The Jobless Recovery and Other Paradoxes
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In yesterday’s New York Times Janet Yellen, President of the Federal Reserve Bank of San Francisco, is quoted as predicting a slow drop in the U.S. unemployment rate, now 9.7 percent, to 9.25 percent by the end of this year and 8.0 percent by the end of 2011.  This is pretty anemic in view of her forecast of 3.5% GDP growth this year and 4.5% next year, a robust performance for a mature economy, though she attributes much of this growth to reduction in inventories rather than growth in sales. Ms. Yellen doesn’t foresee a return to peak economic performance and a corresponding drop in unemployment until 2013. The cause, she says, is clear: an increase in business efficiency and labor productivity, which she says, “is here to stay.”

One has to assume that Ms. Yellen’s prediction of stubbornly high unemployment takes account of Wednesday’s probable passage by the Senate of the $15 billion jobs creation package, which its supporters say will create tens of thousands of new jobs by providing an exemption from payroll taxes to employers who hire people who have been out of work for six months or more, as well as a $1,000 tax credit if those people remain employed for at least a year.

This development follows President Obama’s spirited defense last week of the stimulus package, which he claims has saved or created as many as two million jobs. Never mind any possible flaws in the calculation, and never mind that it is private business, not government, that creates jobs in the private sector. Let’s accept the President’s assertion that the stimulus package, which the Congressional Budget Office now estimates has cost $862 billion, has accomplished what he says.  That works out to $431,000 per job created or saved, or about 10 years’ wages for the average employee. That’s a lot of money to save or create a job that could disappear as soon as the incentives expire.

Tax incentives to create jobs generally don’t work. In the late 1980s and early 1990s I helped the government of Botswana design incentives policies to attract foreign direct investment and create new jobs. Botswana’s incentives were as generous as they come: for qualified investments the government would pay 100% of a company’s wage bill in the first year of operation, declining in 20% increments over the following four years. The program initially was a great success, creating over 10,000 new jobs in garment production, automobile assembly, and other light manufacturing.  The only problem was that most of these jobs disappeared as the incentives expired, creating a new set of social and economic disruptions. In the late 1990s, after one of the biggest beneficiary companies collapsed, the government realized the cost of the incentives had far outweighed any calculable benefits and scrapped the program entirely. Many other countries have had similar experiences.

By their very nature, incentives of this kind distort business decisions. Investment and employment decisions taken primarily for reasons of government grants or tax breaks instead of a sound business case may generate some short-term benefits, but at the cost of long-term competitiveness. Few people in the Obama Administration have any business experience, so they fail to grasp what is intuitively obvious to most businessmen.

It is impossible to save jobs in declining industries, and attempts to do so typically condemn those industries to a more complete demise. A hundred years ago, some 40 percent of the U.S. work force farmed for a living. Mechanization of agriculture, improved soil and crop management, better roads, and refrigeration changed everything. Today, less than two percent of the population works on the farm, but that small number of farmers produces far more food and feeds many more people at a far lower cost. Efforts to support farmers through subsidies, price supports, and tax incentives have done nothing to increase or even maintain agricultural employment, though they have enriched many large agro-industrial corporations.

Largely as a result of the past 30 years of innovation and investment in information technology, our economy is undergoing a similar shift now, in which manufacturing requires fewer and fewer people to produce more, higher-value goods. For the most part, this is a good thing.  If productivity doesn’t increase, neither can wages and living standards.

I have seen garment factories with over a thousand sewing machine operators under a single roof, but these facilities are in Haiti and the Dominican Republic and China, and no incentives will ever bring them back to the United States. My great-grandparents worked in the sweatshops of New York’s Lower East Side, but those jobs went, first to South Carolina, and later to other countries, but they were replaced by better, higher-paying occupations. It can be an otherworldly experience to visit a modern factory, in which a handful of workers with digital controls can run a vast production flow.  Any attempt to increase the number of employees with tax credits and other incentives would find few takers, but to the extent that it succeeded it would make these plants less competitive and put the entire enterprise at risk.

This is not an argument for the government to do nothing at all. The Oklahoma sod-busters who moved to California during the Great Depression and the Dust Bowl eventually found jobs in higher-value agriculture and emerging industries like aerospace, without much government assistance but not without wrenching dislocations and horrible suffering. No one wants to see a 21st century repeat of The Grapes of Wrath. So what should government do?

