Creating Jobs in America, Part 2

Stephen DeAngelis

September 23, 2011

In yesterday’s post, I discussed some of the initial recommendations offered by the President’s Jobs and Competitiveness Council as well as some of the programs that the President put forward in his jobs bill. Having listened and read what is being offered on the jobs front, opinion columnist Robert J. Samuelson believes that politicians and their constituencies “need a refresher course in Job Creation 101.” [“Job Creation 101,” Washington Post, 11 September 2011] He writes:

“Recall that the private sector is the main employment engine. Businesses create jobs when two conditions are met. First, extra demand for their products justifies more workers. Second, the extra demand can be satisfied profitably. There are qualifications to these generalizations (start-ups, for instance), but these are the basics. By contrast, government is less a job creator than a job changer. It supports jobs (soldiers, teachers, scientists) by taxing, borrowing and regulating. If government taxed, borrowed or regulated less, that money would stay with households and businesses, which would spend it on something else and, thereby, create other jobs. Politics determines how much private income we devote to public services.”

Samuelson reminds us why demand is down. First, there was “the housing collapse.” Not only did the collapse result in the unemployment of large numbers of construction workers, but “potential buyers” have remained out of the market “waiting until prices reach bottom.” Perhaps a bigger reason is that U.S. “households have lost $7 trillion in wealth, mostly from lower home and stock prices.” Rather than spending (i.e., increasing demand), U.S. consumers “are saving more, spending less and repaying debt.” As a result, Samuelson writes, “Demand is insufficient [to justify companies hiring new employees].” It’s almost a Catch-22 situation. Demand is down because unemployment is high and unemployment is high because demand is down. Breaking that vicious circle is what economists and politicians are trying to figure out. Samuelson believes that psychology is going to play an important role in that effort. He writes:

“The answer, I think, is psychology. Small changes in precautionary behavior by anxious consumers and companies offset stimulus. Suppose, for example, consumers raised their savings rate by three percentage points; that would neutralize three-quarters of Obama’s program. The surprise and brutality of the financial crisis left a powerful legacy of risk aversion. Companies — like consumers — have become defensive. They accumulate a cash hoard against unknown threats. Our political leaders have also compounded the caution and fear; indeed, government policies sometimes cause unwanted behavior. … Republicans and Democrats exult in vitriolic attacks on each other. Their pleasure from mutual vilification comes at the public cost of lower confidence. By contributing to this, the disarray over long-term deficits also undermines employment.”

The most profound thing Samuelson writes is:

“No policy will succeed unless it results in self-sustained hiring by private firms. This means giving job creation precedence over other goals. It means conducting the debate so that the nation’s spirits — and hence, private spending — are not further depressed by partisan rancor. It suggests taking proposals from both parties, because neither can be sure its approach will work. It ought to be about building confidence, not scoring political points. This is a tall order. As the 2012 election approaches, it may be too tall.”

In yesterday’s post, it was pointed out that somewhere between two and three million jobs are currently available for qualified workers. So the jobs creation debate needs to start with how to train workers to fill those jobs. Lawrence F. Katz, an economics professor at Harvard, believes that the federal government has acted too timidly. He writes, “There are no signs of recovery in the labor market. Public-sector employment fell in the last year and private-sector employment growth remains tepid. The employment crisis has exacerbated the longer-term trends of rising inequality and a decline in middle-class jobs. Bold action by the federal government is needed.” [“Invest in Workers,” New York Times, 6 September 2011] He recommends three specific steps for the government to take. He writes:

“First, a net job-creation tax credit for the next two years could provide a powerful incentive for private-sector employers to speed hiring and create momentum for a jobs recovery. Private employers who increase employment would get a tax credit to cover a substantial share (say 40 percent) of the payroll costs of net new hires; they would get a check even if they didn’t owe taxes. Such a tax credit would focus the incentives on expanding businesses, where the new jobs are more likely to persist, even after the subsidy expires.”

The economy is in such a deep hole, I’m not sure that a two-year timeframe for such a tax credit would be long enough. The thing I like most about this recommendation is that it is aimed at helping create jobs that persist. As Samuelson points out, temporary jobs created by stimulus money have little long-term impact. Persistent jobs are needed. Employees with good long-term outlooks become consumers. As consumption increases, so does demand. Katz continues:

“Second, increased federal spending of at least several hundred billion dollars a year for the next two years is needed to offset weak private-sector demand and crumbling state and local government finances. I would emphasize aid to state and local governments to prevent further layoffs and to increase spending on infrastructure for public schools and community colleges. Recent research shows that investments in public school infrastructure can raise property values and student performance. The most promising transportation, research and development and energy-efficiency investments should also be included.”

