How Can We Create Jobs? – 2017

Male worker tighening bolts on a large boiler-like device.

Steam Fitter by Lewis Hine (1920)

In 1992 James Carville, Bill Clinton’s campaign manager, famously coined the phrase, “The Economy, Stupid.” The phrase went viral as it was transformed into, “It’s the economy, stupid.” Today, in 2017, many observers claim that Carville’s slogan still applies. “It’s (still) the economy, stupid,” a lesson the Democrats failed to remember. Despite the charges of race baiting, misogyny, xenophobia, and all the rest, many claim it was economic discontent that produced Donald Trump’s surprising electoral victory on November 8, 2016.

Voter economic discontent points to economic policy failures. Now that the new administration is in office, is is now time to seriously discuss economic policy issues. This is fertile territory insofar as few policies were discussed during the campaign. The discussions that did take place yielded little regarding specifics. Two policy areas, both of economic importance to the public, appeared to dominate the campaign. They were immigration and trade policy. The former was important because to many it appeared that immigrants, especially those in the United States illegally, were both taking American jobs and lowering the wages of others. The latter was important because of the impact of international trade on the decline of manufacturing jobs in the United States.

It is the creation of good jobs that I want to address here because their creation is vital for the healthy growth of the economy. While it is true that the unemployment rate in the U.S. stands at less than five percent, the economic recovery is deceiving on several counts. First, the rate of workforce participation is only at about 62 percent of adults. The long-term unemployment rates are substantial. Wage growth is stagnant and has been for at least thirty years. And, the growth in jobs during the 2008 recession has been largely in the low paying service sector of the economy. Thus, while the economy looks strong if we rely on the traditional metrics, the job outlook for many Americans is bleak.

Below I review several of the major proposals advanced for the creation of good jobs. (The list of measures I review is not exhaustive.) Unfortunately, during the presidential campaign, neither the Democrats nor the Republicans presented  any truly convincing ideas of how to create good permanent jobs for the currently underemployed and unemployed. Yet, there are numerous recommendations  on the subject. A simple Google search on “How to create jobs in the United States” yields 275 million results in only .68 seconds. Looking at articles on the right and the left, several proposals emerge as the main contenders for the solutions to the problem of job creation.

Different Approaches to Job Creation

It is no secret that the major positions for Democrats and Republicans on how to create jobs are fundamentally opposed. Because there was so little discussion of economic policy in the presidential campaign, this fact is often overlooked. Anyone who fails to appreciate the different economic approaches advocated by the Republicans and the Democrats did not fully understand the key economic issues at stake in this election. Notwithstanding all the talk about making the Chinese adopt fair trade policies, or deporting all the undocumented workers, the  approaches to job creation advocated by the political parties  are quite different.

On one side are the Keynesians who want greater government expenditures to stimulate demand, investment, and employment. The basic idea is simple. The goal is to put money into circulation as quickly as possible. Direct government investment (or business investment, for that matter) into job creation creates income. As worker income is spent, it generates more income throughout the economy. By the time each dollar has worked its way through the economy, it has generated several dollars of income. The amount of increase in income created as money moves from buyer to seller through the economy is predicted by the “investment multiplier. “In the process of increasing  employment additional tax revenues are generated and the original expenditures are recouped. This is the basic approach, along with tax credits to businesses that create jobs and an increase in taxes on the wealthiest Americans, of the Democrats. The favorite target of government expenditures for Democrats would be for the aging national infrastructure.

On the other side are the free-market conservatives, sometimes referred to as “neo-liberals.” It is important to observe that neo-liberals are found in both the Republican and Democratic parties. On the Democratic side of the aisle, the Clintons are well-known for their neo-liberal inclinations. From this perspective the way to increase jobs is to reduce all government spending, lower corporate income taxes, and commit to no new taxes whatsoever. For the free-market conservatives the recitation of these neo-liberal measures has become a mantra for virtually all social ills. Paul Ryan, Speaker of the House of Representatives and chief economic policy spokesperson for the Republican Party, asserts that job growth cannot come from Washington. Rather, job creation must come from American business and industry. This position is in keeping with the view (as Mitt Romney argued in the 2012 presidential campaign) that the government does not create jobs. Only business creates jobs. This perspective reflects the neo-liberal view that the marketplace is the best regulator and distributor of goods and services as well as the best determinant of social policy. Proponents of this view often cite Milton Friedman and Hayek (heroes for Paul Ryan) for having laid bare the mistakes of Keynesian economics. It takes only a moment’s reflection, however, to note that both the public sector, i.e., government, and the private sector create jobs. In the United States there are some twenty-two million public sector jobs. People holding public sector jobs are postal employees, soldiers, policemen, teachers, public park employees, city road crews, garbage collectors, bureaucrats, state university college professors, and so forth.

