Inside jobs

The US is a working contradiction. It currently boasts one of the most productive workforces in the world but in terms of job creation it has the lowest rate out of all the G7 nations. Barack Obama’s planned American Jobs Act has a lot of pressure on it to reform the employment system

 
 

Few Americans would pay any attention to such dry data as the monthly statistics for total nonfarm payroll employment. But one certainly does and he’s president Barack Obama. That’s because his re-election will by general agreement depend on how good those statistics are. If nonfarm payroll, as it’s usually abbreviated, is heading in the right direction, it means that the president’s planned massive economic stimulus programme would be the right strategy after all.

And it is a massive stimulus, so big that it takes us back to the New Deal of president Franklin Delano Roosevelt. The current incumbent at the White House has budgeted $447bn to get Americans back to work and the nonfarm payroll numbers tell the story.

A big project in itself, the nonfarm payroll numbers are drawn from all over the US. Thousands of factories, offices, hotels and motels, federal and state agencies of all kinds, excepting only farms: they all provide the latest figures to the Bureau of Labor Statistics on who they’ve hired or fired to deliver a comprehensive picture of the most important element of the US or indeed any other economy. That is, how many Americans are in paid employment. A dedicated office within the bureau pores over the figures, analyses them and produces a summary in double-quick time because of their economic, political and human significance.

It’s not only Obama’s Democrats that believe job creation will be the key to a second, four-year term. The Republicans have also made it the cornerstone of their strategy to eject the current incumbent from the White House. But at this stage it’s going the president’s way. Beating just about all economists’ forecasts, last December’s nonfarm payroll statistics show a gain of 200,000 jobs, twice as many as for the previous month, and a decline in the jobless rate from 8.7 percent to 8.3 percent. The return to health of the world’s largest economy – and an engine for global growth – could be imminent.

A new New Deal
If the president’s $447bn American Jobs Act makes it through Congress, it can only accelerate the patient’s recovery. He presented the bill to Congress in September in a fervent speech reminiscent of the Depression-era rhetoric of FDR, also a Democrat president, who consciously took the side of the ordinary American in his addresses to the nation, often in fireside chats on radio when he referred to the “little fellow” who had been forgotten by Washington. When FDR became president in 1933, America was in dire straits with unemployment standing at around 25 percent, three times higher than now. Thus the new president promised “a new deal for the American people” (It was only later than the term was elevated to capitals).

Although he didn’t mention the “little fellow”, Obama adopted FDR’s technique of talking over his audience to ordinary Americans. “The millions of Americans who are watching right now: they don’t care about politics. They have real life concerns. Many have spent months looking for work. Others are doing their best just to scrape by – giving up nights out with the family to save on gas or make the mortgage; postponing retirement to send a kid to college. These men and women grew up with faith in an America where hard work and responsibility paid off. They believed in a country where everyone gets a fair shake and does their fair share – where if you stepped up, did your job, and were loyal to your company, that loyalty would be rewarded with a decent salary and good benefits; maybe a raise once in awhile. If you did the right thing, you could make it in America.”

Although the “little fellow” was not nearly as badly off two years ago – mainly because of a nationwide welfare system – as he was in 1934, US nonfarm payroll figures had suffered their worst hit since 1945. As the Kaufmann Foundation, a specialist in US employment research, points out: “Compared to all prior recessions since the end of the World War II, the 2007-2009 recession ranks worst in terms of the number of jobs lost (over eight million), and second worst in the percentage decline (six percent).” In 2009, when president Obama was taking office, nearly one in five workers was out of a job by the broadest measure of unemployment, a percentage that Kaufmann’s researchers described as “ridiculously high”. Its conclusion was that “the US employment situation has not looked so bleak in several decades” and that it might take a decade to return to normal levels.

As Democrat senator Kent Conrad, an authority on job creation, pointed out late last year in a hearing on the subject: “It is important to remember what has happened to the economy. In January of 2009, [it] was losing more than 800,000 private-sector jobs a month.” And significantly for job creation, McKinsey, the global research institute, identified a calamitous 23 percent collapse in business start-ups. Small enterprises, and especially longer-established ones are widely accepted as the engine of employment growth.

The situation had not improved greatly by mid-2011, with the unemployment rate still sitting stubbornly above nine percent. But most alarmingly, long-term unemployment was worsening. Always a barometer of the health or otherwise of the labour market, the percentage of people unemployed for 27 weeks or longer had climbed to 3.7 percent, way above the 0.8 average for most of the last 60 years.

Restarting the engine
Although the Obama administration had taken various reasonably successful measures to trigger a recovery, the comeback of the world’s biggest economic engine had pretty much stalled by August of last year. Clearly, it was time for just such another stimulus as the American Jobs Act. Nothing if not an all-round programme, it’s designed to kick-start all sectors of the economy and open up the job market for “construction workers, teachers, veterans, first responders [volunteer medical workers], young people and the long-term unemployed”, in the   president’s words.

