslide in 1984 with unemployment at 7.2 per cent, in a recovery from the steep recession of 1981-82.

But he was the Gipper. While Obama is also a great campaigner, his problem seems to be governing.

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