What’s the world’s scarcest commodity?
Now, during and before the global financial and economic crisis. And for years—probably decades–to come.
Jobs.
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” that we’re aiming for?
Let’s at least admit that there is a problem. Then maybe we can figure out how to fix it.
Ready to start?
We all know that the U.S. has a jobs problem now. The official unemployment rate was 9.7% in May. Add in discouraged workers, workers in temporary jobs who would like full time work, and other workers that the Bureau of Labor Statistics calls “marginally attached to the labor force” and the total unemployment rate goes up to 16.6%.
And we all know that the U.S. isn’t the only developed economy with an unemployment problem. In May official unemployment 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 of these cases, just as in the United States, 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 workforce.
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 as this recession drags its weary way to a close. Two years from now, the Congressional Budget Office projects, the official unemployment rate in the United States will still be 8%. That’s twice the unemployment rate in 2000.
Second, it looks like the U.S. economy dug a big jobs hole even before the current recession and that the currently stubbornly high rate of unemployment simply makes an existing problem worse.
All partisan politics aside, the administration of George W. Bush had a truly abysmal record of job creation. In eight years in office the Bush administration created just a net 3 million jobs. That record looks especially terrible compared to the 23 million net jobs created during the eight years of the administration of Bill Clinton. The George W. Bush administration’s eight years looks bad even in comparison to the George Herbert Walker Bush administration which managed to create 2.5 million jobs in only four years.
But what’s really important isn’t just the top line number but the huge job hole that the U.S. economy dug during the eight years of the George W. Bush administration. To see the dimensions of that hole look at the relationship between the number of jobs created and population growth. The administration of George W. Bush created a net 3 million jobs during a period when the population grew by 22 million. If you assume a labor force participation to population ratio of something like May 2010’s 58.7% then the economy needed to produce almost 13 million jobs from 2000-2008 when it only got 3 million.
So the United States went into the recently ended recession about 10 million jobs in the hole—and then things got worse. According to data from the Economic Policy Institute, the U.S. lost about 7.4 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 3 million jobs just to stay even. From the December 2007 start of the recession, the U.S. has dug itself another 10.5 million jobs hole.
Now 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 losses are included in the recession job losses. But I think it’s fair to put the size of the hole somewhere in the vicinity of 15-18 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 new jobs but remember that the population grew during that period too. Using some rough back of the envelope calculations almost 13 million of the Clinton jobs went to keeping even with a growing population. That would leave just 13 million jobs to fill that 15 million to 18 million hole.
There are three good reasons to believe that we’re not going to see anything like the Clinton job creation numbers coming out of the recently ended (I don’t think we’re headed to a double dipper, but that’s not a certainty) recession.
First, the job creation in the Clinton years was an outlier in U.S. history stretching back to the post-World War II Truman administration. In its eight years the Ronald Reagan administration built an extraordinary record on job creation, but that administration still created just 16 million jobs. That’s 7 million short of the Clinton administration record.
Second, all indications are that the current 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 my post https://jubakpicks.com/2010/05/25/get-used-to-it-the-global-debt-crisis-will-play-out-over-and-over-again-in-the-next-decades/ )
And fourth, I don’t think the Obama administration or the administration that follows after either four or eight years 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.
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 has been called the Rubin-Greenspan Understanding.
The terms were pretty simple, Robert Rubin, the Secretary of the Treasury in both Clinton terms, would run a tight fiscal ship that would eventually take the federal budget to a surplus. Even if you discount 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 over 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. For example, in 1993 when inflation averaged 2.96%, the Fed’s target interest in December 1993 was just 2.99%. That’s a real rate of just 0.03%.
Money was cheap. Oh, maybe not compared to 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 real Fed target interest rate well above 0% is plenty cheap for an economy that isn’t being nursed to recovery after the worst downturn since the Great Depression.
