Time - What U.S. Recovery? 5 Destructive Myths E-mail
Tuesday, 14 June 2011 08:41

By Rana Fordoohar

No wonder the rest of the world is so worried about our future. Sadly, other regions won't be able to help us out, as happened in 2008. Europe is in the middle of its own debt crisis. And emerging markets like China, which helped sustain American companies by buying everything from our heavy machinery to our luxury goods during the recession, are now slamming on the growth brakes. Why? They're worried about inflation, which is partly a result of the Fed's policy of increasing the money supply, known as quantitative easing. Much of that money ended up in stock markets, enriching the upper quarter of the population while the majority has been digging coins out from under couch cushions. Investor money also chased oil prices way up (which hurts the poor most of all) and created bubbles in emerging economies. Now these things are coming back to bite us.

All this sounds complicated, and it is. But it's important to understand that our economy has changed over the past several decades in important and profound ways that politicians at both ends of the spectrum still don't get. There are half a billion middle-class people living abroad who can do our jobs. At the same time, technology has allowed companies to weather the recession almost entirely through job cuts. While Democrats may be downplaying the bad news, Republicans, obsessed with the sideshow that is the debt-ceiling debate, haven't offered a more cohesive explanation for the problems or any real solutions. Rather, both sides continue to push myths about what's happening and how the economy will — or won't — recover. Here are five of the most destructive myths and why we need to figure out a different path to growth.

Myth No. 1: This is a temporary blip, and then it's full steam ahead
True, only 12.2% of economists surveyed in the past few days by the Philadelphia Fed believe that the current backsliding will develop into a double-dip recession (though that percentage is up significantly from the start of the year). Avoiding a double dip is not the same as creating growth that's strong enough to revive the job market. In fact, there's an unfortunate snowball effect with growth and employment when they are weak. It used to take roughly six months for the U.S. to get back to a normal employment picture after a recession; the McKinsey Global Institute estimates it will take five years this time around. That lingering unemployment cuts GDP growth by reducing consumer demand, which in turn makes it harder to create jobs. We would need to create 187,000 jobs a month, growing at a rate of 3.3%, to get to a healthy 5% unemployment rate by 2020. At the current rate of growth and job creation, we would maybe get halfway there by that time.

Myth No. 2: We can buy our way out of all this
While a third round of stimulus shouldn't be off the table in an emergency (Obama has already indicated it's a possibility if things get much worse), the risk-reward ratio isn't good. For starters, our creditors — the largest of which is China — would squawk about the debt implications of doling out more money, not to mention the risk of creating hot-money bubbles in their economies. That's almost beside the point, though, because the stimulus — which has taken the form of Fed purchases of T-bills designed to reduce long-term interest rates and make homeowner refinancing easier — isn't much help if homeowners don't have jobs that allow them to make any payments at all. Although foreclosures are declining, the supply of foreclosed homes for sale is undermining the real estate market, which is dampening consumer spending and sentiment. "It's time to move beyond financial Band-Aids," says Mohamed El-Erian, CEO of Pimco, the world's largest bond trader. "It's clear that the stimulus-induced recovery hasn't overcome the structural challenges to large-scale job creation."

Myth No. 3: The private sector will make it all better
There is a fundamental disconnect between the fortunes of American companies, which are doing quite well, and American workers, most of whom are earning a lower hourly wage now than they did during the recession. The thing is, companies make plenty of money; they just don't spend it on workers here.

Half of Americans say they couldn't come up with $2,000 in 30 days without selling some of their possessions. Meanwhile, companies are flush: American firms generated $1.68 trillion in profit in the last quarter of 2010 alone. But many firms would think twice before putting their next factory or R&D center in the U.S. when they could put it in Brazil, China or India. These emerging-market nations are churning out 70 million new middle-class workers and consumers every year. That's one reason unemployment is high and wages are constrained here at home. This was true well before the recession and even before Obama arrived in office. From 2000 to 2007, the U.S. saw its weakest period of job creation since the Great Depression.

Nobel laureate Michael Spence, author of "The Next Convergence", has looked at which American companies created jobs at home from 1990 to 2008, a period of extreme globalization. The results are startling. The companies that did business in global markets, including manufacturers, banks, exporters, energy firms and financial services, contributed almost nothing to overall American job growth. The firms that did contribute were those operating mostly in the U.S. market, immune to global competition — health care companies, government agencies, retailers and hotels. Sadly, jobs in these sectors are lower paid and lower skilled than those that were outsourced. "When I first looked at the data, I was kind of stunned," says Spence, who now advocates a German-style industrial policy to keep jobs in some high-value sectors at home. Clearly, it's a myth that businesses are simply waiting for more economic and regulatory "certainty" to invest back home.