It is worth noting that in the 2016 presidential campaign, supporters of Bernie Sanders rejected Hillary Clinton’s economic policies, labeling her as a “neo-liberal.” In other words, her economic policies were judged to be much like those of the Republican establishment. It was, after all, her husband who pushed the Democratic Party toward international free trade policies by the adoption of the North American Free Trade Agreement and the granting of most favored nation trading status to China. Both policies served to decrease the number of manufacturing jobs in the United States, thus abandoning the working class.

Assuming that either the Keynesian or the neo-liberal theories to economic growth is correct, it should be noted that, except for continued military spending, neither perspective automatically creates good or long term jobs. The Keynesians argue that it is important where stimulus funds are spent. For example, Kimberly Amadeo (2016) reports that a 2007 University of Massachusetts-Amherst study found that “one billion dollars spent had the following effects:

  • Public works = 19,795 jobs.
  • Unemployment benefits = 19,000 jobs.
  • Education = 17,687 jobs.
  • Defense spending = 8,555 jobs.”

Thus, it is easy to see why the current consensus is that funds should be spent on infrastructure and schools. Arguments calling for expenditures on more gambling casinos or tanning salons will not carry much weight in political debates. Similarly, the neo-liberals argue that the success of investment incentives is in part conditioned by the attitudes of corporate executives. In his 2011 book, Back to Work, Bill Clinton, reflecting his neo-liberal views, criticized Obama  for attacking the elites of the financial sector, thus making them angry and obstinate. In truth, both approaches to jobs creation operate in a larger environment of speculation, attitudes, fears, expectations, and other phenomena that are best understood as psychological and look very little like economics.

Major Proposals for Job Creation

So, what are some specific suggestions for the creation of jobs in the United States?

Proposals for job creation come in several types. The first type includes those policies that require government only set the stage for job creation by creating the conditions that induce businesses to hire workers. For example, it is suggested that the government:

