Impact of Job Numbers Goes Far Beyond the Jobless

Jul 12, 2011Jeff Madrick

 

The high rate of joblessness suggests a deep malaise in America that begs for strong leadership.

A New York Times article on Sunday by the fine journalist Catherine Rampell suggested that a reason the jobs crisis in America (my phrase) is not getting sufficient attention is that the unemployment rate, even if a very high 9.2 percent, still means that nearly 91 percent are employed.

 

The high rate of joblessness suggests a deep malaise in America that begs for strong leadership.

A New York Times article on Sunday by the fine journalist Catherine Rampell suggested that a reason the jobs crisis in America (my phrase) is not getting sufficient attention is that the unemployment rate, even if a very high 9.2 percent, still means that nearly 91 percent are employed.

But we need to take a moment to clarify what high unemployment really means, and how broad its implications are. It is an indicator of overall economic weakness, not merely a number about those without jobs. And as such, it suggests that much is seriously wrong. It does not mean that 14 million are hurting people and the other 125 million are not.

First of all, we of course know that millions are looking for jobs and have given up or have taken part-time jobs when they want full-time jobs. That adds another 7 or 8 percent to the unemployed or underemployed. We are now are getting to the point where one out of six workers or so is having employment disappointments. We also know many have been unemployed for a very long time -- a record number, in fact.

Second, these people have relatives and friends who increasingly realize they may also get the axe. Their families, not only themselves, suffer.

Third, when you lose a job you now usually lose your health coverage -- or have to pay up big time to retain it. That adds to the misery.

In fact, far more people than 9.2 percent are upset by the high unemployment rate. About a quarter say in surveys it is our number one problem.

But high unemployment also implies little or no wage growth for most employees. There are two theories about this. One is the classical theory that when labor markets are loose, there is more supply and the price will not rise readily -- that is, the wage. The other is a little more Marxian in orientation. When people are losing their jobs, they get scared -- and they don't ask for a raise, they work more hours if asked, and on.

Since mid-2009, when the recovery technically began, there has been almost no increase in wages and salaries. But profits have soared by hundreds of billions of dollars.

That's almost never been the case before. Indeed, the relationship between job creation and GDP growth seems to have changed some time ago. Many people, including Nobel laureate Michael Spence, hardly known as a progressive economist, worry that something is deeply wrong -- and a lot of it may be about globalization.

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But when you consider that salaries and wages have risen slowly, stagnated, or fallen for almost all workers except those at the top for forty years, the American economic condition gets pretty frightening.

I think the unemployment rate suggests there is growing malaise in the nation. More and more people are pessimistic. Are Americans giving up on the future?

And yet both political parties talk far more about budget deficits than jobs. Obama has fallen into one of the great political traps of all time. On average, the media follow meekly behind. Yet Americans have long fallen for the deficit scare, back in the 1930s and even before that. That is an issue worthy of more discussion.

I wrote a few weeks ago on New Deal 2.0 that Obama should sound the jobs alarm. Leadership matters in America. That is the problem. Right now, we don't have it. Leaders have to tell Americans the economy is weak and the deficit is necessary right now.

But in sum, a high unemployment rate does not merely mean that 14 million Americans, and they alone, are suffering. It suggests far broader pain and suffering. And disappointment may turn to anger before we know it. The Tea Party is the first manifestation of this. What's next?

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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The Real Crisis is Unemployment

Jul 11, 2011Marshall Auerback

A deal on the debt ceiling of the kind proposed by both parties will only make the jobs crisis worse -- and push deficits up.

"O, the heart's blood of a patriot! That's a fellow now that'd sell his country for fourpence-ay-and go down on his bended knees and thank the Almighty Christ he had a country to sell." - Irish proverb

We had a horrendous employment number last Friday. Leaving aside the headline details, (which showed unemployment rising from 9.1% to 9.2%), the household measure of employment fell by 445,000.

A deal on the debt ceiling of the kind proposed by both parties will only make the jobs crisis worse -- and push deficits up.

"O, the heart's blood of a patriot! That's a fellow now that'd sell his country for fourpence-ay-and go down on his bended knees and thank the Almighty Christ he had a country to sell." - Irish proverb

We had a horrendous employment number last Friday. Leaving aside the headline details, (which showed unemployment rising from 9.1% to 9.2%), the household measure of employment fell by 445,000.

Okay, it's just one number. But this measure of employment, which is never revised, now shows no employment growth over the last five months and very negative employment growth over the last three.

But it gets worse: The work week was down one tenth. Overtime was down one tenth. The labor participation rate at 64.1% was the lowest since 1984. The broad U6 unemployment rate rose from 15.8% to 16.2%. In other words, several other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.

And the President's response to this disaster: Get a deal done on the debt ceiling!

"The sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised and that we have a serious plan to deal with our debt and deficit, the sooner that we give our businesses the certainty that will need in order to make additional investments to grow and hire," Obama said.

He made his remarks just hours after the latest employment report was released.

And when they agree to the deficit cuts, then unemployment will fall...and I'll go on a diet by eating a bunch of Super Sized Big Macs.

Here's the problem: Nobody in Washington DC seems to understand that today's crisis of unemployment is all about a lack of effective demand in the US economy. The persistently high unemployment is about a lack of jobs, nothing more. It has nothing to do with the uncertainty over the debt ceiling negotiations, except to the extent that any future deal, which features the cuts mooted by both parties in the press, will create an even greater shortage of spending power in the economy. Furthermore, as Bill Mitchell has argued, "the financial nature of the crisis...means that any revival of private spending will be slow to return. So private firms and households are first of all going to try to reduce their debt levels to restore some security to their balance sheets."

