What the President’s Jobs Speech Should Say Next Thursday Night (Hint: Restore U.S. Competitiveness)

President Obama is slated to unveil his long-awaited jobs plan Thursday, September 8. What are the optimal policies he should advocate to restore both short- and long-term U.S. jobs growth? The answer depends first and foremost on the right diagnosis of the causes of anemic U.S. economic growth and corresponding job losses both over the past decade and in the last few years. Three primary—and fundamentally differing—diagnoses have been advanced. The two prevailing ones are: 1) this is a demand-side Keynesian recession, albeit of severe proportions; or 2) this is a financial crisis-induced recession and as such recovery inherently takes much longer. But the right diagnosis is related to America’s fundamental lack of economic competitiveness and that is where the President needs to focus.

Two years after the official end of the Great Recession, it’s clear that the solutions tried thus far aren’t working: GDP is still below its peak, employment growth is sputtering, consumer confidence is at rock bottom, and even productivity growth is waning. According to the Keynesian view, the persistent high unemployment is the result of a shortfall of demand and therefore it is up to government to restore some of this demand through a temporary increase in spending and/or tax cuts. In time, government stimulus can be gradually withdrawn as private sector investment and consumer demand take over. This view was the driving force behind the 2009 stimulus package and it has clearly failed to meet the Administration’s own stated prediction of getting unemployment back under 8 percent. New York Times Columnist Paul Krugman and others have argued the initial stimulus package was insufficiently large. Many conservatives contend the results prove the futility of government investments to stimulate growth. More likely, too much of the original stimulus package consisted of transfer payments and not enough on true investments that could build platforms for future growth. The bottom line, however, is that, government stimulus (while it helped) has not fundamentally solved the U.S. jobs problem. Doing  a little more of the same—whether it’s couched as home weatherization programs for energy efficient buildings, building more schools, etc.—is not likely to solve the jobs problems, even if there were the funds or bipartisan political will to try (which there isn’t).

The second diagnosis, and the increasingly prevalent one in Washington, argues that financial crises simply take a long time to recover from. This view is argued most prominently by economists Carmen Reinhart and Kenneth Rogoff, authors of the book This Time Is Different: Eight Centuries of Financial Folly. They argue that in contrast to typical recessions, which often are caused by contractions in some real part of the economy, recessions caused by financial crises are more like a serious flu than the typical Keynesian cold. And because they are fundamentally caused by an overhang of credit and illiquidity they take much longer to recover from. As Rogoff states, “At the root of today’s credibility deficit is a failure to come to grips with the long, slow growth period that is typical of post-financial crisis recovery.” Moreover, financial crises are more immune to the standard Keynesian stimulus medicine. Again, Rogoff states, “There are people going around saying, ‘Oh, Keynes was right. Everything Keynes said was right.’ I think this is a different animal, with this debt overhang that you need to think about from the standard Keynesian framework.” But while Reinhart and Rogoff may be right that financial crises take a long time to recover from, they fundamentally miss the true cause of the financial crisis in the first place—and in doing so miss the right solution to the short and long-term problems. Basically, the patient was weak even before the flu struck and the weakness helped bring the flu on and make it worse.  Sitting in bed drinking fluids and waiting for the crises to abate is not what the doctor ordered.

Indeed, we believe that the most accurate diagnosis is that the fundamental cause of both the financial crisis that induced the Great Recession and has contributed to the ensuing lagging recovery has been the fact that the overall U.S. economy has lost its international competitiveness.  We see this most clearly in the performance of the traded sectors of the U.S. economy—particularly in manufacturing. Consider the contribution of manufacturing output change to changes in GDP.  From 1980 to 1989, and from 1990 to 1999, the sum of annual GDP changes was 30 percent and 32 percent, respectively. But from 2000-2009, the sum of changes was 18 percent, reflecting the slow growth of the last decade and the steep decline in 2009. However, if manufacturing had contributed the same share to GDP growth over this decade as it did in the 1980s and 1990s, overall GDP growth would have been 28 percent in this last decade, rather than 18 percent. The reason for this is that, as ITIF’s The Case for a National Manufacturing Strategy report explains, when measured properly, while manufacturing output expanded in the 1980s and 1990s, it contracted in the 2000s, exerting a steady and significant countercyclical drag on the economy.

