Equities almost certainly will continue to outperform cash and bonds over the long haul, as they hav...
Biggest Problem Now: Job Creation
06/29/2010 9:27 am EST
Hoping that the end of the recession will fix things isn't going to work. Now that we're not as distracted by more urgent crises, it's time to come up with some solutions.
What's the world's most precious commodity?
Now, during, and before the global financial and economic crisis? And for years—probably decades—to come?
Somehow, in our rush to fix the stuff that went wrong and caused the financial crash, and in our efforts to bring the huge deficits that the financial crisis left us with under control, we seem to have forgotten this. The United States and the economies of the other developed countries of the world weren't producing enough jobs in the boom years before the crisis.
And right now, we're not even talking about this long-term jobs problem. Are we really going to be satisfied if unemployment creeps down from 10% to 8% and stays there? That's the "solution" we're aiming for?
Let's at least admit there is a problem. Then maybe we can figure out how to fix it.
We all know the US has a jobs problem. The official unemployment rate was 9.7% in May. Add in discouraged job seekers who had quit looking, part-time workers who wanted full-time employment, and other workers who the Bureau of Labor Statistics called "marginally attached to the labor force" and the total unemployment rate was 16.6%.
And we all know that the US isn't the only developed economy with an unemployment problem. In May, the official unemployment rate was 20% in Spain. In the first quarter of 2010, the official rate was 9.9% in France. In the United Kingdom, it was 8.1% in May. And in each case, just as in the US, the official rate understates the full unemployment rate. In those countries, for example, the number of "employed" workers in temporary jobs is climbing as a percentage of the work force.
Of course, we expect unemployment to be high when an economy is coming out of a recession. But we've got a jobs problem even discounting the effects of the recession.
First, unemployment is going to stay high even though this recession has dragged its weary way to a close. Two years from now, the Congressional Budget Office projects, the official unemployment rate in the United States will be 8%. That's twice the unemployment rate in 2000.
Second, it looks like the US economy had dug a big jobs hole even before the recession, and that the current stubbornly high rate of unemployment simply makes an existing problem worse.
Creating a Jobs Hole
All partisan politics aside, the administration of President George W. Bush had a truly abysmal record of job creation. In eight years, the Bush administration created a net of just three million jobs. That record looks especially terrible compared with the 23 million net jobs created during the eight years of the administration of President Bill Clinton. Bush's eight years look bad even in comparison with the administration of his father, George H.W. Bush, which created 2.5 million net jobs in only four years.
NEXT: Four Reasons Why a Job Boom Isn't Coming Soon|pagebreak|
What's really important isn't just the top-line number, but the huge job hole that the US economy dug during the eight years of George W. Bush's administration. To see the dimensions of that hole, look at the relationship between the number of jobs created and population growth. The second Bush administration created a net three million jobs during a period when the population grew by 22 million. Using May's number, 58.7% of the population is in the labor market, so the economy needed to produce almost 13 million jobs from 2000 to 2008 just to keep pace with population growth.
So the United States went into the recently ended recession about ten million jobs in the hole, and then things got worse. According to data from the Economic Policy Institute, the US lost nearly 7.5 million jobs since the recession started in December 2007. In that same period, the institute calculates, because of a growing population, the United States needed to add three million jobs just to stay even. From the December 2007 start of the recession, the US has dug itself an additional hole of 10.5 million jobs.
You can't just add these two figures together to put the size of the cumulative hole at 20.5 million jobs, because part of the two periods overlap and some of the Bush job deficit is included in the recession job losses. But I think it's fair to put the size of the hole somewhere in the vicinity of 15 million to 18 million jobs.
That's an immense hole. One that even the jobs record of the eight years of the Clinton administration couldn't fill. The Clinton years saw the creation of a net 23 million jobs, but remember that the population grew during that period, too. Using some rough calculations, almost 13 million of the Clinton jobs went to keeping even with a growing population. That would leave just ten million jobs to fill that 15 million to 18 million hole.
There are four good reasons to believe that we're not going to see anything like the Clinton job creation numbers coming out of the recession:
- First, the job creation in the Clinton years was an outlier in US history stretching back to the post-World War II Truman administration.
- Second, all indications are that the economic recovery is going to be slower than most recoveries from a recession. Job creation is going to get less than its usual cyclical bump.
- Third, the global economy seems to be in a period of greater volatility, with economic cycles both more extreme and packed more closely together. (For more on the likelihood that we're going to repeat the current crisis again and again in the next few decades, see this blog post on my Web site.)
- And fourth, I don't think the Obama administration or the administration that follows has access to the tools that produced the job growth of the Clinton years. The financial crisis that broke in 2007 made sure of that.
A Deal and Then a Bubble
To the degree that the job creation boom of the Clinton years wasn't simply a matter of being in the right place in the economic cycle, it was built on what we'll call the Rubin-Greenspan understanding.
The terms were pretty simple: Robert Rubin, Clinton's Treasury secretary from 1995 to 1999, would run a tight fiscal ship that would eventually take the federal budget to a surplus. Even if you discounted the contribution to the budget from a surplus in social security, the Clinton budget saw a surplus of $86 billion in 2000.