This isn't your run of the mill recession; it's Japan's "balance sheet recession" writ large.

Yet President Obama maintains that cutting spending will somehow induce the private sector to invest and help reduce unemployment. He's wrong. A deal on the debt ceiling, of the kind that is being proposed by both parties, actually makes it much harder for the private sector to achieve this goal.

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To recap, a government deficit generates a net injection of disposable income into the private sector, generating an increase in its saving and wealth which can be held either in the form of government liabilities (cash or treasuries) or non-interest earning bank liabilities (bank deposits). If the nonbank public prefers bank deposits, then banks will hold an equivalent quantity of reserves, cash, and treasuries with the distribution among these government IOUs depending on bank preferences. By contrast, a government budget surplus has exactly the opposite effect on private sector incomes and wealth: As the government takes more from the public in taxes than it gives in its spending, this results in a net debit of bank reserves and reduction in outstanding cash balances held by the private sector. In other words, it drains wealth from the private sector.

Firms will only employ if there are sufficient spending to purchase the output that the workers produce. 9.2% unemployment and 16.2% underemployment is clear evidence that the demand deficiency which emerged after the Great Financial Crisis of 2008 is far from over. This problem existed well before anybody even spoke about the debt ceiling, let alone started negotiating another increase. Far from solving this scourge, the Administration's own proposals will exacerbate unemployment and almost certainly cause the government deficits to rise even further.

The President has his causation completely reversed: A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments. Cutting budget deficits when there is slack private spending growth and external deficits -- as the President and his Congressional negotiators are now proposing -- will erode growth and destroy net jobs.

There is zero evidence to support the idea that a nation which cuts public spending in situations where there is high unemployment and huge underutilized resources will grow and create jobs. The ongoing economic disaster in Europe illustrates precisely the opposite phenomenon.

But, hey, what's the worry? I'm sure the Administration's spin-meisters will simply argue that it's just a few headwinds (the "bump in the road" is SO yesterday). In the meantime, just to be on the safe side, the President appears open to cuts in Social Security (which today contributes zero to the budget deficit). Why? Because it will show "the markets" that we are "being responsible" about our deficit "problems", which in turn will do wonders to restore confidence and get us out of the ditch in which most Americans now find themselves (to use one of the President's favorite metaphors).

Almost since the days of his inauguration, Barack Obama has talked a lot about digging the American economy out of the ditch which he inherited from the previous Administration. But he should bear in mind the old expression: when you're in a hole, stop digging. The Democrats are now posing as the party of fiscal austerity, offering up cuts in entitlements if only those "irresponsible" Republicans would agree to tax increases (which will further deflate the economy into the ground). And we have much of the mainstream press praising the President for his "grown-up, statesmanlike" behaviour, as he tries to out-Hoover everybody. The grim examples accelerating across Europe appear to mean nothing. And to what end? The deficits will only get larger if cuts and tax rises of the magnitude contemplated by the President become law.

If the President and his team persist with his current ruinous deficit reduction fixation, they will turn that ditch into which the US economy has fallen into a coffin. At that point, the only people who will be celebrating any "achievement" over a debt ceiling deal will be the GOP hopefuls in the 2012 election.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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The July Jobs Numbers: There is No Silver Lining

Jul 8, 2011Mike Konczal

mike-konczal-2-100Fewer jobs created. Higher unemployment. More people giving up altogether. Today's numbers paint a bleak picture.

The jobs numbers that came out today are horrible, worse than anyone had thought they'd turn out to be. Eighteen thousand total jobs were created, with a decrease of 39,000 government jobs. Let's get some graphs.

This is how the picture looks at a high level (click through for larger image):

Fewer jobs created. Higher unemployment. More people giving up altogether. Today's numbers paint a bleak picture.

The jobs numbers that came out today are horrible, worse than anyone had thought they'd turn out to be. Eighteen thousand total jobs were created, with a decrease of 39,000 government jobs. Let's get some graphs.

This is how the picture looks at a high level (click through for larger image):

This chart was created using data from household surveys, which is going to be slightly different than the payroll numbers you are seeing for aggregate job creation. The biggest takeaway is that the labor force shrunk while unemployment increased, a bad sign. Meanwhile, there was a jump in those who are not in the labor force but who want a job -- people who have given up actively looking for a job.

To dig into that, let's take a look at the group leaving the unemployment circle. Here's a graph of how people are exiting unemployment -- are they finding work or simply giving up?

As I've mentioned before, the phenomenon in which people are more likely to drop out of the labor force than find a job is brand new, one that doesn't exist in the data going back to when it was first collected in the 1960s.

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At this point, conventional unemployment rate numbers are meaningless. The employment-to-population ratio is more important. That ratio dropped 0.2% for men and 0.3% for women. Let's look at this on a longer timeline:

You have to go back to pre-1988 to find an era when there was a smaller percentage of women working than there is right now.

Meanwhile, how's the economy working out for those with jobs? Average weekly earnings of all private employees dropped from $791.20 to $788.56. There can't really be an inflationary spiral based on prices and wages if wages are decreasing. And without a buildup in wages, it's harder to argue that we are experiencing a "structural unemployment problem" -- those who do have the skills necessary to get a job aren't turning them into higher wages. Matt Yglesias shows how the number of government workers have continued to decline under the Obama administration, especially at the state and local level. This has been a pretty clear conservative priority and it's dragging down the recovery.