  • Lower the minimum wage.
    It is argued that lowering the minimum wage would make more money available for hiring new employees. Given the current political environment in which low paid workers nation-wide are demanding higher wages, this option does not seem realistic.
  • Lower corporate taxes to lessen their tax burden and employ more people.
    A variant of this approach was recently demonstrated with the deal that President Trump concluded with the Carrier air-conditioning company. The deal was not to create new jobs, however, but rather to keep jobs in the United States that would otherwise be outsourced to Mexico. The cost of the deal was a $6 million tax break for Carrier. The immediate downside of this approach is that the lost taxes must be made up from someone. The most likely source to make up the loss in revenue is the taxpaying public. In general, lowering corporate taxes to stimulate job production has not been a productive approach. In a recent paper, the Center for Effective Government reports that employment shows no relationship to corporate tax rates. Thus, lowering the corporate tax rate will not be a productive solution to job creation. Consider the following graph.Corporate Tax Rates and Job GrowthAs can be seen, corporate tax rates are about the lowest they have been since World War II. Yet there is little, if any, variation in job growth across sixty years of declining corporate tax rates.
  • Establish tax credits and other incentives for businesses that invest at home, or bring manufacturing jobs back to the United States.
    In 2009 when President Obama took office, one of the measures highly touted for reducing the unemployment rate was the job tax credit. The basic idea of the tax credit is to make it easier for employers to take on new hires by having the government subsidize new workers through a tax credit. This approach to employment stimulation had been tried during the Carter administration in 1977. By 2011 states across the United States had implemented a wide variety of tax credit programs to stimulate new employment. A listing of these programs is available from The National Conference of State Legislatures. The extension of tax credits for job creation or related purposes such as corporate research and development activity is controversial. John H. Bishop, writing in the New York Times, provides an encouraging outlook for job tax credits and a positive evaluation of the National Jobs Tax Credit implemented under the Carter administration. Joseph J. Thorndike, writing for the business section of Time in 2012, offers a much less sanguine evaluation of tax credits and the Carter administration program. In his view, tax credits fall into the “something is better than nothing” category.
  • Encourage companies to reduce employees’ hours instead of laying them off (Roth, 2011).
    The usual name for this proposal is “work sharing.” In a situation where there is a reduced volume of work available, work sharing reduces the total number of hours per employee rather than resorting to layoffs of employees. During the 2009 recession, Germany used this labor market instrument to maintain a relatively low unemployment rate compared to the rest of the European Union and the United States. Known as Kurzarbeit, the German government sponsored the program. Basically, it provided a supplement to the reduced wages of the worker whose hours were reduced due to work sharing. Thus, for example, a worker whose hours were reduced by 20 percent might have his or her wages reduced by only 10 percent due to the government subsidy. In this fashion, the workforce was maintained. Participating businesses avoided the expenses associated with firing, and then rehiring workers. Unemployment rates remained low and taxes continued to be paid that maintained, in part, the government subsidy payouts. Programs such as this can be successful if the downturn in production is not long term. In that case, high unemployment rates cannot be avoided (Crimmann, Wieβner, and Bellmann, 2010). In the German case during the recent recession, however, Kurzarbeit appears to have been successful.
  • Adopt policies that enhance worker mobility.
    Worker mobility is the extent to which workers can move between jobs. It has both occupational and geographic aspects. Occupational mobility can be divided into vertical and horizontal mobility. Vertical mobility is the movement of an employee to a higher or lower position in the line of work in which he or she is now engaged. Horizontal mobility constitutes a lateral transfer to a different position, but which has the same rank and status as the worker’s present employment. Geographical mobility is important insofar as a decline in economic opportunities in one locale will necessitate labor movement to different locales in search of new opportunities. Since the 1970’s worker mobility has declined substantially in the United States (Schleicher, 2016). In 2012, the percentage of Americans moving from one state to another was about half of what it was in the 1990’s (The Economist, 2012). The effects on the economy have been substantial. The decline in worker mobility has led to a loss of productivity and increased unemployment rates, especially among the poor and less skilled, with a simultaneous increase in inefficient welfare spending (Schleicher, 2016). It is estimated that the loss in productivity due to the fall in worker mobility is equal to 13.5 percent of U.S. GDP, a percentage equal to the size of the economy of California. Frequent barriers to worker mobility can be identified. Schleicher reports several of these. (1) These include the difficulty of moving from a region with low wages to a rich region with high housing costs. Land use restrictions in wealthy cities have effectively kept newcomers from moving in. (2) Another barrier concerns professional licensing. Occupational licensing has increased substantially over the past fifty years, and licenses frequently do not transfer from state to state. (3) Pensions often lock employees to a position for several years while they become fully vested in the system. Thus, pension lock-in is another barrier to mobility. (4) Housing markets, especially in cities with declining economies, constitute another barrier to moving. Often those wanting to move cannot because the market value of their house is less than they owe on the property, or the selling price for their property is not adequate to afford them entry into housing markets where employment opportunities are better. And, (5) states tend to favor policies that prevent people from leaving.

Other proposals for job creation are more direct and require greater government participation in the process.

  • Rebuild the nation’s infrastructure.
    Everyone is aware that a major portion of the nation’s roads and bridges is in a state of disrepair. A public works program with infrastructure repair as it target was a favorite proposal of the Obama administration, but it went nowhere due to Republican opposition. The Republican opposition has been ideologically unprepared to support an infrastructure works program, preferring instead to provide tax cuts and incentives to corporate business and consumers. President Trump has indicated he supports government spending to rebuild the nation’s infrastructure. Mitch McConnell, the senate majority leader, recently stated, however, that the nation’s infrastructure is not the highest Republican priority. Thus, we do not know now whether action on this proposal to create jobs will be forthcoming.
  • Increase military spending.
    Increased military spending generally results in an increase in employment. Democrats, however, are generally opposed to this job creation solution. They point out that the United States, with a defense budget of approximately $616 billion per year, spends more on defense than the next seven countries combined (Carroll, 2016). China has the second largest expenditure, but at approximately $220 billion it is still far behind the United States. Republicans respond that the U.S. military is at its lowest troop levels in many years. Cuts in military budgets have forced a trade-off between increased manpower (i.e., troop levels) and advancements in weapons technology. This dispute over military spending results in part from a difference in philosophy about the type of military force the nation needs. The dominant approach since the 1990’s and that which continued under the Obama administration has been a high-tech, reduced manpower approach to warfare. The high-tech, minimal manpower approach had dominated U.S. military thinking even though recent engagements in both Iraq and Afghanistan have demonstrated the increased need for adequate levels of manpower resources.

