W Post
Why job creation is so hard
By _Robert J. Samuelson_
(http://www.washingtonpost.com/robert-j-samuelson/2011/02/24/ABSZV8O_page.html)
,
Published: February 17, 2013
President Obama and the Democrats want more jobs. So do Republicans. Heck,
everyone does. Yet, job creation is weak. It’s true that the economy has
generated _5.5 million jobs_
(http://www.washingtonpost.com/politics/state-of-the-union-2013-president-obamas-address-to-congress-transcript/2013/02/12/d4
29b574-7574-11e2-95e4-6148e45d7adb_story.html) from its low point. Still,
there are 3.2 million fewer jobs now than at the previous high. The
official unemployment rate is _7.9 percent_
(http://www.bls.gov/news.release/pdf/empsit.pdf) , but it would be _14.4
percent_
(http://www.federalreserve.gov/newsevents/speech/yellen20130211a.pdf) if it
included part-timers who would
like full-time work and discouraged workers who have stopped looking,
notes _Janet Yellen_
(http://www.washingtonpost.com/politics/yellen-says-fed-rate-hikes-not-assured-even-after-unemployment-drops-below-65-percent/2013/02/11
/79c7f1f4-7489-11e2-9889-60bfcbb02149_story.html) , vice chair of the
Federal Reserve Board. Scarce jobs are the nation’s first, second and third
most
important economic and social problem.
What’s especially disheartening and mystifying is that, until now, job
creation was considered an inherent strength of the U.S. economy. Despite some
years of recession-induced joblessness, _unemployment averaged 5.6 percent_
(http://data.bls.gov/timeseries/LNU04000000?years_option=all_years&periods_o
ption=specific_periods&periods=Annual+Data) from 1950 to 2007. The
Congressional Budget Office doesn’t expect it to fall below _7.5 percent until
2015_
(http://www.cbo.gov/sites/default/files/cbofiles/attachments/43907-BudgetOutlook.pdf)
. That would make six years above 7.5 percent — the longest
stretch of high joblessness in 70 years. It has defied massive budget
deficits and ultra-low interest rates.
Something’s changed in how the economy works. One theory is “deleveraging”
: Americans paying down their high debt. The economy won’t accelerate until
this process is complete, the argument goes; the fact that _debt-service
ratios_ (http://www.federalreserve.gov/releases/housedebt/) have dropped to
early 1990s levels is considered a good omen. Another approach is to
examine the economy by sectors and see which ones are lagging compared with
past
recoveries. Yellen did this and indicted housing (its deep slump) and state
and local governments (spending cuts). Again, there are said to be
encouraging signs. _Home construction_
(http://www.reuters.com/article/2013/01/17/usa-economy-housing-idUSL1E9CGIB720130117)
, _prices_
(http://money.cnn.com/2012/11/27/real_estate/home-prices/index.html) and
_sales _
(http://articles.marketwatch.com/2012-12-27/economy/36013851_1_sales-of-new-homes-new-home-sa
les-rock-bottom-mortgage-rates) are up; state and local spending is
stabilizing.
This analysis helps but misses the main story. To overgeneralize slightly:
We have gone from being an expansive, risk-taking society to a skittish,
risk-averse one. Before the 2008-09 financial crisis, the bias was toward
more spending. The inclination was to surrender to immediate gratification.
Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved
similarly. Banks made the next loan; companies hired the next worker and
approved the next investment project. An ever-expanding economy justified
optimism, and optimism supported an ever-expanding economy. Hello, bubble.
The psychology has now reversed. The bias is against extra spending. Eat
out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom
years, the _personal saving rate_
(http://www.whitehouse.gov/sites/default/files/microsites/ERP_2012_App_B.pdf)
(savings as a share of after-tax income)
fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging
up; from 2010 to 2012, it _averaged 4.4 percent_
(http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf) . It
could go higher, imposing a
further drag on the economy.
Businesses have also retreated. They resist approving the next loan, job
hire or investment. Since 1959, business investment in factories, offices and
equipment has averaged 11 percent of the economy (gross domestic product)
and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports
economist Nigel Gault of IHS Global Insight.
Note that these attitudes govern sectors accounting for roughly four-fifths
of the economy: Consumer spending is about 70 percent of GDP; business
investment is the rest. They dwarf housing construction, which is about 2.5
percent of GDP. The caution and risk-aversion aren’t so great as to cause a
recession, but on the margin they have limited the economy’s expansion to
rates — lately, 1 percent to 2 percent — too weak to absorb most jobless.
Pessimism produces a sluggish economy; a sluggish economy produces pessimism.
That’s the main explanation of poor job creation.
As I’ve written before, this _psychological shift_
(http://www.washingtonpost.com/wp-dyn/content/article/2010/06/13/AR2010061303330.html)
stemmed from
the fact that the financial crisis and Great Recession were largely
unpredicted. Americans aren’t just deleveraging. They’re also building wealth
to
protect themselves against unknown dangers. Perhaps the stock market’s
recent assault on record highs signals restored confidence, but remember: The
market is simply regaining levels of late 2007. A report from _Credit
Suisse_
(https://infocus.credit-suisse.com/data/_product_documents/_shop/382269/credit_suisse_global_investment_returns_yearbook_2013.pdf)
argues that
returns to stocks will average about 3.5 percent annually (after inflation) in
the next 20 years, down sharply from 6 percent since 1950. To compensate for
lower returns, companies would need to contribute more to pensions. Wages
would suffer. Consumption spending would weaken.
We are hostage to a stubborn, restraining psychology. There’s no obvious
fix for slow job growth, precisely because it requires a change in public
mood or some autonomous source of added demand — a burst of exports,
investment in new technologies — not easily predicted or controlled. It could
happen
but is hardly guaranteed. Politics does matter, to a point. Constant
budget and tax feuds between the White House and Congress spawn uncertainty
and
subvert confidence. Obamacare’s disincentives to hiring hurt, though how
much is unclear. But grandiose solutions, say infrastructure spending,
founder on practicality. A meaningful level of projects would take time to
start
and add excessively to budget deficits. We are waiting and hoping.
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