Cheap money had its usual effect on the economy. Growth boomed as companies borrowed to expand and as 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 the 2009 fiscal year that would end 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 my post https://jubakpicks.com/2010/06/24/could-we-be-looking-at-another-global-credit-crunch-as-central-banks-step-back-from-the-markets/ )
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 is 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 rate of GDP growth from 2000-2007 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 2000-2007, and given that Wall Street was creating new “money” as fast as it was, why didn’t the U.S. 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 U.S. slowed wage growth for the huge U.S. middle class. Competition with workers in low-wage emerging economies depressed wages in the United States and assured that some of the jobs that in other times would have been created in the United States were instead created in China, and India, Brazil, and other developing countries. An aging U.S. workforce raised costs for those U.S. 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 U.S. competitive advantage in design and development. A slowdown in innovation—it happens and no one quite knows why—meant that more products became commodities and that sent profits to manufacturers and assemblers in low-cost economies.
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 equally 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 new expertise in design or marketing that is more profitable than, say, assembly.
Together this complex of solvable problems does over time amount 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. 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 U.S. 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.
The Federal government will next report the unemployment rate on Friday, July 2.
Christopher:
That’s why whenever I hear Bill Gates & Co. pitch for more “skilled foreign workers”, I feel boiling. He is nothing but a big cheap labor explorer. Same is his tax pitch. BS.
endorfd:
If given a choice, everyone would like a clean and nice paid job, but that’s not always the reality. That’s why despite the mine explosion and death of miners, People in America’s mining areas do not want to close the mines. Same in the gulf drilling areas.
I still think to some degree American’s don’t want to work blue collar jobs like they used to. That is why you see alot of Mexican’s working in meat packing places and farms in the south, granted they will work for less but those jobs are not real appealling either.
endorfg:
Your first posting looked to me that you think Americans no longer want to do hard labor jobs, but your above comment made it much clear.
I understand why people would not want to take a construction job (even if it’s reasonably paid) when the government keeps extending the benefits for not working. All the benefits including the unemployment benefits are all going come back to hunt the companies. Keep in mind, if a company layoff people, it not only has to pay all the unemployment benefits that government hands out to the laid off employee, but also the company the unemployment premium payments will immediately go up too and it stay there pretty much for ever. Another reason to discourage companies from hiring. Ever heard of French employment? In France, it’s said that once a company hired someone, it owes to him/her for ever.
If it’s hard to fire, it will be hard to hire.
scpecial craig:
I did not blame Obama for the spill, but his RESPONSE to the spill. I think more than 70% American (polled) agree with me. I used Obama’s response to the spill as a example of how lawyer would respond to things. All he knows is sending in more lawyers and call for law suits.
Nor I blamed Obama for the recession, but his SOLUTION for the recession. Over 60% American think this country is on a wrong track, that’s the highest % ever.
As I said before, we do not restart everything just because a new president swore in. EVERYTHING IS INHERITED, good or bad. The economy was bad when he came in, but it’s his jobs to fix it. He and his supporters better understand that American people expect him to fix it! As your guy said, it’s the economy stupid!
BTW, I did not defend Bush. I merely said that during the Clinton years, outsourcing had not been widely practiced but it became very common during Bush years and to this day which may have contributed to the low job creation under Bush and Obama. And I said cheap labor is not the only reason for which companies left.
As they say, it’s the economy stupid!
XY,
Kittykathy talked about MBA types, not lawyers. (I think you just wanted to bring your boyfriend Obama into it! 😉 ) It seems like the greatest way to grow profits over the last ten years has been to cut workers. That is a major problem. Where is the innovation from management? The only way they can increase profits is by cutting costs. Yet they all make the most, and keep thier jobs and retirement packages. Does that make sense, you can probably cut 10 upper management for the same price as 200 “average” workers. (Full Disclosure: I work for an engineering firm)
@ endorfb – Where are you located? Do you have a job for a 50+ yo woman? I’m pretty small (5’3″) but healthy, handy, mechanical, techno-savvy (software, web, some hardware), educated (college grad), with paralegal cert., math adept, responsible, dependable, great at providing customer service, excellent troubleshooter.