The first thing is to remove some of the huge barriers to investment and employment in existing Federal laws. Writing in his blog, Mickey Kaus,  hardly a Rush Limbaugh conservative, points to the Davis-Bacon Act, which requires workers hired on Federally-funded contracts to be paid the “prevailing wage” in the relevant county as determined by the Federal government. One of the centerpieces of the stimulus package was funding for “weatherization” of homes, but since it was launched the program has weatherized only 22,000 houses, largely because the Feds spent most of 2009 trying to establish the prevailing wage for weatherization work in more than 3,000 U.S. counties.

Davis-Bacon has been around since the 1930s, and was introduced to “stabilize” the construction industry by protecting white northern workers from being undercut by cheaper black migrants from the South. The Obama Administration is now presiding over a big expansion in the scope of Davis-Bacon to many additional jobs not previously covered.  Moreover, the “prevailing wage” is set not in reference to actual wages as reported by the Labor Department’s Bureau of Labor Statistics but by its Wages and Hours Division, which uses a formula based on what the prevailing wage would be if all applicable jobs were unionized. According to some studies, this adds 22 percent to the actual prevailing wage. Kaus reports that the city of Portsmouth, New Hampshire turned down stimulus package money for construction of a new water treatment plant because the application of Davis-Bacon would have added $2.3 million to its $17.3 million cost. Ideally, Davis-Bacon would be repealed entirely, but with a President and a Democratic majority in both houses of Congress, who depend on labor union support, the likelihood of this happening is nil.

There are plenty of other examples of wrong-headed policies, including one of the highest corporate tax rates in the world, which is so riddled with special tax breaks and loopholes as to make a mockery of any claim to transparency and fairness.  Many countries have found that a lower tax rate combined with elimination of most special exemptions generates more revenue with fewer distortions. Another  example is the Obama Administration’s determination to impose taxes on overseas operations of U.S. corporations even before profits are remitted, which no other country does. Unfortunately, in the current political environment and under the current administration, neither of these anti-competitive policies stands any real chance of reform.

Finally, there is the “vision thing.” Barack Obama came to power promising a new approach to policy and politics, but in almost everything he has done he has proven himself a thoroughly conventional politician. His approach to technological change and its effect on the composition of industry is to award grants to companies trying to develop batteries for electric cars, while at the same time he has spent over a hundred billion dollars of taxpayers’ money to preserve jobs, wages, and benefits at GM and Chrysler. In an industry that has to cut its production capacity by at least a third just to survive, this makes no sense at all.

What we need instead is a set of policies that can help workers dislocated by technological transformation, globalization, and other fundamental changes to adapt to the requirements of the new economy. Rather than spend huge sums on vain efforts to preserve jobs destined to vanish, some fraction of that money could be spent on helping workers find new jobs and acquire the skills needed to succeed in them. Instead of trying, as the U.S. and some European countries do, to use incentives and penalties to prevent companies from shedding jobs, we should instead focus on the redundant workers themselves, as most Scandinavian countries and the Netherlands do. In Denmark, when two large meat packing plants closed with a loss of over 1,500 jobs, the national “workbusters” program shifted into gear, providing about €400,000 in assistance to complement financial contributions by the former employer, to detect vacant jobs and new job opportunities and to promote the laid-off workers to potential new employers. The company, with government assistance, published a leaflet, which it sent to 500 companies in the region, outlining the skills and ambitions of the former employees and providing information on the program and other employers’ experiences with it. Within 10 months, 98 percent of them had found new jobs, at a cost of around $350 per person.

When the Swedish energy company Vattenfall retrenched some 450 workers the company, with government support, set up an internal support organization to which each of the employees was reassigned to “work” full-time on finding new employment. Each person was assessed and assigned a tutor to develop a plan for training for a new trade or for self-employment or to pursue additional education. The company published a job journal on the company’s intranet to help workers find new jobs within the company, while all new internal recruitment requests had to go through the redundancy pool to identify a possible match. The program also topped up the salaries, at least temporarily, of those workers who accepted lower-paid jobs within or outside the company. The cost? About $20 million, or $50,000 per worker. A lot of money to be sure, but much less than the $400,000 in the Obama stimulus package.

These are not panaceas, and may not be applicable in all cases. But they are indicative of a flexible and innovative approach to unemployment that takes into account structural changes in the national and global economy and seeks sustainable solutions instead of quick fixes. Some may argue that the American system of government makes this kind of approach exceptionally hard, but even now President Obama may still have enough political capital to get something done. If he took on Davis-Bacon he would achieve the kind of bipartisanship he claims to want. But that would take extraordinary political courage and leadership of a kind the President so far has not exhibited.

Posted 02-24-2010 2:25 PM by Charles Krakoff
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