A third type of job creation solution is found in controversial proposals that promise long-term solutions. Some of these are:

  • Establish a national industrial policy.
    This proposal entails the creation of a “long-term public-private strategy in terms of boosting our manufacturing sector” (Bernstein, 2011). Other countries such as China and Germany do this successfully, But the U.S. has no national industrial policy, and the idea is opposed ideologically by many conservatives. The opposition conservative opposition originates in the belief that free markets provide opportunities for entrepreneurs, while managed markets create stagnation and the lack of innovation when market circumstances change. Those opposed to national industrial policy argue that government does not know how to “pick winners and losers, it makes mistakes, the process becomes politicized” (Zakaria, 2012). Notwithstanding the opposition to national industrial policy, strong arguments exist in its favor. Clyde Prestowitz (2012) argues that the United States does, in fact, have an industrial policy despite objections to the contrary. And, that policy is “essentially anti-manufacturing.” Prestowitz notes that U.S. agriculture is heavily subsidized by the government. Universities, health care, the construction industry, the private equity business, the military-industrial complex, the bio-tech industry, the airline industry, and big oil all receive subsidies either directly or indirectly through tax breaks and government infrastructure spending. He writes that the “only part of the economy not getting special help, indeed, being neglected and even attacked by the government is manufacturing.” Robert Reich (1981) makes a similar argument. He points out that government invariably affects industrial development and the patterns of commercial investment. Unfortunately, the results of government influence are haphazard, often harm the U.S. economy, and are “largely a function of politics.” Conservative opposition often equates industrial policy with Soviet style national economic planning; that is, a failed experiment in economic development. Reich argues emphatically that industrial policy is not national planning. Its purpose is to make the economy more adaptable to changing circumstances. And, he argues that it can be done within the context of a democratic society.
  • Take steps to combat the trade deficit by first devaluing the dollar 10 to 20 percent.
    In other words, do what China has done to support their export sector. By devaluing our currency, we would immediately make our exports more attractive in international markets, while making U.S. made goods cheaper in comparison to imports. While this policy might work in the short term, numerous arguments exist against the devaluation of the dollar. First, the devaluation would make all imported goods more expensive, thereby raising the cost of living for consumers. Second, a 20 percent devaluation, say, to boost exports would likely result in substantial inflation, thus “robbing” the savings of the elderly and others. Third, because foreign investors and governments are holding U.S. securities and bonds in dollars, an abrupt devaluation of the dollar would undermine international confidence in the dollar. The immediate consequence would be a downgrading of the U.S. credit rating. It might also result in the U.S. dollar being discarded as international currency. The U.S. dollar has been accepted as a world currency since the end of World War II. That might change if there is a loss of confidence in the dollar due to a decrease in its strength. Other currencies such as the Euro, the British pound sterling, the Japanese yen, or even the Chinese yuan would likely take its place.
    Notwithstanding the objections, C. Fred Bergsten (2010) advises that the exchange rate of the dollar is an important variable in the maintenance of support for the export sector. He points out that in the thirty years prior to 2002, the dollar was overpriced by 30 to 40 percent. He notes that every percentage point in overvaluation of the dollar results in a loss of 150,000 jobs in the United States. Bergsten writes, “The policy goal should be a competitive exchange rate that produces a sustainable trade balance, rather than a “strong dollar.”
  • Invest government assistance to science, engineering, and technical education.
    We have an increasing lack of talent in high tech industries. Many graduate programs in these fields cannot fill the seats available with students from the United States. Fortunately, both liberal and conservative tend to agree that we should revise our visa and immigration policies to allow talented foreign graduate students to stay in this country upon receipt of their degrees instead of sending them home. This would significantly help the science and engineering fields. It makes little sense, it is argued, to educate these students in American universities and then force them to return to their countries where they will become competitors with U.S. business.
  • Increase immigration.
    One of the most controversial proposals for the stimulation of job creation concerns immigration. In a recent article in The Atlantic, Gillian B. White reports on the research of John McLaren and Gihoon Hong at the University of Virginia and Indiana University respectively. They argue that an increase in immigration creates 1.2 jobs per immigrant in “non-tradable” industries. Non-tradable industries are those that must be sold or created locally by local workers. Examples would be construction, teaching, retail, and local services (White, 2015). In a similar conclusion, Adam Looney and Michael Greenstone (2012) report that the research from different researchers indicates that immigration creates a small increase in average wages for all U.S.-born workers. “Average” is the operative term here. In the table below, the research reported in blue indicates a decrease in wages for American workers without a high school diploma as well as a decrease for college graduates.