On top of all of this, Americans are working fewer hours. First, I'm going to pull a graph I haven't used before, which is an index of aggregate weekly hours. What's this? From the BLS's definition:

Indexes of aggregate weekly hours are calculated by dividing the current month’s aggregate hours by the average of the 12 monthly figures, for the base year. Indexes are based on 2007 averages for all employees and on 2002 averages for production and nonsupervisory employees. For basic industries, the hours aggregates are the product of average weekly hours and employment of workers to which the hours apply (all employees or production and nonsupervisory employees). At all higher levels of industry aggregation, hours aggregates are the sum of the component aggregates.

So you add up all the hours worked in the economy and plot them on a graph, divided by a previous year to set a baseline. This deals with total hours worked in the economy, not hours per employee or anything like that.

How does that look? Here's the aggregate number of hours worked in the economy for the private sector:

Even though our population is larger, all people across the economy are working significantly fewer hours. How does this work out on a longer timeframe? This is the index of aggregate weekly hours for production and nonsupervisory employees for all private industries, which has a longer time series than other totals:

If you add up all the hours worked in the economy in June 2011, it is roughly equal to all the hours worked in February of 1999. This is part of what people mean when they say there's unused capacity, and it's a tremendous waste of people's talents and lives.

There's no silver lining in today's job numbers. The discussion needs to shift away immediately from deficit reduction to jobs growth in terms of public works, tax breaks for workers and getting to the bottom of the foreclosure crisis and shadow housing inventory.

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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How 'Maximizing Value' for Shareholders Robs Workers and Taxpayers

Jul 7, 2011William Lazonick

stockmarket-1500001In the latest installment of his series "Breaking Through the Jobless Recovery," economist William Lazonick challenges the assumption that shareholders are the only ones taking risks in a business -

stockmarket-1500001In the latest installment of his series "Breaking Through the Jobless Recovery," economist William Lazonick challenges the assumption that shareholders are the only ones taking risks in a business -- and therefore deserving of rewards.

Want to solve the mystery of the American economy's current employment and competitiveness problems? Take a close look at the current corporate obsession with "maximizing shareholder value." It sounds like a sound business principle, but in reality, it's based on a flawed ideology that leaves something crucial out of the business equation -- workers and taxpayers.

Let's review the decade of 2000-2009. During this time, companies in the S&P 500 index, accounting for about 75% of the market capitalization of publicly listed corporations in the United States, distributed 99% of their profits -- almost $4.3 trillion -- to shareholders.  Cash dividends were 41% of profits, while stock buybacks absorbed 58%. This left companies with precious little left over to invest in innovation and job creation (for more on this, see my paper on Innovation and Financialization).

At the most basic level, the rationale for maximizing shareholder value is that shareholders own the company's assets, and therefore have exclusive claim on its profits. A more sophisticated argument is that that among all stakeholders in the business corporation, only shareholders bear the risk of getting a positive return from the firm, while all other participants receive guaranteed returns for their productive contributions. If we want risk-bearing, so the argument goes, we need to return value to shareholders.

This argument sounds logical -- until you question its fundamental assumption. Especially in a "knowledge economy" that can generate innovation, the productive assets of a business enterprise reside in human capital as well as physical capital. And while shareholders may presume to own physical capital, they can't claim to own human capital (we no longer permit slavery, which is why we do not show human, or intangible, assets on the firm's balance sheet). And if you think about it, shareholders are the only participants in the business enterprise who make investments in productive resources without a guaranteed return. In an innovative economy, workers and taxpayers make these risky investments all the time!

When you work for a company, you may contribute your time and effort over and above the levels required by your current remuneration to a collective and cumulative innovation process. By definition, this innovation process can only generate returns in the future (otherwise it would not be innovation), and because the innovation process is uncertain, it may not in fact generate returns. As a member of the firm, therefore, you bear the risk that your extra time and effort won't yield the gains to innovative enterprise from which you can be rewarded. But if the innovation process does generate profits, then you, as a risk-bearer, have a claim to a share in the forms of higher earnings and benefits.

Taxpayers also invest in the innovation process without a guaranteed return. Through government agencies, taxpayers fund infrastructural investments that, given required levels of financial commitment and inherent uncertainty of economic outcomes, business enterprises would not have made on their own. These state agencies also provide businesses with subsidies that encourage investment in innovation.

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In terms of investment in new knowledge with applications to industry, the US has been the world's foremost developmental state. It is impossible, for example, to explain US dominance in computers, microelectronics, software, and data communications without recognizing the role of government in making investments that developed new knowledge and facilitated its diffusion. As another prime example, the 2010 budget of the US National Institutes of Health (NIH) for life sciences research was $30.9 billion, almost double in real terms the budget of 1993 and triple that of 1985. Since the founding of the first national institute in 1938, NIH spending has totaled $738 billion in 2010 dollars (for further discussion, see my paper on Biopharmaceutical Finance).

More generally, the US government has made investments to boost the productive power of the nation through federal, corporate, and university research labs that have generated new knowledge as well as through educational institutions that have developed the capabilities of the future labor force. Businesses have taken full advantage of this knowledge and capability. In funding these investments, taxpayers have borne the risk that the nation's business enterprises would further develop and utilize these productive capabilities in ways that would ultimately redound to the benefit of the nation, but with the return to taxpayers in no way contractually guaranteed.

And there's more: Federal, state, and local governments often provide cash subsidies to businesses, both established and new, to develop new products and processes. The public has funded these subsidies through current taxes, borrowing against the future, or by making consumers pay higher product prices for current goods and services than would have otherwise prevailed. Multitudes of business enterprises have benefited from subsidies without having to enter into contracts with the public bodies that have granted them to remit a guaranteed return from the productive investments that the subsidies help to finance.