This recommendation is in line with one of the recommendations made by the President’s Jobs and Competitiveness Council. There seems to be a general consensus that America’s infrastructure is in need of serious attention. For more on that subject, read my post entitled America’s Infrastructure. Although Katz seems to believe that improving infrastructure needs to be entirely a governmental enterprise, I suggest that public/private partnerships are a better way forward. Katz continues:

“Third, the work force investment and re-employment system needs to be revamped. Re-employment services can be cost-effective in helping dislocated and disadvantaged workers find employment more rapidly. The economic rewards from community college and other postsecondary education remain high for young workers and some dislocated workers. There is much evidence that well-functioning training and education programs — like Job Corps, the National Guard Youth Challenge and Career Academies — help disadvantaged youths. Existing employment and job-training systems are fragmented and hard to navigate. We need to make sure all workers have the resources and information to invest in high-return training. … Industry-specific training programs that prepare disadvantaged workers for skilled jobs and help connect them to employers have been shown to raise earnings and should be expanded.”

The above recommendation begins to attack the problem of intransigent unemployment; but, not everyone believes that programs like the Job Corps, the National Guard Youth Challenge and Career Academies have been “well functioning.” James Bovard, for example, writes:

“Earlier this year, the Government Accountability Office reported that there were 47 different federal employment and training programs, costing taxpayers $18 billion a year. There is massive overlap and duplication, and few programs seriously evaluate their impact on trainees. If federal job training efforts worked, Congress would not have thrown out the programs it has created every decade or so and enacted new ones. In reality, government training has always been driven by bureaucratic convenience, or politicians’ re-election considerations. There is no reason to believe the latest round of proposals will be any different.” [“What Job ‘Training’ Teaches? Bad Work Habits,” Wall Street Journal, 13 September 2011]

Surely we have people smart enough to create a job training/re-training program that is both effective and efficient. Perhaps Bovard and Katz should get together and design such a program. Although Katz sees a large government role in job creation, Arthur Laffer, chairman of Laffer Associates, has a different approach for creating jobs in extremely depressed areas. I’ll discuss Laffer’s recommendations below. Finally, Katz discusses unemployment insurance. He writes:

“Unemployment insurance should be made more flexible so that employers have an incentive to shorten workers’ hours instead of laying them off. Jobless workers trying to start new businesses should be eligible for continued unemployment insurance benefits. Wage-loss insurance should be granted to help buffer the earnings losses of displaced workers who take new, lower-paid jobs.”

Katz believes that “these initiatives could start us down the road to a sustained jobs recovery with more broadly shared prosperity.” As I noted above, Arthur Laffer recommends taking a different approach for creating jobs. I think Laffer might categorize Katz as someone who believes that “government can create jobs by taxing and borrowing from people with jobs and then giving that money to people without jobs.” [“How to Fight Black Unemployment,” Wall Street Journal, 12 September 2011] Obviously, Laffer believes that is poor strategy. He writes:

“Government taxes cigarettes to stop people from smoking, not to get them to smoke. Government fines speeders so they won’t speed, not to encourage them to drive faster. And yet contrary to common sense, it seems perfectly natural to some people that government would tax people who work or companies that are successful only to give that money to people who don’t work and to bail out losing companies. The thought never crosses their minds that these policies are the very reason why our economy is in such bad shape.”

Nevertheless, Laffer does believe that government policies can play an important role in helping the private sector create jobs. He is particular concerned about creating jobs in the most depressed areas of the country. He continues:

“African-Americans are suffering inordinately in the Obama aftermath of the Bush Great Recession. While overall U.S. unemployment stands at 9.1%, black unemployment has jumped to 16.7%. Black teenage unemployment is bordering on 50%, and that figure doesn’t even take into account ‘discouraged’ workers, ‘involuntary’ part-time workers and ‘underemployed’ workers. But even these numbers don’t tell the real story. They represent real people who are suffering deeply and have been suffering for a long, long time. Behind these numbers are millions of lives discouraged and despondent. People who’ve lost their self-esteem and pride. The young who have given up on America and some of whom have even turned to crime. Scars are being made across a whole ethnic subset of America. Unemployment, underemployment and involuntary part-time employment represent the loss of a precious natural resource that can never be recouped. No one can feel good about himself if he’s living on handouts from Uncle Sam. We as a nation can’t wait until 2013 to address this issue.”