Effects of Immigration on Wages

    David Frum (2015), addressing the report by Looney and Greenstone (2012), takes exception to the claims that immigration has little or no effect on American workers. With attention to the work of Peri and Borjas, as noted in the table above, Frum notes that the result of “no effect” or a “negligible effect” depends on the complementarity of tasks between immigrants and American workers. If, however, the immigrants perform the same tasks as American workers in a given sector of the economy, and they are willing to work for less, then the wages of American workers will be depressed. Moreover, Frum notes that the economic models used for the research reported assume that the American worker response will be to accept lower wages, or move to a different sector in the economy. If, on the other hand, the American worker drops out of the work force altogether, the resulting negative effect is not tallied in the results.

Finally, I note a few “innovative” proposals for job creation. Some of these seem, on their face, to be unworkable or simply bizarre. That doesn’t mean they are bad suggestions, but they lack face validity.

  • Lower the age for social security from 66 to 60.
    Dennis Kucinich of Ohio suggests that we lower the age of retirement for social security from 66 to 60. As millions leave the job force, the unemployed could then fill the vacancies created by the retirements. This idea has been discredited on economic grounds because the effect of so many new people joining the social security pension system at once would prove unsound. Nonetheless, the idea has traction with some economists. James K. Galbraith of the University of Texas at Austin suggests that the current retirement age is too high. Furthermore, the conventional wisdom that we should raise the retirement age to save Social Security is wrong-headed (Lozada, 2011).
  • Paint all the building tops in the United States white.
    Bill Clinton proposes that the federal government initiate an employment program to paint the tops of buildings white. He claims that the energy savings alone would pay for the employment of those who do the work. This is innovative thinking, but it is dubious that the energy savings from white building tops would be great enough to offset the cost of the project.
  • Retrofit old buildings across the country for energy efficiency.
    Another of  Clinton’s proposals is to retrofit old buildings for energy savings. This was done for the Empire State Building. This idea should be closely examined. Clinton’s idea is that a large nation-wide project of this sort would generate immediate employment and support green energy companies. The costs, he claims, would be recouped by the energy companies within five years (The Daily Beast, 2011).

Conclusions

This report has not addressed two major topics related to job growth. The first of these is the “skills gap” between jobs that are available and qualified candidates to fill them. There are at present some five million job openings in the United States that will go unfilled, in part because the available pool of job applicants lacks the qualifications for these positions (See Gillespie, 2016). Remedies to this problem for the short term would include an analysis of current job training efforts.

jaguar-factoryThe second major topic not discussed here concerns the role of technology in job creation. Several economists have argued that technological change in the manufacturing process is responsible for more job losses than globalization, i.e., the export of jobs to countries with low labor costs. Thus, if China were to shut down its production today, most of the manufacturing jobs lost to Chinese production would not return to the United States (See, for example, The Economist, 2016.) The role of technology, therefore, is critical in acquiring an accurate picture of the job situation in the United States and elsewhere. That, however, is a discussion for another day.

Notwithstanding the absence of an informed discussion of the omissions just mentioned, there don’t appear to be any quick fixes for our employment woes. Some proposals above might operate rather quickly if implemented. Most, however, appear to be suggestions for the long term, and many are controversial. High-tech jobs might be the future of employment in the United States, but not in the short-term. Changes in the Chinese employment situation, coupled with strengthened Chinese currency and a weakened U.S. dollar might make our workers more competitive in the export sector. But those are long term hypothetical prospects, not immediate realities.

The earlier consensus among many analysts was that long-term job prospects for the United States would depend on a highly trained work force for high end manufacturing. While it is difficult to argue against an increase in the education of the work force, new prognoses suggest that education alone will not overcome the negative impact on jobs brought about by technological change in manufacturing. In the meantime, the outlook is discouraging for those who are unemployed. The best bets for near term employment are to be found in service occupations, especially in health care, retail sales, food preparation, and construction. Unfortunately, most of these are low paying jobs.

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This article also appears on Wise Guys.

2 thoughts on “How Can We Create Jobs? – 2017

  1. Great post! One would think the graph showing effective tax rate on corporate profits vs annual job growth would be a real eye opener to many people.

    By the way, I hope all is going well for you, sir. It’s been a long time since we last spoke. Keep up the great work.

    Like

    • Thank you Bryan. I agree that the table on corporate taxes and job growth should give pause to anyone making the argument that we should lower corporate tax rates, but we are living in a world where facts don’t seem to matter very much.

      I’m doing well. Thanks for asking. I hope things are going well for you too. Have you been to China lately?

      Like

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