Jim, excellent post. Kittykathy your comment was dead on. Why do workers want to work for a company that cuts wages, makes them work longer hours, and raises healthcare premiums? You can only squeeze the workers so much, I think we are at a point where they say, it’s not worth me doing the work for that, you do it yourself.
And all the Obama bashers if you don’t like Jim’s articles don’t read them, no one is forcing you to. Have you really already forgotten about Bush already? Do you guys just pretend like the last eight years didn’t happen? Our country went down the tubes on his watch, yet you try to lay all the blame on Obama.
yx
I don’t need a link or a stupid story all I need is the proof that I see day in and day out. I have been in this business along time and this is the worst it has become for people wanting a job. Our company has been in the construction indusrty for 31 years and we hardly can get an employee that cares or wants to work let alone a great quality one. Years ago people respected there job but not anymore.
Also wages don’t matter, we offer higher than normal rates than anyone in the area and it still isn’t enough. People just don’t care. When you can get unemployment for being fired, then something is wrong with society(and yes that happened to an ex emlployee)
yx,
Of course, like I said their job is to make money. If you can import people to do a job for less they will. Along with shipping as many jobs as possible overseas.
They use to use the excuse that they just couldn’t find enough skilled workers (and it was true they were hiring people in the boom years that couldn’t do the job), but how they can convince the politicians that there is a lack of skilled workers now, is beyond me.
“Bill Gates and Silicon Valley will never say enough to H1 visa.”
Yeah and McDonalds will never say enough to importing tomato pickers in Florida. We could easily afford $40/hour for pickers (about $.05/lb), but what advantage would that give the largest contract purchasers? Americans would load up the 1921 Olds truck and head to Florida in droves for $40/hour in the tomato fields.
Well said Whitecloud. There’s nothing wrong with working a starter job either.
That manufacturing has left America is an urban myth. Manufacturing’s contribution to GDP has grown over the years. We’re still the largest manufacturer in the world. The problem seems to be the percent of workers in the manufacturing field has shrunk considerably due to technology. The service sector has replaced many of those jobs. I don’t see a reason to condemn a service economy as it is a sign of wealth!
I think we need to embrace the wealthy service economy and quit making stone age arguments against technology. Maybe less trade debt and more vacations to American destinations are all we need. And why not cut the corporate tax rate to zero to help bring more manufacturing back home as well? You could even offset the small revenue loss, if any, with a tax hike on the higher earners (who would most likely see a raise from the corporate tax drop anyway).
Christopher:
Bill Gates and Silicon Valley will never say enough to H1 visa.
If people really think that American’s are refusing jobs and are lazy, and just want to stay on unemployment then I suggest you read a few of these stories:
http://jobsearch.about.com/u/sty/unemployment/unemployedstory/
For such a hot topic I think there have been lots of great posts to a great article.
The points that strike me are:
1) Government does not create productive long term jobs that add to the GDP. The best it can do is create in environment where the private sector can thrive.
2) Trying to tie job creation to one administration/policy is very hard because actions in the past (or present that you don’t control) affect current job creation. For instance 2 worker families, personal computer (created in 1975, but many years to take off), the Internet. And many more were things that started long before they created the great boom of jobs.
3) People, government, businesses all have a hand in creating the over supply and movement of jobs in the world. People are over populating the world, the government policies influence where it is best to hire someone, and who. Businesses are created for profit and will seek it even if it isn’t good for jobs/workers in their country.
People make the mistake to think that businesses are ethical (some are, but overall they are just profit machines). For instance if you ask the general population about the challenges in immigration, and we will get answers about taking jobs, taxing resources, and security. If you ask Silicon Valley businesses leaders, they are saying that they need more visas for high tech jobs! This is at a time where the unemployment is 10-12% and there are tons of high tech workers on unemployment, because they can’t find a job.
endorfb:
Where did you learn that American no longer want to do those hard labor jobs (or blue color jobs as you put it)? Aren’t those miners who risk their lives at the Virginia mines Americans? Aren’t the spill cleaning workers hired by BP working under grulling sun Americans?