So the ideology of maximizing shareholder value provides a flawed rationale for excluding workers and taxpayers from sharing in the gains of innovative enterprise. To turn this idea on its head, ask yourself: What risk-bearing role do public shareholders play in the innovation process? Do they confront uncertainty by strategically allocating resources to innovative investments? No. As portfolio investors, they diversify their financial holdings across the outstanding shares of existing firms to minimize risk. They do so, moreover, with limited liability, which means that they are under no legal obligation to make further investments of "good" money to support previous investments that have gone bad. Even for these previous investments, the existence of a highly liquid stock market enables public shareholders to cut their losses instantaneously by selling their shares -- what has long been called the "Wall Street walk".

The modern corporation has brought about a fundamental transformation in the character of ownership, as Adolf Berle and Gardiner Means recognized almost 80 years ago in "The Modern Corporation and Private Property." As property owners, public shareholders own tradable shares in a company that has invested in productive assets. In an innovative enterprise, however, the most important productive assets are human. In a free society, human assets can't be owned by others. Through massive distributions to shareholders, dominated by stock buybacks, the ideology of maximizing shareholder value is robbing taxpayers and workers of returns to the risks that they took -- and in the process undermining the innovative capability of the US economy.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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How Stock Buybacks Strangle Innovation and Job Creation

Jun 30, 2011William Lazonick

jobless-man-150Conventional wisdom says that the job crisis stems from a mismatch in the labor market or lack of business confidence.

jobless-man-150Conventional wisdom says that the job crisis stems from a mismatch in the labor market or lack of business confidence. But in his special ND20 series, "Breaking Through the Jobless Recovery", economist William Lazonick points the finger at stock manipulation.

Where have all the good jobs gone? As I outlined last week, the disappearing act of decently-paid and stable "middle class" employment opportunities in the US economy over the last three decades is the result of the triple-whammy of plant closings ("rationalization"), the end of career employment with one company ("marketization), and offshoring ("globalization").

In a world of rapid technological change and global development, our economy, with its heritage of capabilities for knowledge creation by government, academia, and business, should have been able to replace these lost jobs with even better ones. Through a combination of business and government investment, a "knowledge economy" can generate plenty of opportunities for educated and experienced workers, and many US corporations have been and remain world leaders in innovation.

And yet the jobs aren't here. Because increasingly, over the past three decades, the executives who run major US business corporations have become far more concerned with allocating corporate resources to boost their companies' stock prices than to invest in innovation in the United States.

The main instrument for boosting stock prices is the stock buyback (or stock repurchase).  With the prior approval of the company board for a program of buybacks of, say, $10 billion, over, say, four years, executives can then do open market repurchases at their discretion.  Stock buybacks can be very useful for meeting the quarterly earnings-per-share targets so closely watched by Wall Street analysts. Buybacks can also help to offset a stock-price decline from bad news such as a failed product. Or they may be used to counter short sales by stock-market speculators, as was done by Wall Street banks just prior to the 2008 financial meltdown.

In other words, buybacks can be used to manipulate the stock market.

In the United States, stock buybacks are huge. From 2000 through 2009 S&P 500 companies -- which account for about 75 percent of the market capitalization of all US publicly-listed corporations -- spent more than $2.5 trillion on stock buybacks, equal to 58 percent of their net income. In addition, these companies distributed dividends equal to 41 percent of net income over the decade, bringing the total payout ratio (buybacks plus dividends) to 99 percent. The average buybacks per S&P 500 company more than quadrupled from less than $300 million in 2003 to over $1.2 billion in 2007, before falling to around $700 million in 2008 and $300 million in 2009. Average buybacks rebounded to $600 million in 2010, however. And they're on pace to total at least $700 million per company in 2011, or $350 billion for the S&P 500 as a whole.

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Executives like to say that buybacks are financial investments that signal confidence in the future of their company as measured by its stock-price performance. In fact, however, companies that do buybacks never sell the shares at higher prices to cash in on these investments. To do so would be to signal to the market that its stock price had peaked, something that no executive would ever do. But at the same time, these same executives use the stock boosts from buybacks to enrich themselves by exercising their very ample stock options and immediately selling the acquired stock to lock in the gains. And guess what? The gains from exercising stock options represent the most important component of outsized executive pay.

In short, as US business corporations have profited from the trends of rationalization, marketization, and globalization, top executives have used those profits to engage in a massive manipulation of their stock prices at the expense of job creation and innovation. From this perspective, the primary cause of the current jobless recovery is neither a mismatch in the labor market nor a lack of business confidence -- two conventional arguments for explaining the sluggishness of reemployment operating, respectively, on the supply-side and the demand-side of the labor market.

The "mismatch" argument is that the skills that workers possess do not match the skills that employers need. But this argument does not explain how, for the vast majority of workers, a "match" is made. The prime reason why the US economy gets a match between the capabilities of labor supplied and labor demanded is because business corporations invest in the capabilities of the types of workers whom they require. From this perspective, a so-called mismatch results from a failure of business corporations to make these investments in the training -- both formal and on-the-job -- of the US labor force. On top of that, as globalization continues, already-educated and trained US workers undergo permanent job loss in their areas of specialization. Valuable human capital quickly atrophies. The decline of middle-class jobs stems from the changed employment practices of US business corporations, exacerbated by their financialized behavior that leads them to favor buybacks over job creation.