Another way to look at this is through the impact on jobs. From 1999 to 2009, the U.S. economy gained just 1.04 million jobs.  One key reason is that it lost 5.5 million manufacturing jobs.  In fact, of eleven major OECD economies, the United States lost the largest share of manufacturing jobs when controlling for growth in working age population from 1997 to 2010.  However, if manufacturing output had grown at the same rate as GDP during this period, there would be 2.2 million more manufacturing jobs in the United States. Given the multiplier effect that manufacturing jobs have on the rest of the economy, which is at least two to one, (and as high as five to one), had manufacturing not shrunk, there’d be perhaps 8 million more Americans working today.  In other words, the impact of manufacturing decline is not just on the 5.5 million manufacturing workers or in a few “manufacturing” states, it’s on an entire economy.  This is why there is a strong (.57) correlation between the change in manufacturing jobs in those eleven OECD nations in the first part of the 2000s, and the growth of all jobs in the latter part of the 2000s.

In short, we’ve gone from having a “rust belt” in the 70s and 80s to being a “rust nation” today.  So we need to stop pretending that if we just give extend unemployment insurance, cut the payroll tax for a year, and curtail spending that our economy will truly recover. The problem of the rust belt was that it become fundamentally uncompetitive and lost many of its key “traded” industries and more (when you lose an auto plant, you also lose the barber shop, pizza parlor and dry cleaner).  But now 30 years later, it’s America that is in that predicament. Thus, the central long-term and short-term economic question is how to make America once again the place where multinationals want to expand and where the best environment to support high-growth start-up companies exists.

Some will acknowledge that this might be good long-term policy, but that we need jobs now. Our response is that a major reason we don’t have jobs now (besides having lost so many manufacturing jobs and the millions of jobs related to them) is that American businesses and consumers have lost faith in the dynamism and competitive capabilities of the U.S. economy. We are lacking in what Keynes called “animal spirits.”  Imagine how different things would be tomorrow if we could wave a magic wand and convince everyone that in 2020, the United States will be the world leader in innovation and competitiveness, running a trade surplus, including in high-technology products, and growing thousands of high-growth entrepreneurial companies every year. Companies from around the world would want to invest here.  Consumers would open their wallets.  Entrepreneurs would be more willing to take risks and start those high growth companies.

In the absence of a magic wand, the President needs to at least stir those animal spirits and restore confidence in America’s economic potential. First, he needs to identify fundamental problems of U.S. competitiveness, particularly in the traded sectors, as the problem and get the rest of Washington to acknowledge it as well. Second, as ITIF explains in Finding a New Bipartisan Consensus on U.S. Competitiveness and Innovation Policy, the President must call on both parties to put aside partisan posturing and to develop a true bipartisan competitiveness strategy that addresses taxes, regulation, investment, and trade issues. And both sides must recognize that one-off policy measures—whether funding energy efficient buildings from the left or giving tax cuts to small business owners in non-traded sectors (realtors, pizza parlors, etc.) from the right—won’t be sufficient. Rather, a national innovation and competitiveness strategy should address sagging U.S. competitiveness with regard to tax, talent, trade, and technology. Policies here would increase federal R&D funding, boost R&D tax credits, and bring the U.S. corporate tax system in-line with those of leading U.S. competitors, focus on enforcement of U.S. trade rights as much as trade liberalization, and ensure that the U.S. educational (and worker retraining) system produces the world’s most talented workforce while at the same time opening up our borders to high skill immigrants.

To the extent that the President wishes to advance policies that will create jobs immediately (while also boosting competitiveness), the best thing would have an immediate impact on manufacturing and other traded sectors is to drive down the price of the dollar, as ITIF explains in Import Money—Export Goods. Given the massive and growing U.S. trade deficit (an estimated $600 billion this year), it’s clear that the value of the dollar remains far too high. This overpriced currency makes too many of our nation’s exports uncompetitive in global markets and encourages imports that producers in America might otherwise fill.  If the Administration changed course on its strong dollar policy, Chairman Bernanke could then announce a round of QE3 where the Fed commits to buying up more bonds and securities, which would both add liquidity to the economy and help lower the value of the dollar.