Please send us a link next time when you see any report on American refusing hard labor jobs. Otherwise, what I saw was a recent report saying several hundred people showed up to apply for couple of processing jobs!
Ed,
I’ve been watching BIDU for a while now and it’s intriguing. Little to no debt and good returns, but I still think it’s waaayyy to expensive with it’s current p/e near 100 and future p/e over 30. But if momentum swings up then it should enjoy a nice ride up as well…guess I’m just old skool.
EdMcGon
You may be correct about AONE. They did not get the contract for the Chevy Volt. Chevy went with LG chem out of Korea.
I guess I’m trying to figure out a potential play in the electric car market since these cars are coming out soon. I don’t know if you think they will be a hit or not. I did read that Toyota is taking an interest in the Tesla IPO that came out today. I think there is some potential for growth now that oil so expensive and if the economy comes back gas will start rising again. Back in the 80’s the technology was not there and gas was a lot cheaper. Any thoughts.
kittykathy raised very important point. I too think China is run by engineers and America is run by lawyers.
Not only the current Chinese president and premier are all engineers by training, but also engineers dominate the thick and long leadership creating pipe in China. Even the science and engineering schools which used to be much less important than non-science schools (i.e. schools specialize in humanity study) now occupy important spots in Chinese society. (This can be easily found from China’s annual university power ranking.) Meanwhile, who occupy the same spot in America? It’s not MIT or CalTech scientists or engineers, but Harvard lawyers, Princeton Economists, etc.
Engineers solve problems by creating solutions. (I know people who had worked with MIT graduate on energy efficiency. It’s amazing, though too long to list here.) Lawyers solve problems by filing law suits. (I know my lawyer friends on this blog are going to boil again.) Anyone who don’t believe this just look at Obama’s handling of the oil spill.
I remember less than few days after the rig exploded, he sent in a SWAT team. About one week later he sent DOJ lawyers, not skimmers or barriers. That’s why I posted here then that the best way to put out a fire is calling a lawyer, not a fireman. I got slammed for that comment by our lawyer friends on this blog. About a month later Obama sent more lawyers including DOJ head Eric Holder himself as I remember. Holder went on TV saying he’ll prosecute those who are responsible for to the “max. extend of the law”. (I heard the sound bite very clearly. No mistake.) Guess what happen? Everyone who may have involved in the explosion and spill all lawyered up and take 5th!
This spill is horrible beyond description. We, as a nation, need to know and deserve to know what happened. I am afraid that we may never know what happened. Everyone now shot up!
Similar things in the financial crisis. Holder is all thunder, no case! I have seen several reports recently saying that the government’s case against the financial industry is extremely weak. Some even questioned why Holder wants to act so tough before he even has a case.
MBAs indeed had their run in the 80’s and 90’s, but they are increasingly taken over by lawyers, because of the complex of business environment. I think soon lobbiests will take over this country.
$9/hour jobs though noble are not going to place you in the middle class even if 2 spouses are working at that level. As developing nations are growing their middle class, we will shrink ours if all that is available are $9/hour jobs. There will always be a need for unskilled and low skilled workers in the USA to provide immediate service to consumers in restaurants, hotels, etc. and for support of facilities through cleaning and delivery, etc. Although these jobs won’t be high paying, they at least won’t be shipped overseas. No one should expect to be part of the American middle class without a good education or knowledge, skills and experience. Unskilled or low skilled American workers can’t compete with foreign workers wage-wise, and mass production industrial and service jobs will leave this country for the cheap labor. Any American who is not actively trying to improve their education and knowledge/skills/abilities have little chance of living a middle class life. High School is no longer enough. Democrats and republicans are virtually irrelavent on this issue and can’t help you…you have to help yourself.
cwt334,
You’re talking about AONE, right? The company that is bleeding cash like Imelda Marcos in a shoe store? When their NET profit margin is -104%, their stock is an insult to the dead trees it’s printed on.