It is this financialized corporate behavior, not a lack of business confidence, that stands in the way of a renewal of high-quality employment opportunities in the US economy.  Highly profitable US corporations are currently sitting on almost $1 trillion in cash, even after a sharp rebound in stock repurchases in 2010 and the first quarter of 2011. Rather than manifesting a lack of business confidence, these cash hoards reflect a desire by corporate executives to have funds available for stock repurchases in the years ahead as companies compete through an escalation of repurchases to boost their stock prices as was the case in 2003 to 2007.

The globalization of the labor force for educated and experienced workers is here to stay. But, for the sake of sustainable prosperity, the financialized business corporation has to go. In the absence of a change in corporate financial behavior, the future of the US economy is more booms, busts, and jobless recoveries, with each boom more speculative, each bust more devastating, and each recovery more jobless than the one before.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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What Conservatives Don't Want You to Know About Government's Role in the Economy

Jun 28, 2011Jon Rynn

fdr-we-need-you-200If we don't learn the lessons from the Great Depression, our infrastructure will crumble, the recovery will stagnate, and our economy will be left behind.

fdr-we-need-you-200If we don't learn the lessons from the Great Depression, our infrastructure will crumble, the recovery will stagnate, and our economy will be left behind.

The current conventional wisdom for many in the U.S. is that the less government is involved with the economy the better. But this is precisely the moment in history when more government is needed. Without government intervention, the recovery will continue to stagnate, the economy as a whole will remain off balance, and we won't be able to meet the challenges facing the country.

I have been proposing a different way of looking at an economy than the traditional, neoclassic one. In my view, each industry fits into a wider system, as say trees or deer or bears fit into a wider forest ecosystem. In the same way, goods manufacturing, machinery industries, service industries, infrastructure, and the myriad other parts of a functioning society -- including the health and education systems -- have to work properly in order for the economy as a whole to function, with manufacturing functioning as the central sector. All industries are co-evolving, dynamically growing, concentrated within discrete geographical regions. And it is the responsibility of government to help orchestrate this interaction, or else it can turn into an ugly riot.

But at the root of the neoclassical world view is the idea that the economic system is self-regulating, that is, if the economy is pushed off course by "external" forces, then it will become stable by itself -- without government interference. And yet we know that economies are constantly growing and changing -- that is, they are not stable -- and they are often under threat of recession and depression. That is why governments always have to be part of the solution. They are needed in order to support economic growth, maintain the right structure of the economy, and intervene when the economy goes bad.

FDR's presidency is the perfect example of this. When he became president, Herbert Hoover had just spent several years trying to reverse the Great Depression with market-based solutions, but FDR championed a set of governmental policies that turned the country around. To deal with unemployment, FDR established the Works Progress Administration, or WPA, which was not only designed to employ one fully able member of each household in which no one could find work, but also to build up the country's physical infrastructure. Building infrastructure is what governments do best. In fact, one could say that civilization started when the first governments constructed the irrigation and drainage systems that enabled agriculture to flourish. The United States, like every successful country, has a long and rich history of infrastructure building, without which the country would have very likely stayed poor. From canals like the Erie Canal before the Civil War, to the railroads after, from the dams that even conservative Republicans like Calvin Coolidge initiated, to the WPA that built libraries, schools, airports, roads, and other structures in virtually every town, to the Interstate Highway System championed by a Republican president, the United States has kept itself at the forefront of the global economy by making the building of transportation, energy, communications, water, education, and other systems the foundation of prosperity.

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Partly as a result of his interventions into the economy, FDR was able to lead the nation into World War II by fundamentally transforming the economy to produce military equipment. At its height, one third of the country's GDP was devoted to the war effort, with millions fighting overseas. That's five trillion dollars in today's economy. In other words, even assuming the continuation of a one trillion dollar military budget in the face of no wars of necessity, the economy has four trillion dollars left over to remake itself while providing for a comfortable standard of living for its inhabitants.

Instead of learning this lesson of history, however, our current political class seems determined to follow Herbert Hoover, not FDR. Meanwhile, the long-term domestic problems we face are worse than what FDR confronted. In the 1930s, the US was by far the leading manufacturing power and the top producer of oil; now the manufacturing sector is sinking fast, and not only do we import almost two-thirds of the crude oil we process, the global supply of oil is becoming harder to produce and is shrinking. In addition, we desperately need to eliminate the use of fossil fuels and transform agriculture and forest management in order to avoid the worst of global warming. The path forward is clear: we need an electric transportation system based on high-speed rail for long-distance travel, electric rail for freight, transit and small electric cars for intra-city movement, wind and solar power for electricity generation, recycling on a serious and massive scale, a densification of urban areas, and a more labor-intensive, localized, organic agricultural system. And these could provide the market for a revived manufacturing sector.

Only the government can build all of these systems in the time needed to both save the economy and save the environment. Incentives can go part of the way, but not fast or far enough. Taxing carbon or trading rights to carbon won't solve global warming or decrease the use of oil as quickly as we need them to; lowering taxes or reducing the deficit won't bring the manufacturing sector back. Government-as-builder does not mean government-as-warrior or government-as-Big-Brother. It is possible to have a strong government that is peaceful, democratic, and not beholden to our economic royalists, as we currently are. But maintaining democracy is never easy; the political system is no more a self-regulating system than is the economy. At least we can have a clear vision of where we are heading.

History doesn't care if the political conversation of the United States won't allow for talk about large-scale government intervention into the economy. The path to economic and ecological collapse is paved with "realistic" intentions. If the conservatives can be audacious enough to threaten policies that will further destroy the middle class and poor for the sake of the superwealthy, why can't progressives draw on a rich American history, from before FDR and after, to rebuild a once mighty nation and help the rest of the planet move toward a sustainable future?