The second policy the President should immediately pursue is working with Congress to provide a temporary tax holiday for U.S. companies bringing back foreign profits to the United States. Like the Fed’s recent quantitative easing, this would inject money into the economy, leading people to spend more and corporations to invest more, both of which would create jobs. Under current tax law, U.S. companies can earn profits overseas that are taxed at lower rates in the countries in which they are earned. Because the U.S. corporate rate is higher than in many other nations, U.S. multinational firms have built up over $1 trillion in profits that they have not brought home since doing so would mean that they would be taxed at the higher U.S. rate. Allowing companies to bring this money back through a temporary, reduced tax rate would provide an immediate economic stimulus.

Bringing back this capital, regardless of how it is used, creates a short-term economic stimulus as the money is infused into the economy. Even if companies only did stock purchase buybacks this would still lead to more money flowing as stockholders spent money and stimulated job growth. But if past experience is repeated, companies would use at least a portion of repatriated money to directly reinvest in the U.S. economy. One analysis of the uses of the profits repatriated after the passage of the 2004 American Job Creation Act found that 25 percent of the repatriated funds went to domestic capital investment, while 14 percent went to R&D.

Another initiative the Administration should support is a low-cost way to drive infrastructure investment. The President should press Congress to pass a highway bill that gives states real incentives to engage in public-private partnerships to build toll roads, with the goal of building $150 billion worth of toll roads over the next five years. The consumer demand for toll roads is tremendous, and there is an enormous amount of money in the private capital markets to fund this, but only if federal regulations get out of the way and states are incented to use federal highway funds in ways that leverage private sector dollars to maximize their impact. This would not only help fix the chronic underinvestment in America’s highways, it would be stimulative since the investments would be made over the next five years, while the revenue to pay for them would be collected over the next 30 to 40 years (the life of the toll revenue bonds).

In conclusion, the President has asked for time to make a major address to the nation Thursday night, and it’s critical that his address focuses on policies that not only address the U.S. jobs crisis in the short-run, but also put U.S. employment on a stable footing over the long-run.  For too long, the United States has propped up a faltering, uncompetitive economy, much like a drug addict, with adrenaline hits to the heart that have resuscitated economic growth through short-term fixes like low interest rates after the dot-com bust (which only spurred the subsequent housing bubble) or massive stimulus packages. Despite all these adrenaline shots, the underlying heart muscle—the core engine of U.S. economic growth, it’s manufacturing, technology, and entrepreneurial traded sectors—has weakened as the United States has allowed its underlying competitiveness to deteriorate severely. Thus, a true jobs (and wealth) growth plan next week will lay out the correct diagnosis and challenge both parties to put aside partisan differences and engage in a true competitiveness policy compromise where both sides have to give a little, and even a lot, to make the U.S. competitive again with regard to technology, tax, trade, and talent.

 

Note: ITIF Senior Analyst Stephen Ezell co-authored this post.

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About the author

Dr. Robert D. Atkinson is one of the country’s foremost thinkers on innovation economics. With has an extensive background in technology policy, he has conducted ground-breaking research projects on technology and innovation, is a valued adviser to state and national policy makers, and a popular speaker on innovation policy nationally and internationally. He is the author of "Innovation Economics: The Race for Global Advantage" (Yale, forthcoming) and "The Past and Future of America’s Economy: Long Waves of Innovation That Power Cycles of Growth" (Edward Elgar, 2005). Before coming to ITIF, Atkinson was Vice President of the Progressive Policy Institute and Director of PPI’s Technology & New Economy Project. Ars Technica listed Atkinson as one of 2009’s Tech Policy People to Watch. He has testified before a number of committees in Congress and has appeared in various media outlets including CNN, Fox News, MSNBC, NPR, and NBC Nightly News. He received his Ph.D. in City and Regional Planning from the University of North Carolina at Chapel Hill in 1989.
  • 4GBill

    Competitiveness is necessary but it needs to be clarifed and it is not sufficient. Visionary leadership is required with an economic and innovation roadmap like Hamilton’s roadmap that drove the transformation of an agriculural economy to become an industrial economy. The economy is now shifting to one where consumers as entrepreneurs are also producers of value such as energy and information. This is apparent with residential and industrial solar electric generation, electric microgrids, self-publishing and open source software. Policy should promote and aggressively support this shift. For the shift to be competitive, systems should be designed wih a new competitive capability in engineering, manufacturing and maintenance – immune system engineering – that enables systems to be largely self-diagnosing and self-healing, enables systems to be designed more productivity with better quality expecially in software, reduces the cost of maintenance and improves safety. Innovation requires a combination of roadmaps and upgrades in capability and architecture for platforms that transform competitiveness – dominant designs (DD). DD’s exist at different layers from technology at the bottom to business models in the middle to the economy at the top. At the top, the new DD is consumers becoming producers in nearly every industry. Without an innovation roadmap, the pursuit of competitiveness can be an investment in a dying economic model. Eisenhower gave us a roadmap for transportation. Kennedy gave us a roadmap for space that enabled new industries such as satellite communications. Obama should describe a roadmap in which consumers as entrepreneurs become producers of value and the competitiveness we need beginning with competitiveness in a new fourth generation of innovation theory and practice supported by innovation extension centers.

