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 In time, government stimulus can be gradually withdrawn as private sector investment and consumer demand take over.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.