And it’s intended to achieve all this by giving away federal tax revenues. Companies that hire new workers will be rewarded with tax credits, small business owners will get tax relief through a 50 percent decrease in payroll taxes to free up funds to plough back into the enterprise, and the middle class will get tax cuts which Washington hopes will be spent back into the economy in a virtuous circle. At least in theory, it shouldn’t cost Washington a dime in the long run because the Obama administration is currently in the process of railroading through government a $2.5trn cost-cutting programme.

The return to small businesses, the engines of job creation, are very real. For instance, any business with 50 employees on average pay rates would pick up an $80,000 tax cut while any company hiring a long-term unemployed would book a $4,000 tax credit. Like FDR with the New Deal, the president has turned the vote on the American Jobs Act almost into a patriotic duty. “Pass this jobs bill and we can put people to work rebuilding America,” he pressured Congress.

Roads were decaying, bridges falling down, highways clogged with traffic, skies the most congested in the world, he proclaimed. It was inexcusable that American would “sit back and watch China build newer airports and faster railroads?“ America should not warm to the oblique application of other countries’ protectionism: “If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers. I want to see more products sold around the world stamped with three proud words: ‘Made in America’”.

A crazy man?
But will it work or are these empty words? The New Deal took much longer to work than FDR had promised and longer than early supporters such as Jack Morgan, president of J.P.Morgan and then the richest man in the western world, had hoped.

At first admiring Roosevelt for “approaching problems in the spirit of getting something done” in the face of a timid Congress, he would later describe him in a letter to Sir Montagu Norman, former governor of the Bank of England, as “a crazy man.” It was impossible to stimulate an economy when there was no water in the well, judged Morgan.

Certainly, the American economy poses unique challenges for any president aiming to boost job creation. Easily the most dynamic and innovative in the world, it relies like most other economies on start-up companies to mop up new entrants to the workforce. As a study by the International Monetary Fund (IMF) points out, “…for any given level of unemployment, faster job creation increases a country’s output and among other things raises the ratio of workers to pensioners, thereby lowering the cost of its social safety net.”

So far, so good. But America also boasts one of the most productive workforces in the world and it’s getting more productive all the time. Indeed most companies have found they are making as much – if not more – profits now than they ever were, but on smaller payrolls. Although companies responded to the financial crisis by slashing jobs mercilessly at a rate of an average rate of 780,000 a month in the first quarter of 2009, profits just kept on climbing. As an Associated Press survey in December shows, by the middle quarter of 2010 US corporate earnings were an astonishing 12 percent up on those before the recession. In most other western economies, corporate earnings were in a general state of collapse around that period.

“US workers have become so productive that it’s harder for anyone without a job to get one,” Associated Press concludes from its Global Economy Tracker, a quarterly analysis of 22 countries that accounts for over 80 percent of global output.

“Measured in growth, the American economy has outperformed those of Britain, France, Germany, Italy and Japan – every Group of Seven (G7) developed nation except Canada.” And yet, stubbornly, America ranks as the weakest of all other G7 nations in terms of creating new job vacancies, and so has the highest unemployment rate.

The reason is that harder and smarter-working employees are inadvertently keeping others out of work, a phenomenon which Harvard economist Kenneth Rogoff attributes to a heaven-sent opportunity for companies to cut the bench, as it were: “My sense is there was much more weeding out of the weakest workers – the ones they didn’t want.” That weeding out process is made easier by labour laws and management practices that allow for more flexible, part-time workforces.

“[Companies] have temporary help they can hire easily,” explains economist Erica Groshen, Vice President at the Federal Reserve Bank of New York. “They’re less constrained by traditional human resources practices or by union contracts.”

A 10-year task
Making the president’s task more complicated again is the changing nature of the economy. Indeed it could hardly be more different than 50 years ago, let alone in FDR’s day when a slump in farm incomes brought many families to the brink of starvation and led to a massive migration to the presumed good life in California.

At that time most of the jobs were in farming, mining and utilities. Today the sectors creating the most jobs, as McKinsey’s report found, are finance, waste disposal, retail, healthcare, hotels and restaurants.

In the president’s favour is compelling evidence that federal intervention has already made a big difference. According to Alan Blinder, a former vice-chairman of the Federal Reserve, the administration’s earlier measures through the Recovery Act have “probably averted what could have been called Great Depression 2.0”. His research shows that there would have otherwise been 8.1 million fewer jobs by half way through 2010. That would have pushed the unemployment rate to a disastrous 15 percent and landed 8.5 million people in poverty by America’s definition of that state.

Still, there’s a long way to go before the mighty US economic engine returns to the prosperity it saw before the global economic meltdown. McKinsey predicts America must create over 21 million new jobs in this decade, but what kind of jobs will they be? In recent testimony before Congress, Georgetown University professor Harry Holzer, an authority on employment, predicted that high unemployment rates – and, very likely, low wages – would persist for years. “Low earnings will scar millions of young workers for years to come, even when the labour market fully recovers.” And that, say most economists, is a problem that many western countries will face in the long recovery from the Great Recession.