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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Is Your Boss Really in Business to Create Jobs?

Jun 27, 2011Richard Kirsch

Richard Kirsch takes on the myth that what is good for the pocketbooks of major corporations is also good for jobs.

Richard Kirsch takes on the myth that what is good for the pocketbooks of major corporations is also good for jobs.

Spinmeisters for the U.S. Chamber of Commerce and Republican politicians like Speaker John Boehner like to call businesses "the job creators. " But what every American knows, if he or she thinks about it, is that unless you work for a small business, your boss will only create a new job if there isn't a cheaper option: force you to work longer hours, hire a temp, purchase new technology. Or if you work for a big company, get the work done overseas.

I was thinking about this after reading an article in The New York Times this past Sunday ("Companies Push for Tax Break on Foreign Cash"), which described how corporate America wants to be able to slash the taxes it pays on overseas profits that it returns to the United States from 35% to 5.25%. The corporations are selling this as job creation, saying that the billions of dollars they would bring back home will be invested in jobs. Who are they kidding? These are the same companies that are already sitting on nearly $2 trillion in cash, which they clearly are not investing in jobs in the United States. What will they do with the money if they get to bring it back on the cheap? Last time the corporations convinced (translation: "paid") Congress to give them a repatriation holiday, 92% of the cash was rewarded to shareholders in the forms of dividends and stock buybacks.

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Even if they did need money to create jobs, there's little chance corporate America would locate those jobs in the United States. Apple has $12 billion in profits waiting offshore to be repatriated, but it's clear that bringing that cash home won't mean more jobs for American workers. Apple's entire U.S. workforce of 25,000 is dwarfed by the 250,000 workers who make Apple products for the Chinese company FoxConn. Apple is far from alone.  From 2005 to 2009, IBM expanded its international workforce by 100,000 while cutting 29,000 U.S. Employees. All told, U.S. multinationals cut their U.S. workforces by 2.9 million during the 2000s while adding 2.4 million employees overseas.

Last February, President Obama embarrassed himself by going to the Chamber of Commerce and pleading with corporate executives to invest some of the $2 trillion in cash in the United States. The President appealed to the Chamber to respond to forecasts of "a healthy increase in demand" and invest in job creation. He even declared to the lobbying association that had led the fights to kill his signature achievements in office - health care and financial reform - "we're in this together."

No, Mr. President, we're not in this together with corporate America. Corporations are in it to maximize profits and boost CEO salaries, not help the U.S. economy or put people back to work.

With no "healthy increase in demand," on the horizon and unemployment heading back up, the President has talked more about government-led solutions that would actually create jobs in America. Near the end of his address on Afghanistan, and in a full-throated pitch at a Democratic fundraiser in New York City the next evening, Obama called for investments in education, infrastructure, and clean energy at home.

Democratic leaders in Congress have also started to sharpen their focus on the failure of corporations to create jobs at home. Nancy Pelosi's reaction to the Majority Leader Eric Cantor's walking away from budget talks was, ""Yes, we do want to remove tax subsidies for big oil, we want to remove tax breaks for corporations that send jobs overseas... "

The Republican leadership in Congress has taken investing in job creating programs and closing corporate tax loopholes off the table in the debt-ceiling negotiations. But if the President is to be reelected, he needs to make it very clear to the American people that he is doing everything he can to create good jobs at home. He should oppose budget-cuts in the debt-ceiling talks that kill jobs, including cuts in education and Medicaid. Moreover, he should insist that any debt-ceiling deal include closing corporate loopholes that encourage profits to be used overseas and invest those savings in measures to create U.S. jobs. And when Republicans charge that doing so would hurt the "job creators" he should ask Americans a simple question: "Is your boss in business to create jobs in the United States, or to make as much money as he can?

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, whose book on the campaign to win reform will be published in 2012. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Where Have All the Good Jobs Gone?

Jun 23, 2011William Lazonick

jobs-letters-150In a brand-new series, economist Bill Lazonick takes on the structural changes and reforms needed to create good jobs in the U.S. First question: what happened to the jobs we had??

jobs-letters-150In a brand-new series, economist Bill Lazonick takes on the structural changes and reforms needed to create good jobs in the U.S. First question: what happened to the jobs we had??

It's now two years since the official end of the Great Recession. Yet the US unemployment rate in May was 9.1 percent, and even college grads are having trouble finding jobs. The US economy is mired in its third, and worst, “jobless recovery” since the early 1990s.

Things look pretty bleak for the foreseeable future. So how did it come to this?

Let's take a look. The scarcity of good jobs, even in an economic recovery, reflects the cumulative impact of three structural changes in the employment practices of US industrial corporations, going back three decades to the early 1980s. These changes are the result of a triple-layered process of 1) rationalization, 2) marketization, and 3) globalization. Together, these trends have taken a permanent bite out of the quantity of well-paid and stable middle-class jobs in the US economy.

From the beginning of the 1980s, the trend of rationalization, which is characterized by plant closings, tended to jettison the jobs of unionized blue-collar workers. And from the beginning of the 1990s, marketization, which brought the end of the one-company-career norm, has placed the job security of middle-aged and older white-collar workers in jeopardy. Finally, from the 2000s, globalization, which drove the offshoring of jobs, left all types of members of the US labor force -- even those with advanced educational credentials and substantial work experience -- vulnerable to displacement.