On that last point, I think that Samuelson, Katz, and Laffer can agree. Laffer’s recommendation centers around a concept he calls “enterprise zones.” He continues:

“While enterprise zones are desperately needed in our inner cities, there are lots of areas in the hollows of Kentucky and West Virginia that need enterprise zones as well, not to mention barrios in California and New Mexico. Enterprise zones should be areas that are geographically defined with exceptionally high concentrations of poverty, underachievement and unemployment.”

What I like about the enterprise zone concept is that it tries to create jobs in the areas where they are most needed. The problem, of course, is that the skill level of potential employees in these areas is extremely low. As noted above, Laffer believes that government’s role is to establish policies that make enterprise zones work. He believes that “the policies applicable to enterprise zones should include”:

“A) For all employment within the enterprise zone of people whose principal residence is also the enterprise zone, there should be no payroll tax whatsoever, neither employer nor employee portions. The employer need not be headquartered in the enterprise zone to take advantage of the elimination of the employer’s portion of the payroll tax. The locus of employment does have to be in the enterprise zone. Don’t for a moment think that this will be a budget buster. Right now there aren’t many jobs in our inner cities anyway and the few dollars of tax revenues lost will be more than offset by reductions in welfare spending because people will have jobs and won’t need welfare. The best form of welfare is still a good job.”

I agree completely with the statement that “the best form of welfare is still a good job.” The important modifier in that sentence is “good.” Laffer’s next recommendation seems to undercut that statement a bit. He writes:

“B) Federal and state minimum wages must be suspended in the enterprise zone. If not for all employees, then at least for employees under 30. These young people need on-the-job training, and at the present minimum wage many of them aren’t worth hiring. That is why they are unemployed. Even for teenagers who are in school, a summer job is an enormous benefit for a future productive career. This summer and last summer only 30% of all teens worked—all-time lows. We need to break this vicious cycle right now by getting rid of the youth minimum wage in our enterprise zones.”

I believe that Laffer is trying to address Samuelson’s second condition for creating persistent employment, i.e., that demand must be able to be satisfied profitably. He is addressing the reality that the skill level in extremely depressed levels is not very good. The fact is: It costs money to train workers. Frankly, when it comes to suspending the minimum wage, I’m more concerned about workers over 25 than I am about younger workers. Perhaps some of Katz’ recommendations about supplementing income for older workers, while they are being trained, could prove useful. Laffer continues:

“C) In the enterprise zones the government should do an expedited review of all building codes, regulations, restrictions and requirements to make sure that they don’t unjustifiably impede economic growth. For example, mandated union membership rules should be voided in enterprise zones as should all prevailing wage provisions and the like. When I lived in Chicago I reviewed a number of rules and regulations and restrictions whose primary impact was to impede our inner cities from ever achieving prosperity. I’ll bet they’re even worse now.”

The recommendation to expedite review of building codes, regulations, restrictions and requirements, is in line with the recommendation of the President’s Jobs and Competitiveness Council to “cut red tape so job-creating construction and infrastructure projects.” I suspect, however, that Laffer’s recommendation about eliminating mandated union membership would be met with stiff opposition from some quarters. Look at the trouble the government is giving Boeing over its new plant in South Carolina. Rather than applauding Boeing for creating good jobs, the NLRB is accusing Boeing of union busting. Laffer’s final recommendation deals with profits and taxation. He writes:

“D) Profits generated by companies operating and employing people within the enterprise zone should only be taxed at one-third the regular tax rate. No matter how many fewer regulations a company faces, those companies still quite rightly respond to profits for their shareholders. Businesses don’t move their plant facilities as a matter of social conscience. They do it to make profits for their shareholders. If you want more jobs in our most depressed areas, make those areas more profitable for companies to relocate there. It’s as simple as that.”

Laffer is correct that if you want to get businesses interested in creating jobs, especially in highly depressed areas, you have to make a business case for them to do so. Laffer is trying to make that business case. He’s pretty confident about his program. He concludes, “Once [the President] sees how this plan works for our most depressed areas of America, he can then extend enterprise zones to cover the whole country.” It should be clear from the numerous job creation plans that have been put forth that no consensus is likely to be forthcoming; especially, in the months leading up to a presidential election. The longer that the economy remains in the doldrums the more severe long-term challenges are going to become. Recovery begins with jobs. I think that most parties agree with that premise. Frankly, the most important jobs to create are manufacturing jobs. The reason is simple: manufacturing jobs create other jobs. Estimates are that up to eight supply chain jobs are created for every manufacturing job created. That’s a great “tooth to tail” ratio for job creation.