Where the jobs went

Where the jobs went

The jobs scene turned really ugly last week as the Labor Department reported that in June the economy had generated only 18,000 new jobs instead of the 250,000 it desperately needed to maintain some semblance of ongoing recovery.

For my money, however, even uglier than the jobs numbers were the reactions and analyses of leading economists. For starters, most of them expressed shock at the paucity of new jobs created. I was shocked that they were shocked. On which planet are they living? Of course economists tend to make a lot of assumptions. So maybe they can assume jobs. But here in Maui where I’m hanging out for the summer (yes, someone does have to do it) there are no jobs.

At church yesterday, one couple reported that he had lost his position on the police force and she had been laid off by her longtime insurance company employer. At least she’s getting some unemployment pay, but he’s getting none. A single mom told me she’s making gluten-free coconut cream cakes in her kitchen and selling them to local grocery stores. To supplement that she also takes pianist gigs and hawks skin-care solutions at Costco. It sounded like she is working really hard but not really making ends meet. I think this is not just a Maui phenomenon, but that it is the experience of the vast majority of the American people who are not economists.

Even the economists who do have a better understanding of reality seem stuck in transition from the pre-crisis to the post-crisis world. Writing in last Friday’s Financial Times, former White House economic advisor Laura Tyson urged more stimulus spending to prevent an even sharper falloff in jobs and job creation. Similarly, New York Times columnist Paul Krugman argued in his most recent piece, as he has in several others, that while debt reduction may be necessary in the long term, what is needed in the short term is more stimulus spending. The idea being that more debt in the short term will get the economy ticking over and thereby reduce debt in the long term.

Tyson and Krugman are surely correct to the extent that more demand for the output of American workers is desperately needed. Yet, I think even they are not fully recognizing a fundamental shift that has taken place and that is surely not incorporated in the standard models of most of the forecasters. There are two factors. One is that over the past 30 years, a succession of trade deficits and and real estate bubbles has reshaped the U.S. economy in ways that have decimated some trades and professions and their skills and that have fostered especially the U.S. construction and financial industries and their skills. In the wake of the crisis, it is now clear that construction and finance must shrink, and indeed they are shrinking.

The idea of stimulus incorporated in the standard economic models is that it will create demand for goods and services produced in America and thereby drive investment in new factories and jobs to produce more of those goods and services. The difficulty is that we do not want to stimulate a lot more construction or finance (those were the bubbles that collapsed after all), and greater stimulus to create demand for things we largely import does not drive new investment or creation of new jobs in America. It only increases our debt. What is needed is not just demand in the American economy, but demand that results in domestic production and that does not increase domestic or international debt.

Think about this in the wake of the recent New York Times article reporting on the new Oakland Bay Bridge being made in and imported from China. Building infrastructure like bridges is a time-honored way of creating demand in the economy that creates jobs. Indeed, just this past weekend President Obama called for creation of an Infrastructure Bank that would enable a dramatic ratcheting up of U.S. investment in critical infrastructure. It’s a good idea and one that I, along with others, have long promoted. But if the decision of the state of California to have the main structural elements of the Oakland Bay Bridge made in China is a harbinger of things to come, then an Infrastructure Bank is likely to create more jobs in Asia than in the United States.

No doubt former Governor Arnold Schwarzenegger and his cabinet thought they would save about $400 million on steel by buying the bridge in China because Chinese steel production has been heavily subsidized and China’s government manages its yuan to be artificially undervalued versus the dollar. But what they didn’t consider was that those subsidies tend to make U.S.-based production uncompetitive and not only put American workers out of jobs but exert downward pressure on wages generally while eroding critical investments in equipment and human skills, reducing state, municipal, and federal tax revenues, and contributing to the shrinkage of the national educational base. No one in California took a look at even the whole state picture, let alone the national picture, to determine whether buying a bridge in China was really going to be a net gain for the state (as it turns out, in the past two years the price of Chinese steel has risen much faster than that of U.S. steel so that even the initially projected savings are unlikely to be realized). Even worse, no one at the federal level of the U.S. government has any responsibility for evaluating the net impact of these kinds of deals or for reducing the leakage of stimulus spending abroad and maximizing the domestic production impact of government spending.

Until our economists and officials begin to wrestle with the need for the United States not only to stimulate its economy but to do so in ways that will lay the basis for America to increase its wealth-producing capacity and pay its way, they are likely to find themselves in a continuous state of shock.