In each case, the structural change in employment took root in a cyclical downturn: rationalization in the double-dip “blue-collar” recession of 1980-1982; marketization in the “white-collar” recession of 1900-1991; and globalization in the “Internet” recession of 2001. Looking back, we now know that the recoveries that followed the recessions of 1990-1991 and 2001 were “jobless” as marketization and globalization, along with ongoing rationalization, continued after the recoveries. Indeed, in terms of blue-collar employment, the recovery from the recessionary conditions of 1980-1982 was also jobless because of the continuation of plant closings in 1983 and beyond. In 1985, for example, the number of machine operators, inspectors, and assemblers in the US economy was down 22 percent from 1980. For the economy as a whole, however, these blue-collar job losses in the first half of the 1980s were offset by new employment opportunities for white-collar workers created by the microelectronics boom and the rise of what would come to be known as the New Economy.

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Initially, you could justify these structural changes in employment in terms of changes in industrial conditions related to technologies, markets, and competition. The plant closings that came with rationalization were a response to the superior productive capabilities of Japanese competitors in consumer durable and related capital goods industries that employed significant numbers of unionized blue-collar workers. The erosion of the one-company-career norm among white-collar workers that characterized marketization was a response to the dramatic technological shift from proprietary technology systems to open technology systems that was integral to the microelectronics revolution. The offshoring of the jobs of well-educated and highly experienced US members of the labor force that went along with globalization was a response to the emergence of large supplies of highly capable workers in nations such as China and India, many of them with graduate degrees and work experience in the United States.

But once these structural changes in employment had gained legitimacy as responses to new industrial conditions, US corporate executives often pursued them purely for financial gain. Some companies closed manufacturing plants, terminated experienced workers, and offshored production to low-wage areas of the world simply to increase profits, often at the expense of not only the jobs of long-time US employees who had helped to make a company successful but also, going forward, investment in the company’s long-term competitive capabilities. As these changes became embedded in the structure of US employment, business corporations declined to invest in new, higher value-added job creation on a scale that could at least offset the job losses.

At first sight, the Great Recession of 2008-2009 appears to be detached from these changes in employment practices, given its origin in the casino-like activities on financial firms in the subprime mortgage market. Yet the very existence of a large body of subprime borrowers derived in large part from the failure of US industrial corporations since the 1980s to invest in innovation and high-quality job creation while middle-class jobs were permanently lost through rationalization, marketization, and globalization. Through subprime lending, Wall Street sought to exploit the vulnerability of a working-class population to whom industrial corporations no longer delivered middle-class employment opportunities. And, as I will explain in a later post, the current dismal employment situation and outlook reflects the ongoing investment and employment practices of US industrial corporations that, over the past three decades, have become thoroughly financialized.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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Despite Self-Esteem Boost Now, Young People are in for Long-Term Pain from Debt

Jun 22, 2011Bryce Covert

No matter how good taking on debt may feel at a young age, today's grads are being set up for disaster.

This week's credit check: Those ages 18-27 report a self-esteem boost from student loan and credit card debt. But about 9% of people ages 55-64 are still paying back student loans.

No matter how good taking on debt may feel at a young age, today's grads are being set up for disaster.

This week's credit check: Those ages 18-27 report a self-esteem boost from student loan and credit card debt. But about 9% of people ages 55-64 are still paying back student loans.

A new study recently came out that says young people get a self esteem boost from taking on debt. For those ages 18-27, its findings show, more credit card and student loan debt lead to higher self-esteem levels and a feeling of control over life. This lines up with some common sense: student debt is considered to be "good" debt, an investment in the future. And as Annie Lowrey reports, there is ample evidence that credit cards give us all the joys of consuming without the pain of spending actual money. She quotes George Lowenstein of Carnegie Mellon explaining, "Credit cards effectively anesthetize the pain of paying. You swipe the card and it doesn't feel like you're giving anything up to make the purchase, unlike paying cash where you have to hand over bills."

But the other side of the coin, the study finds, is that the self-esteem high plummets later on when the students have to start paying that debt back -- and realize how long and hard it will be to do so. For those over 28, having higher levels of debt reduced that sense of self-esteem and mastery. "By age 28, they may be realizing that they overestimated how much money they were going to earn in their jobs. When they took out the loans, they may have thought they would pay off their debts easily, and it is turning out that it is not as easy as they had hoped," one of the study's authors opined. This is unsurprising: While student loans help finance a college degree, and that does have an effect on eventual pay, the burden of paying them back often hangs around late into life. About 9% of people ages 55-64 still have student loan debt. Part of that is due to the fact that unlike most other forms of personal debt, student loans can't be discharged in bankruptcy -- there's no way to get rid of them except payment.

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And those loans will linger even longer without savings -- even though young people think they are saving better than their parents. Almost half of respondents to a recent SavingsAccounts.com poll said they think as much. But as Jill Schlesinger points out, this isn't really true. "The Bureau of Economic Analysis' personal savings data indicates that the personal savings rate averaged only 3.48 percent of income over the previous 10 years, and doesn't come close to matching the 10-year average personal savings rate of 9.63 percent seen from 1971-1981." In fact, one in three adults under 33 have no savings at all. So on top of young grads being loaded to the hilt with debt burdens, they have very little stocked up to help pay it off.

They'll be even more hindered, in fact, by another aspect: they can expect lower wages than their parents. Overall, middle class wages have almost completely stagnated over the past few decades. As CNNMoney reports, "In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data." On top of that trend, grads are entering an absolutely dismal job market, one that will likely have lasting effects on how much they'll earn over their lifetimes. The NYTimes writes, "The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008... Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007." And any reduction in pay now will have profound effects later. Charlie Eisenhood found that drops in initial wages due to high unemployment rates hang around: "even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant," according to one study.