In exchange for that fiscal restraint, Federal Reserve chairman Alan Greenspan would keep interest rates low and monetary policy relatively loose. The Fed didn't cut rates to the bone during these years. For example, the Fed's target interest rate was more than 6% in 2000. But the Fed kept the inflation-adjusted interest rate—the real interest rate—to less than 3% even in 2000. (Inflation that year averaged 3.38%.) And for much of the period, the Fed's real interest rate was much lower than that.
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Money was cheap. Oh, maybe not compared with right now, when the inflation rate is 2% and the Fed's target interest rate is 0% to 0.25%. But that's comparing apples and oranges. A Fed target rate that is essentially equal to inflation, or roughly a 0% interest rate—as it was during parts of the 1990s—is plenty cheap for an economy that isn't being nursed to recovery after the worst downturn since the Great Depression.
Cheap money in the 1990s had its usual effect on the economy. Growth boomed as companies borrowed to expand and consumers borrowed to consume. Median wages fell during the first half of the decade, but by 1996, wages were growing again. By the first quarter of 1999, they were 2% above the level of ten years earlier. The actual increase in wages provided some support for increased consumer borrowing, but the direction of wages, which created an expectation for future wage increases, was even more important. Consumers were willing to borrow more because they thought they'd earn more in the future.
This cheap money also led to a stock market bubble that finally burst in March 2000.
The ensuing recession, the Bush administration tax cuts, and the low interest rates engineered by the Federal Reserve to aid in the recovery ended the Rubin-Greenspan understanding.
It was replaced by an era of extremely low interest rates (the Federal Reserve's target rate fell to 1% in July 2003, stayed at 1% until July 2004, and didn't see 3% until May 2005) and a rising federal budget deficit. The final Bush administration budget for fiscal 2009, ending in September 2009, projected a deficit of $400 billion.
But low interest rates and soaring deficit spending weren't the end of economic stimulus during these years. Wall Street was pitching in, too. From 2000 to mid-2007, Wall Street went on a securitization binge, taking debt such as mortgages or credit card receivables and then repackaging it for sale to investors looking for cash flow and income in the form of securitized debt. By mid-2007, the volume of securitized debt had grown to $8 trillion, according to Citigroup. (For more on the growth and collapse of the securitized debt markets, see this blog post.)
The great puzzle of the Bush administration, given all this stimulus and the extremely fast growth in the money supply, isn't why it created a bubble in housing and other asset markets—that bubble and its bursting are exactly what, in retrospect, should have happened as a result of all this stimulus. The real puzzle is why this stimulus didn't generate faster economic growth or create more jobs. The average annual growth rate of the gross domestic product from 2000 to 2007 was just 2.5%. And the economy created just 375,000 jobs a year, not enough to stay even with population growth.
Given fiscal and monetary policy from 2000 to 2007, and given that Wall Street was creating "money" as fast as it was, why didn't the US economy take off on a wild growth bender? That, and not the crash in 2007, is the real puzzle.
I suspect there are a lot of partial explanations. Growing income inequality in the US slowed wage growth for the huge US middle class. Competition with workers in low-wage emerging economies depressed wages in the United States and ensured that some of the jobs that in other times would have been created in the United States were instead created in China, India, Brazil, and other developing countries. An aging US work force raised costs for those US industries that were the traditional source of high-paying, blue-collar jobs to the point where these sectors bled jobs. Even when workers could find replacement jobs, they didn't pay as well. The luck of the technology cycle resulted in a relative scarcity of new products that rewarded US competitive advantage in design and development. A slowdown in innovation meant that more products became commodities, and that sent profits to manufacturers and assemblers in low-cost economies.
NEXT: Solving a Problem, But Not the Problem|pagebreak|
Solving a Problem, But Not the Problem
What's striking to me is that none of these causes alone signals a monumental shift in the playing field away from the United States. And that's good. It means that these are problems that can be addressed and solved.
But it's also clear that these causes have a certain momentum. For example, manufacturing efficiencies in low-cost countries lead, in time, to greater efficiencies and lower costs that don't depend on low wages. China is going through this transition now. Manufacturer efficiencies and high volumes tend to lead companies to try to move up the value chain by adding expertise in design or marketing that is more profitable than, say, assembly.
This complex of solvable problems, over time, amounts to a shift in relative economic growth and relative economic advantage of a magnitude that explains why job growth was so slow during the Bush administration—and why it will take so long in this recovery to reduce unemployment.
And we're not doing anything to tackle any of the pieces of this complex problem. Our plans for recovery seem predicated on fixing the financial system that created the crisis of 2007. That's worth doing. The debate over what to do after that is focused on how fast to reduce our deficit. That debate is worth having, and certainly the deficit needs to be reduced.
But neither fixing the US financial system nor reducing the deficit addresses the job-creation problem that existed before this financial crisis broke upon our heads, and that will still be with us when the current recovery is celebrating its second or third or fourth anniversary.
And certainly, we should know without a doubt that we can't financially engineer our way to job growth. Been there. Tried that. Didn't work.
Jobs are the scarcest commodity in our world, and we need to make creating more of them a true national priority. If not, the jobs hole will just keep getting bigger.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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