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“…and never fails to say, GET A JOB…” The Silhouettes

May 16, 2012

One of the most troublesome economic policy questions in the US today is how to create new jobs and rid ourselves of high unemployment. There is little question that unemployment today (and “disemployment” –which counts all those discouraged workers who have left the work force ) is a major problem in the US. It has many negative implications for the economy, for an individual’s self-worth and esteem and by most estimates a huge toll on personal health. So an obvious question is how to get the economy fully employed (or nearly so) at least at the levels that the US became accustomed to prior to the 2008-09 recession.

Unfortunately, the normal Neo-Keynesian response these days to spur job growth is to provide economic stimulus in one of three general forms:

(1) programs tailored to spur jobs in specific sectors by subsidizing activities that are usually NOT economic (e.g. renewable production tax credits, cash for clunkers etc.)

(2) federal government deficit spending at record high levels supporting more federal government jobs, related private sector jobs, as well as increasing/extending payments such as unemployment insurance and food stamps and a temporary cut in the payroll tax, all of which help support consumer spending  and

(3) monetary policy designed to accommodate major deficits and ultra low-interest rates so that consumers save on borrowing for major purchases such as homes.

I will acknowledge that some of this activity has been necessary and certainly humane and by most measures accounts for most of the short-term– albeit limited– growth in the economy and jobs since 2009. However, the degree and extent to which we have artificially stimulated the economy is really quite frightening. This “stimulation” coupled with a number of other factors (our HUGE levels of consumer and federal debt, massive money printing and highly inflated stock and bond prices and even home prices) means we are probably headed for a major fall of the US dollar and US inflation (eventually) and a steep recession or even depression in the US and around the world with devastating  job implications. This is an important topic for a future blog: Whether we can still avoid the inevitable serious recession or at least ameliorate the degree of recession?

However, with respect to jobs the real question is how can we improve LONG TERM job prospects in the US rather than a short-term quick fix as we have seen with stimulus.

First, I think it is appropriate to diagnose what has happened to US employment over the past several decades to better understand what needs to be done to create new jobs in the US in the future. Over most of the past 40 years, the US has been the envy of the world in both economic growth and job creation. Between 1970 and 2007 , US jobs have grown from 79 million to 146 million or at an average 1.7% compounded growth rate. This growth rate significantly exceeds the US working age population growth rate of about 1.3% per year during the same period. With only a few exceptions, the US growth rate in jobs far outstrips most of the developed countries around the world which have generally seen much slower growth rates during this same period. (Australia and Canada are the major exceptions but in both cases, the growth in working age population far outstripped the US).

Of considerable note  is that there were only 3 times prior to 2008 that absolute jobs in the US actually fell year to year. In 1975 , 1982, and 1991 there were losses of about 1 million jobs from the previous years and in 2002, a loss of 0.4 million jobs. So even during past recessions (including the fairly deep recessions of 1974-75 and 1981-82), not nearly as many as jobs were lost as in our current recession where we shed 7 million jobs between 2007 and 2010. Even more importantly, job losses in past recessions were quickly made up in just one year (with the exception of 1991 when it took two years), but sadly we still haven’t made up the 7 million job loss more than four years after the recession began.

So whats wrong now? Or better yet, what did we do correctly in the past? Looking at the data more closely, the rate of growth in jobs has varied over the forty-year period. The best period by far was the 1982-1990 period when 19 MM jobs (or 2.4MM jobs/year) were created , a compound annual growth rate of 2.23% which was almost double the 1.17% per annum growth in the working age population during that period. 1992-2000 was second best with a creation of 18 MM jobs (or 2.3 MM jobs/year) a growth rate of 1.8% per year which still outstripped the 1.23% growth rate in working age population. Both the 1971-81 and 2002-2007 periods created about 2 MM jobs/year, but only slightly outstripped the annual growth rate in the working age population in both periods.

In looking at these periods, it is clear that many factors were involved in economic and job growth, but several long-term structural factors seem to be most associated with job growth:

  1. Deregulation of industries–In the case of the 1980s, airlines, banking, telecommunications, trucking, railroads and natural gas supply were all deregulated to varying degrees. New electric generation was deregulated. In virtually all of these cases, prices declined and output went up resulting in significantly more jobs. Also, lower prices for these services resulted in greater disposable income which in turn was spent on more goods and hence further job growth. In the 1990s, the effects of the 1980s deregulation continued, and electric utility deregulation and telecomm deregulation was expanded.
  2. Free trade agreements–some of this began in the 1980s but major progress was made during the Clinton administration with the passage of NAFTA (North American Free Trade Agreement)  in the mid 1990s. This allowed US products to freely compete in Canada and Mexico and on balance produced many more net exports and jobs for the US.
  3. Lower Marginal Tax Rates on Business and Individuals–During the early 1980s, the top income tax rate was lowered from 60 to 50% and then ultimately to 28% by the late 1980s. There is little question that the top rate of the 1970s (which was commonly paid by many small businesses) squelched new business formation and investment and hence job creation. The top rate was raised back to 40% during the Clinton years and is probably one of the reasons that the rate of job formation was slower during the Clinton years than the Reagan years. The Bush-era tax cuts helped spur some job growth during 2002-07 BUT the change in the top income tax rates was relatively small and phased in slowly (40 to 35 percent over 4 years) despite all the hoopla to the contrary. A bigger change was the reduction in dividend and capital gains tax rates which had the effect of increasing equity and capital investment– an important component of the growth in jobs.
  4. Major Technology/ Productivity Advancements—These have clearly been enhanced by #1, #2 and #3 and have occurred throughout our history. However, there is little question that the period from the 1980s and 1990s saw a computer and internet revolution which substantially lowered the cost of doing business, improved productivity, lowered prices and hence fueled more demand and jobs. There have been technology advancements for centuries, but by any measure the advancements in the 1980s and 1990s were pretty extraordinary.
  5. Significant Increases in Two-Income Families–during the late 1970s thru the late 1990s, the number of two earner families grew significantly. (As one indicator of this, labor participation rates among women in the US grew from 45% in 1974 to 60% by 1999). This meant that even more disposable income was available for discretionary spending by families which helped fuel the economy and jobs further.
  6. Relatively Low or Declining Inflation– The corollary to this is a “conservative” monetary policy. Clearly, this was not the case in the 1970s and as inflation soared, employment growth soured. But in the 1980s and 1990s, inflation was tamed in large measure because the Fed refused to grow the money supply beyond what was needed for economic growth. During 2002-2007, the fed became much more accommodative and held interest rates down too long which contributed mightily to the housing bubble (and eventual bust).