  • 4GBill

    Competitiveness is necessary but it needs to be clarifed and it is not sufficient. Visionary leadership is required with an economic and innovation roadmap like Hamilton’s roadmap that drove the transformation of an agriculural economy to become an industrial economy. The economy is now shifting to one where consumers as entrepreneurs are also producers of value such as energy and information. This is apparent with residential and industrial solar electric generation, electric microgrids, self-publishing and open source software. Policy should promote and aggressively support this shift. For the shift to be competitive, systems should be designed wih a new competitive capability in engineering, manufacturing and maintenance – immune system engineering – that enables systems to be largely self-diagnosing and self-healing, enables systems to be designed more productivity with better quality expecially in software, reduces the cost of maintenance and improves safety. Innovation requires a combination of roadmaps and upgrades in capability and architecture for platforms that transform competitiveness – dominant designs (DD). DD’s exist at different layers from technology at the bottom to business models in the middle to the economy at the top. At the top, the new DD is consumers becoming producers in nearly every industry. Without an innovation roadmap, the pursuit of competitiveness can be an investment in a dying economic model. Eisenhower gave us a roadmap for transportation. Kennedy gave us a roadmap for space that enabled new industries such as satellite communications. Obama should describe a roadmap in which consumers as entrepreneurs become producers of value and the competitiveness we need beginning with competitiveness in a new fourth generation of innovation theory and practice supported by innovation extension centers.

  • Chris Hill

    Rob, There is no need to make “either/or” arguments about what the President should say on Thursday. We do need jobs NOW, AND, we need a stronger, more dynamic economy both NOW and in the FUTURE. Nothing in recent experience argues against a good dose of Keynesian stimulus; we just haven’t tried it yet! No sooner did the (inadequate and poorly designed) stimulus funds begin to flow in 2009 than state and local governments began to experience even steeper revenue shortfalls and returned to laying off government employees and contractors. The 2009 stimulus didn’t last long enough to make a difference to the macro economy, and it wasn’t large enough even to offset the cuts at the state and local levels. It included too little spending and too much tax cutting. And, it was a mistake to load up the stimulus spending we did do with extraneous and extraordinary requirements for auditing and assessing impacts. We needed to wage “war” on a failing economy, and war time is no time to try to implement good government practices, however well-intentioned they might have been. Now, just to give one illustration, America has huge numbers of construction workers, heavy equipment operators, building materials producers, electrical equipment installers, and the like who could be put to work in 90 days building, upgrading and improving both private and public infrastructures and buildings. They aren’t out of work because someone has lost faith in the dynamism of the American economy or because multinational corporations can’t repatriate their overseas profits tax-free; they are out of work because they and the millions of unemployed like them can’t afford to buy or rent a house, buy a car, take a vacation, or buy a new set of clothes for their kids. The first thing they need is a decent job at decent wages. Stimulus can provide that, at little real cost to the economy, as Keynes and Roosevelt demonstrated a long time ago. (Roosevelt also demonstrated the folly of becoming a convert to deficit reduction too soon; a lesson apparently lost on nearly all Members of Congress and the President this time around.) At the same time, we do need to get the long-run fundamentals better in hand, both by taking most of the actions you recommend, and by accepting that we will not be going back to the good old days of stable, long-term employment in high-wage basic manufacturing industries. Our competitiveness policies must focus on the opportunities, industries and jobs of tomorrow, not those of yesterday. Finally, the President needs to keep in mind that his speech on Thursday is a POLITICAL speech, not a wonky statement on economic policy, short-run, or long-run. A little “old time religion” will serve him, and us, well. Let’s hope a bit of James Hoffa’s style rubbed off on him yesterday. Chris