All in all, the short-term ego boost of student and credit card debt pales in comparison to what young people are up against in the long run. A college degree can lead to good jobs, higher pay, and of course education, but the amount of debt students are asked to take on is getting out of control. They should probably sober up for a rocky road ahead.

Bryce Covert is Assistant Editor of New Deal 2.0.

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FDR, Quantitative Easing Wonk, Used Every Tool in His Box to Jumpstart Recovery

Jun 22, 2011Mike Konczal

Rather than focusing on far off threats, FDR chose to combat high unemployment and sluggish growth with everything he had.

Rather than focusing on far off threats, FDR chose to combat high unemployment and sluggish growth with everything he had.

I’ve been reading this important David Beckworth post on the quantitative easing and monetary policy FDR implemented during the Great Depression. Beckworth argues that the first QE policy happened during this time and that it benefited from the fact that Roosevelt explicitly said he would do what it took to get to the pre-trend price-level target. Beckworth links to this Gauti Eggertsson paper that argues that when FDR took office, he signaled that they’d get the price-level back to pre-Depression trend by going off the gold standard, financing a Federal government through deficit spending, and explicitly stating target levels for prices, and this change in expectations from Hoover's administration did a lot of the work of recovery.

I wasn’t sure how serious to take this -- a president talking about price levels with the public? But sure enough, here’s the second Fireside Chat from May 7th 1933 (my bold):

Much has been said of late about Federal finances and inflation, the gold standard, etc. Let me make the facts very simple and my policy very clear. In the first place, Government credit and Government currency are really one and the same thing. Behind Government bonds there is only a promise to pay… [I]n the past the Government has agreed to redeem nearly thirty billions of its debts and its currency in gold, and private corporations in this country have agreed to redeem another sixty or seventy billions of securities and mortgages in gold… [They] knew full well that all of the gold in the United States amounted to only between three and four billions and that all of the gold in all of the world amounted to only about eleven billions.

If the holders of these promises to pay started in to demand gold the first comers would get gold for a few days and they would amount to about one-twenty-fifth of the holders of the securities and the currency… We have decided to treat all twenty-five in the same way in the interest of justice and the exercise of the constitutional powers of this Government. We have placed everyone on the same basis in order that the general good may be preserved.

The Administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed. We do not seek to let them get such a cheap dollar that they will be able to pay back a great deal less than they borrowed. In other words, we seek to correct a wrong and not to create another wrong in the opposite direction. That is why powers are being given to the Administration to provide, if necessary, for an enlargement of credit, in order to correct the existing wrong. These powers will be used when, as, and if it may be necessary to accomplish the purpose.

I discussed most of the parts of that quote dealing with gold clauses here and here. FDR told rentiers who had put suicide-pact clauses in their contracts, which allowed them to collect more gold than existed in the world so as to allow private parties to profit while the country suffered and was in a deflationary spiral, that he was going to come at them like a spider monkey. Beyond establishing credibility and changing expectations, it makes me happy to see a president so actively go after broken, destructive contractual schemes that prevent the management of bad debts and threaten the general good. But there’s the bold quote, stating what the final goal of monetary policy was at the beginning of his administration.

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Economic and monetary policy commentators like Ryan Avent have noted that "the Fed chose a direction rather than a destination” when it comes to QE and monetary policy. If Avent wants to see a destination mentioned by a sitting president, he should check out FDR’s fourth fireside chat on October 22, 1933 (my bold):

Finally, I repeat what I have said on many occasions, that ever since last March the definite policy of the Government has been to restore commodity price levels. The object has been the attainment of such a level as will enable agriculture and industry once more to give work to the unemployed. It has been to make possible the payment of public and private debts more nearly at the price level at which they were incurred. It has been gradually to restore a balance in the price structure so that farmers may exchange their products for the products of industry on a fairer exchange basis. It has been and is also the purpose to prevent prices from rising beyond the point necessary to attain these ends. The permanent welfare and security of every class of our people ultimately depends on our attainment of these purposes…

Some people are putting the cart before the horse. They want a permanent revaluation of the dollar first. It is the Government’s policy to restore the price level first. I would not know, and no one else could tell, just what the permanent valuation of the dollar will be. To guess at a permanent gold valuation now would certainly require later changes caused by later facts.

When we have restored the price level, we shall seek to establish and maintain a dollar which will not change its purchasing and debt paying power during the succeeding generation. I said that in my message to the American delegation in London last July. And I say it now once more.

I have two takeaways:

1. Wouldn’t it be funny if in this fireside chat, years into a sub-trend growth and massive waste from high unemployment and unused capacity, Roosevelt said something like, “Someday, 25 years from now, Russia might be able to get a space dog into orbit before us. In order to Win the Future against this space dog, we should immediately forget everything going on right now in order to prepare for research competition with potential adversaries decades from now. We must immediately start planning for this battle right now, lest we lose the future, so let’s give a bunch of tax holidays and easily captured credit benefits to various rocket manufacturers and other incumbents.”? That would be crazy. But that's how the discussion is now framed by the current administration. Instead, FDR was really serious about using every pressure point and every lever to get monetary and fiscal policies going instead.

2. Obviously back then the Democratic coalition had a lot of farmers in it, people for whom “the price level” wasn’t a graph pulled from the St. Louis Fed to put on their blogs but a real thing that they dealt with daily. There is a chance that insomuch as hipsters are an influential Democratic coalition group, and hipsters begin to engage in urban farming, “the price level” might become more of a thing that Democrats are responsive to in order to meet the needs of urban hipster gardeners. Until then, it’s up to economic bloggers to carry this message.

Mike Konczal is a Fellow at the Roosevelt Institute.

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