Jim,
Great Post. There really needs to be a real public dialogue about this. Unfortuately it is difficult to have a real public conversation because our news broadcast benifit from the “Jerry Springer” type arguing. Specifically certain shows on Fox like to put down certain shows on MSNBC and vice versa. It’s money in the bank for both networks but dumbs down our poilital discourse. Thanks for bringing the discourse to a higher level. Keep up the good work.
By the way any thoughts on A123 or any other battery companies. you mentioned A123 a while back and the volt and Nissan Leaf are due out in the fall. I don’t think A123 was used in either car. Also, Tesla IPO is coming out today. Any ideas on how to play this potential growth.
wb.3355,
I have to wonder how long Google will put up with Chinese censorship. Even if they are willing to, I am hoping this news brings Baidu down to a more reasonable valuation.
bobisgreen,
Elections have consequences. 😉
SPDTANIA,
At least we all agree there is a problem.
Jim,
Congratulations and THANK YOU for another clear and concise analysis. You are helping to educate us all.
Bravo yx and kittykathy – Thanks for writing something new and enlightening instead of usual political mudslinging and generalized mumbo jumbo.
There is an old story of seven blind men and an elephant…… in the same spirit we all see this massive problem in piecemeal manner and miss the complete picture. More importantly, most of us make an error in assigning relative “weights” to various factors that influence the final outcome. Our individual biases show in “mispricing” each of these factors. Not to mention the untractable problem of distinguishing between cause and effect…
Here are questions for consideration: Do Obama administration policies encourage top-end earners (those guys in a position to hire) to hire? If so, why? If not, why? Is the economy cyclical and that’s the reason unemployment is high? Do policy and cycle dance together?
Ed, you are mostly right about Washington (and individual states too) MIA! They don’t get it and is indicative of Mr. VP’s smart*** remark! The icecream guy gets it!
The market was hit with news that consumer confidence fell sharply this month because of worries about jobs and the overall economy. The Conference Board’s Consumer Confidence Index fell nearly 10 points to 52.9, down from a revised 62.7 in May
I think Americans are telling Obama what they think of his economic leadership.
EdMcGon,
Regarding BIDU, it appears Google is going to give in to China’s demands and change their business model to re-enter the Chinese market.
Great Post Jim!
I am shocked, however, that anyone could be so bold as to suggest that tax cuts and trickle down don’t lead to job creation! Spreading robber baron wealth around in the 30s was the biggest mistake EVER. We need to concentrate the money supply into fewer and fewer hands. Then and only then will we be able to return to the golden age of fiefdoms, when real men where lords with property!
In the mean time, until we figure out who the aristocracy is going to be, we can take comfort in knowing that all of those out of work people have a constitutional right to bear arms and fend for themselves.
Now who wants to buy some WHR for next weeks bounce?
southof8: The last time we were on a real gold standard was the 1920’s and the early 1930’s (until FDR confiscated everyone’s gold). As I understand it, the Fed reduced interest rates (sound familiar?) and that causes a credit bubble that went into stocks, which then led to the beginning of the Great Depression. So based on that, I’d say there’s still plenty of credit available in a gold standard.
However, in the 19th century, the US achieved fabulous growth with almost no debt at the turn of the 20th century. Obviously, there was plenty of credit to go around at that time. The difference was the banks couldn’t use leverage or they were risking a run on their bank.
To your point, I don’t think you have as much credit available in a gold standard system vs a fiat system, but the growth you get is sustainable…meaning you won’t get a credit bubble that’s going to reverse and cause a severe recession or depression.
This isn’t to say a gold standard is a perfect system, it’s not. For instance, you can get bank runs that shut down the entire economy for a while, with no way to counteract it. However I think it provides a much more stable system, as long as their isn’t a Federal Reserve to screw it up.