What I want to hear in the president’s jobs speech
Dear Mr. President, As you put the finishing touches on your forthcoming jobs speech, I am writing to remind you of the conversation we had about a year and a half ago when you invited me as part of a small group to discuss China and U.S. competitiveness with you and your key White House ...
Dear Mr. President,
As you put the finishing touches on your forthcoming jobs speech, I am writing to remind you of the conversation we had about a year and a half ago when you invited me as part of a small group to discuss China and U.S. competitiveness with you and your key White House staff members.
You may recall that I then emphasized that creating good U.S. jobs was the key to a good relationship with China. So I am pleased to see that you are now making jobs your top issue. However, based on what has been leaked so far about your new program, I fear it will fail by being good but insufficient.
You are said to be preparing to propose extension of the payroll tax cut, creation of an Infrastructure Bank to enable extensive renewal of America’s crumbling infrastructure, introduction of a new hire tax credit and partial wage subsidy program, extension of jobless benefits, job training for the long term unemployed, mortgage relief for home owners, aid to cities for hiring teachers and for school renovation, ratification of free trade agreements with Panama, Colombia, and South Korea, and passage of a patent inspection reform bill.
While these are mostly commendable suggestions (although it’s not clear why you want the free trade deals which your own International Trade Commission says will cost U.S. jobs), they are not going to bring America back to anywhere near full employment. On one hand, they assume the greater demand to flow from these measures will automatically lead to greater U.S. output that will result in rehiring and new jobs creating investment. Second, they assume that the investment and new jobs will be in the United States. Neither of these assumptions is necessarily valid.
On one hand, the trade deficit transfers demand out of the U.S. economy. Take infrastructure for example. The major structural components of the new Oakland Bay Bridge in San Francisco are being made in China. So a new U.S. infrastructure bank will surely create jobs in China, but maybe not so many in the United States. On the other hand is the fact that, as Nobel prize-winning economist Michael Spence notes in a recent article, employment in large non-tradable sectors of the U.S. economy (construction, financial services, retail, medical and government services) that ballooned during the credit bubble of the past decade actually needs to shrink in favor of more sustainable output from tradable sectors. New demand that merely re-inflates the old bubble causing sectors will only lead to another crash and further unemployment.
Beyond this is the fact that even in sectors in which the United States is a world leader, the dynamics of globalization are presently such as to move new investment and production offshore. You may recall my mentioning that Intel was putting a new Pentium chip plant and its associated high skill, high paying jobs in China despite the fact that the United States has a comparative advantage in production of such chips and already produces the bulk of the world’s supply. I explained that a major reason for this move was that Chinese investment subsidies would save Intel about $100 million annually over the ten year life of the plant. This is not to mention the impact of China’s systematic undervaluation of its yuan against the dollar. By the rules of economics, those jobs could and should be in America. But Washington has long had no response to the investment and currency subsidies with the result that the jobs are moving despite America’s comparative advantage.
Similarly GE recently announced that despite the fact of America being the leader in development and production of avionics systems it is transferring the technology and production capacity for its advanced avionics products to a joint venture with a state owned Chinese company. Although the associated jobs are precisely the high tech jobs economists say should be America’s forte and could be done competitively in the United States, they are mostly moving to China. They are not moving there because your chief outside economic adviser and GE Chairman Jeff Immelt thinks the costs will be lower in China, but because China, contrary to all free trade doctrine, has made access to its avionics market conditional on transfer to China of the technology, production, and jobs.
Nothing you plan to propose is going to offset this mercantilism and keep those jobs in America or create new ones to replace them. Yet, if you cannot even keep jobs in which America is highly competitive, there will be no way to make a serious dent in unemployment.
Now is the time that you must think outside the box by recognizing the fact that you need big structural shifts and that only by counteracting mercantilism, slashing the trade deficit and focusing on a "make it/provide it in America" theme will you be able to create the jobs you need to save the country and yourself.
That is because some of the key assumptions of the conventional economic orthodoxy on which these proposals are based simply no longer hold true if they ever did.