Why job creation is so hard
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 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, but it
would be 14.4 percent if it
included part-timers who would like full-time work and
discouraged workers who have stopped looking, notes Janet Yellen, 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
from 1950 to 2007. The Congressional Budget Office doesn’t
expect it to fall below 7.5 percent until 2015.
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 “deleveragingâ€: 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 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, prices and sales 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
(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.
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 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 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.