Myth No. 4: We'll pack up and move for new jobs
The myth of mobility — that if you build jobs, people will come — is no longer the case. In fact, many people can't move, in part because they are underwater on their homes but also because the much heralded American labor mobility was declining even before this whole mess began. In the 1980s, about 1 out of 5 workers moved every year; now only 1 of 10 does. That's due in part to the rise of the two-career family — it's no longer an easy and obvious decision to move for Dad's job. This is a trend that will only grow stronger now that women are earning more advanced degrees and grabbing jobs in the fastest-growing fields.

A bigger issue is that the available skills in the labor pool don't line up well with the available jobs. Case in point: there are 3 million job openings today. "There's a tremendous mismatch in the jobs market right now," says McKinsey partner James Manyika, co-author of a new study titled An Economy That Works: Job Creation and America's Future. "It runs across skill set, gender, class and geography." A labor market bifurcated by gender, skill set and geography means that unemployed autoworkers in Michigan can't sell their underwater homes and retool as machinists in North Dakota, where homes are cheaper and the unemployment rate is under 5%.

Myth No. 5: Entrepreneurs are the foundation of the economy

Entrepreneurship is still one of America's great strengths, right? Wrong. Rates of new-business creation have been contracting since the 1980s. Funny enough, that's just when the financial sector began to get a lot bigger. The two trends are not disconnected. A study by the Kauffman Foundation found an inverse correlation between the two. The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs. The credit crunch has exacerbated the problem. Lending is still constrained, and the old methods of self-funding a business — maxing out credit cards or taking a home-equity loan — are no longer as viable.

So where does it all leave us? With an economy that still needs a major shake-up. There are short-term and long-term solutions. Job No. 1 is to fix the housing market. While the government is understandably reluctant to get deeper into the loan business, it's clear that private markets aren't able to work through the pile of foreclosures quickly enough for house prices to stabilize. If the numbers don't improve in the next month or so, it might be time for the government to step in and either take on more failing loans (a TARP for homeowners as opposed to investment banks?) or pass rules that would allow more homeowners to negotiate better terms with lenders.

And let's not forget the youth-unemployment crisis. There's now a generation of young workers who are in danger of being permanently sidetracked in the labor markets and disconnected from society. Research shows that the long-term unemployed tend to be depressed, suffer greater health problems and even have shorter life expectancy. The youth unemployment rate is now 24%, compared with the overall rate of 9.1%. If and when these young people return to work, they'll earn 20% less over the next 15 to 20 years than peers who were employed. That increases the wealth divide that is one of the root causes of growing political populism in our country. While Republicans have pushed back against spending on broad government-sponsored work programs and retraining, it would behoove the Administration to keep pushing for a short-term summer-work program to target the most at-risk groups.

But these are stopgaps. The real solutions, of course, are neither quick nor easy — making them especially challenging for Congress. It's a cliché that better education is the path to a more competitive society, but it's not just about churning out more engineers than the Chinese. The U.S. will also need a lot more welders and administrative assistants with sharper communication skills. There's an argument for a good system of technical colleges, which would in turn require a frank conversation about the fact that not everyone can or should shell out money for a four-year liberal-arts degree that may leave them overleveraged and underemployed.

The other major issue is bridging the divide between the fortunes of companies and the fortunes of workers. Democrats and Republicans argue about whether and how to get American corporations to repatriate money so it can be taxed, and again they are missing the point. For starters, it's hard to imagine that crafty corporate lawyers won't find ways around any new rules. (That in itself is an argument for tax simplification that would reduce the loopholes that allow the 400 richest Americans to pay 18% income tax.) The bottom line is that we have to find ways to make the U.S. a more attractive destination for investment.

One way to do that is by considering a third-rail term: industrial policy. It's a concept that needs to be rebranded, because Democrats and Republicans alike shudder at being associated with something so "anti-American." In fact, good industrial policy can be a useful economic nudge. It's not about creating a command-and-control economy like China's but about the private and public sectors coming together at every level, as in Germany, to decide how best to keep jobs at home.

The lesson of Germany is a good one. Back in 2000, the Germans were facing an economic rebalancing not unlike what the U.S. is experiencing. East and West Germany had unified, creating a huge wealth gap and high unemployment at a time when German jobs were moving to central Europe. The country didn't try to explain away the problem in quarterly blips but rather stared it directly in the face. CEOs sat down with labor leaders as partners; union reps sit on management boards in Germany. The government offered firms temporary subsidies to forestall outsourcing. Corporate leaders worked with educators to churn out a labor force with the right skills. It worked. Today Germany has not only higher levels of growth but also lower levels of unemployment than it did prerecession.

In our politically polarized society, such cooperation may seem impossible. But Germany after the fall of the Berlin Wall was perhaps far more polarized. It is worth remembering that economic change tends to happen only during crises. We've survived the banking crisis. How we deal with the longer-range crisis — the crisis of growth and unemployment — will define our economic future for not just the next few quarters but the next few decades.

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