So what does this tell us going forward?  

First and foremost, the current hyperstimulative path we are on with $1 trillion+ deficits and massive money printing will NOT create or even preserve jobs in the long run, but in fact will do just the opposite when the piper must eventually be paid. It is more than understandable that many in the government want to do something to keep people employed and our economy growing in the short-term, but unfortunately this is only inflating an already inflated economy more. More importantly, history tells us that real improvements in the economy are needed NOT artificial stimulus. At this point, we need to start paying off our debts , turn off the money printing presses and let sanity prevail.

Second, we need to continue to find opportunities to deregulate (rather than regulate) and take advantage of the power of the competitive markets to lower costs and increase net demand and jobs in the US. Health care and education are two prime examples where there is a strong need for competition and deregulation but other examples exist as well. In addition to deregulation, a lighter hand in federal, state and local government regulation (e.g. environmental, permitting, and overlapping federal/state/local regulation) also is important.  

Third, we should continue to resist the cries for protectionism in trade and continue expanding free trade agreements in the future.

Fourth, we need to reform our tax code so that it is much simpler (preferably the Fair Tax that I posted about earlier) eliminates tax subsidies and tax breaks and at the very least lowers marginal rates on small businesses. The efficiency gains from such a major reform (absent ANY net tax revenue cuts) will help fuel long-term economic and job growth.

Fifth, in order to help spur technological progress and the next set of breakthroughs and to make sure American labor competes successfully in the international markets, we need to change our education system in the US so that it uses more competition among schools (and teachers) to improve the basic education every child should get.  (More on this in a later post)

 ******************

I’m afraid that the a major recession is probably unavoidable in the next several years for many of the reasons I have discussed above and in previous posts. Nonetheless, I still believe that we can take action to ameliorate the extent of this downturn and at the very least, such reforms can make the US a better place to live and work for our children and our children’s children. Maybe then the Silhouettes lyrics won’t be prophetic after all: “Tell me that I’m lying ’bout a job…That I never could find.”

4 Comments
  1. Dale Heydlauff permalink

    On the brighter side of the issue, I gave a speech recently to students about to graduate from Eastern Michigan University and used these statistics: 1) the unemployment rate for college graduates is less than half the rate of the overall population – so get your degree; 2) there are 3 million unfilled jobs in the U.S. waiting for people with the right skills to come along; 3) a recent survey of U.S. employers found that 52% were having difficulty filling critical positions within their firms – a clear indication that yesterday’s skills simply don’t measure up in today’s world; and 4) every day in America 10,000 people reach the age of 65 – some have already retired, some will retire soon and some will continue to work because they enjoy doing so or because they can’t afford to retire. While automation, immigration and outsourcing can cover some of these positions, there should still be many job opportunities for those seeking employment, assuming the economy doesn’t crash!

  2. William Hildeson permalink

    No mention of Simpson-Bowles? Unless there’s a supermajority of one party, I think getting a buy in from both parties is really the only way the debt can be tackled.

    Also I’d like to see a more technical post on your third point. I really don’t understand how a dividend tax affects employment….There are so many factors involved in an economy, I’ve always viewed this as a spurious arguement. But my knowledge of taxes, et.al. isn’t as robust as I’d like so help me out.

    • Agreed. Simpson-Bowles is an excellent place to start.

      The dividend tax affects employment because it affects a company’s cost of capital. A lower tax rate lowers the required return on investment for a company on an after tax basis (I.e. after tax-earnings which are “paid” out as Dividends and stock appreciation to investors). This isbecause investors keep more of these returns after taxes so company doesnt need to earn as much on its investments. A lower required ROI means more capital investment and this has historically translated into more jobs. This is not a short run fix however. It is a long term phenomenon.

      This is one of many reasons that I like the FairTax , because it eliminates taxes on capital gains and dividends. However, there are substantial political consequences of doing so. Most notably, the lion’s share of such taxes paid come from the wealthy ( since most people receive dividends thru tax-deferred retirement or 401 k plans where such taxes do not matter and generally don’t have much extra money to invest beyond their retirement plans). That is why we can’t merely tinker wih dividend taxes but need full scale reform to make it a workable and fair system and viable politically.

  3. William Hildeson permalink

    That makes sense. Though I still view it as a hard sell b/c the different taxes are all pretty nebulous for the general public…. that speaks to your Fair Tax and what a simplification of the tax code that lots of others are calling for. I’m too cynical to believe that logic and partisian bickering will ever accomplish anything. Thanks.

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