Thursday, March 25, 2010

Jobs are Job One

A few weeks ago the government announced the details of its great, new, “jobs” bill that is designed to generate jobs and lower unemployment. Two days later, the government announced that the unemployment rate would basically stay the same the rest of the year.

This means you are admitting that your plan isn’t going to work before you even implement it. Can you image doing this is the private sector? “Hey boss I’m going to spend big bucks on our new campaign, but I don’t expect sales to increase at all.” And they don’t understand why people have a problem with this. Brew some tea.

However, the $17.5 billion “jobs” bill enacted last week is a huge improvement over the original $150 billion version. Why? The original cost $150 billion to provide few jobs, but the new bill costs $132.5 billion less to do almost the same thing. It’s a bargain!

In reality, the government cannot do much to create jobs in the short-term. If it could, we would have full employment all the time. The private sector has to create the jobs and the government’s role is to create an environment that promotes job growth while maintaining the general well being of the people. But the people demand that the government do something, so you get expensive programs that don’t accomplish much.

Unemployment is expected to improve very slowly in this recovery. Most forecasts have unemployment just above 9% by the end of 2010 and still around 8% for 2011. The government’s forecasts are actually now more pessimistic that most economist. I believe they are trying to lower expectations after woefully failing to meet expectations in 2009.

Two Types of Unemployment

There are two types of unemployment (sounds like a Vytorin commercial) impacting the job market right now. Cyclical unemployment is the unemployment that results due to the periodic drops in the business cycle, commonly referred to as recessions. When the business cycle rises, companies start hiring, and unemployment drops. There was considerable cyclical unemployment during this recession and most of the current job openings are the result of improvements in the business cycle.

Structural unemployment is much more complicated and has a much greater impact. Structural unemployment results from a mismatch between the sufficiently skilled workers seeking employment and demand in the labor market (Wikipedia). There was a huge, unexpected, impact of structural employment during this recession. To understand why, we need to review the economy of the aughts (00’s).

A Tale of Two Bubbles

The dot com bubble was created by people overestimating the growth potential of the Internet. Too much money flowed into the sector, pushing up stock prices and propping up weaker companies. When the bubble burst, the excess capital left the sector. But some good things came out of this. We were left with a strong Internet- related industry that was right-sized and ready for future growth.

In a free market economy, capital flows to where there is the greatest return on investment. After the dot com bubble burst, the capital ran straight into the housing market. You could make great money building, buying, and selling houses. Because housing is related to so many other industries, money flowed into these places also. The companies offering the highest returns on their bonds and preferred stock were all connected to housing since they could take the capital and get a high return on investment. (I still own some awful bonds from GMAC. I thought they were only financing cars!).

Of course we now know the bubble was created using risking mortgages and toxic assets. When this one popped, the result is huge inventory of empty houses, a damaged financial system, huge government debt and much of the “false” wealth the bubble created evaporated. Worse yet, the repercussions rippled through the economy crippling industries and resulting in our current unemployment situation. Because this bubble was based on falsehoods, there are no positive results.

And it is even worse than that. Because during the aught’s capital was flowing into the housing market and related industries, it was not flowing into true growth industries and small start-up companies that provide long-term economic growth. Instead of money being available in 2005 for the new company “Growth Industries Inc.” which would have employed 100 people today, it went to “Skipper the house flipper”. Think about it, what is the macro-economic benefit of flipping houses? Now he’s known as “Skipper the burger flipper”.

So there are many skilled, unemployed, people looking for work, but there are few jobs available that require their skills. This is the reason the under-employed numbers are so high. The WSJ economic panel estimates that 2.1 million jobs lost during this recession will not return. The scope of the “structural” unemployment problem also is impacting the business cycle (and thus cyclical unemployment) by limiting consumer spending.

Even if the government cannot create jobs in the short-term, it does need to create a better environment so the private sector can create more jobs. Because housing made things appear so good before the recession, the government neglected some issues that are restraining job growth today.

Issues to Address:

1. Develop a national business strategy

There needs to be a strategy of assisting the small, high-tech industries that will create the jobs of the future. An education strategy needs to compliment this to provide the workers needed for these jobs. China has a business strategy and I hear that it just may be working for them.

2. Develop an energy policy based on economic factors

Energy is considered too much to be just an environmental issue. It is primarily an economic issue with national security implications. If all the solar panels and wind turbines are produced in China, what have we really accomplished? It is a great strategy to promote the conversion to electric powered automobiles. This would generate innovation and jobs in the battery industry and create the need for many nuclear power plants to be built throughout the country. We create jobs, decrease pollution, and improve national security at the same time.

3. Develop “fairer” trade policies.

“Exporting” jobs may have worked when housing was propelling the economy, but it doesn’t work now. We have to export more products and fewer jobs.

4. Enforce the immigration law

There may been an economic reason to ignore illegal immigration when unemployment was at 5%, but can you really continue to do this with unemployment at 10%?

5. Increase market competition

The trend has been to promote business consolidation to create greater efficiencies. If you go too far, you reduce competition and limit job growth. It causes other problems also (Hey, how about them giant banks!). Again the strategy worked when housing was strong, but we went too far. It is time to strengthen the anti-trust laws and deconsolidate where needed. The increased competition will result in new companies, new technologies, and new jobs.

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