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When the government released its latest jobs report last week, economists were initially cheered because it showed that the nation's unemployment level had dropped much more sharply than anyone expected.
But that cheer immediately turned into concern when the report also revealed that the U.S. economy created only 36,000 new jobs in January. That's so far below the norm for this stage of an economic recovery that it would take us 10 years to put back to work all the folks who have lost their jobs since 2007.
In short, it's going to take a decade - and probably more - for normalized job growth to return to the U.S. economy.
Something has gone very wrong with the U.S. job-creation machine. Economists have been trying to solve this puzzle for more than 30 years.
And we found the answer.
Doomed If You Do, Doomed If You Don't
Most investors are familiar with at least a paraphrased version of the observation made by George Santayana, the philosopher and writer who stated that "those who cannot remember the past are condemned to repeat it."
While we definitely want to avoid the mistakes of the past, there are also some lessons we should embrace - particularly given the anemic outlook for new-job growth this country is right now facing.
Indeed, if you want to see what should be happening right now, take a look at how the nation's economy rebounded from the 1982 recession - the last downturn that was as deep as this one.
In October 2009, the U.S. unemployment rate peaked at 10.1%. In the 15 months that have followed, the jobless rate has fallen to 9.0% and 930,000 jobs have been created.
On the other hand, during the 15 months that came after the U.S. jobless rate crested at 10.8% in November 1982, it fell by 3.0 percentage points to reach 7.8% and 4.712 million jobs were created.
In other words, the policies that were established as a result of the 1982 recession were five times as effective in creating new jobs as those that are currently being followed.
If you conduct a side-by-side comparison of the two sets of policies (1982 vs. today), there is one moderate similarity and two glaring differences.
The similarity is that, in both cases, the U.S. federal government was running a budget deficit that was described at the time as dangerous.
This time, however, the deficit has been much deeper, having twice peaked at about 10% of gross domestic product (GDP) - first in the 12 months through to September 2009 and again (projected) in the current year that ends in September 2011, with a slight dip in the year in between.
During the 1982-84 recession - in the fiscal year that ended in September 1983 - the budget deficit peaked at 6.3% of GDP. In any case, the resemblance between the two policies is close enough that excess fiscal "stimulus" is unlikely to have been responsible for the lack of job creation this time around.
Things Are Different This Time - Unfortunately
The financial crash that preceded it may explain the exceptional depth of this recession, but it certainly doesn't account for the pathetic job creation that we've seen since. Indeed, the aforementioned 5-1 job-creation ratio seems excessive for a financial crash that is already two years in the past.
And the earlier period was not without some major financial difficulties of its own. For instance, the 1980s saw the collapse of the First Pennsylvania Bank and the near-collapse of most of the savings-and-loan (S&L) industry, while 1984 saw the collapse of the giant Continental Illinois National Bank.
There are, however, two glaring differences between the policies being pursued now and those of the 1980s.
First and foremost, the budget deficits of the 1980s primarily reflected tax cuts reducing the marginal rate of tax on upper incomes. Today, however, they mostly represent "stimulus" spending and other public-sector commitments.
Then there's monetary policy. In the 1980s, monetary policy was exceptionally tight, with high real interest rates. Today, however, it is exceptionally loose, with short-term interest rates persistently below the inflation rate.
When examined closely, the gap between the fiscal policies of the 1980s and those of today may not have made much difference to the disparate employment outcomes.
Under current U.S. President Barack Obama, the additional federal spending certainly diverted resources into unproductive sectors.
In the early 1980s, starving the small-business sector helped finance the major defense buildup (which, as a former global merchant banker, I would argue was equally unproductive economically). And the 1981 tax cut was partially reversed in the following year. It seems unlikely that the moderate differences between the two eras' fiscal policies can have resulted in such a huge change in employment outcome.
With monetary policy, however, we are on firmer ground.
The Answer to an "Unsolved Mystery" - of 30 Years
In the early 1980s, interest rates were exceptionally high; today (at least since 2008), they have been exceptionally low.
On the other hand, productivity growth - which is actually labor productivity growth (as in the growth in output per man-hour) - is unexpectedly high today and was unexpectedly low in the early 1980s.
These two factors are connected.
Very high interest rates make capital expensive, and therefore divert resources into hiring more labor. As a result, those high rates produced faster job creation after the 1982 recession.
Conversely, the extremely low interest rates we see at present make capital very cheap, and therefore prompt businesses to invest in extra equipment. That helps companies save on labor costs, and helps boost corporate profits, but produces very sluggish job growth in the overall economy. (We saw fairly sluggish job growth in the post-2001 recovery, also.)
In short, what we've done here is to solve a mystery that has puzzled economists for 30 years.
The decline in productivity growth in the 1970s and 1980s was not due to any defect in economic policies, but simply to the high cost of money, which diverted resources from capital into labor.
Similarly, the cheap-money environment that's existed since 1995 - and particularly since 2008 - has produced an apparent spurt in productivity growth, as extra capital is used to save labor.
The result: The fast job growth that we saw after 1982 has been transformed into slow job growth today.
Back in 1984, Ronald W. Reagan ran for re-election on a platform of "Morning in America" - credible because of the huge job growth the country experienced in the preceding two years.
Today, unfortunately, the American worker must struggle through the economic equivalent of a "polar night" - a protracted stretch of darkness that seems like it's never going to end. But unlike the polar nights of Alaska, which last six months, workers are looking at an economic variant that will last for years.
That dismal outlook is the fault of the low-interest-rate policies of U.S. Federal Reserve Chairman Ben S. Bernanke. And until those policies change, there won't be a new dawn - and definitely very little sunshine - on the U.S. jobs front.
The problem is a simple one to understand - how long can you keep working, at your current (or even a higher) salary, so that you can save enough money to safely retire? With the U.S. deficit, the uncertain economic outlook, and companies looking to cut all the time, that's not an easy question to answer.
But there is another solution - just cut the amount of time that you require to amass your retirement nest egg.
In fact, cut it in half.
By doing so, you reduce your risk. And if you end up working longer than you'd planned, this new scenario will actually help you boost the size of your next egg.
That's all fine and dandy, you're no doubt asking by now: Just how do I cut in half the time that I need to save for retirement?
Find out by clicking here to read a report that details this strategy.]
News and Related Story Links:
- The Los Angeles Times:
Job growth remains sluggish, though unemployment drops to 9%. - WikiQuote:
George Santayana. - Amazon.com:
"This Time is Different: Eight Centuries of Financial Folly." - HistoryCommons.org:
First Pennsylvania Bank Gets Aid. - Wikipedia:
The Savings-and-Loan Crisis. - The Wharton School Special Report:
The Collapse of Continental Illinois National Bank and Trust Co: The Implications for Risk Management and Regulation. - Harvard University Department of Economics:
Kenneth Rogoff Bio. - InvestorWords:
What is Monetary Policy? - WhiteHouse.gov:
Barack Obama. - Wikipedia:
Polar Night. - WhiteHouse.gov:
Ronald W. Reagan. - Money Map Report:
Special Retirement Strategy Report.
You do not know what you do not know,I.e., that there was a massive business improvement effort in the 80's and 90's in various forms bit mostly TQM,driven by Japenese dominance and horrible US quality products.And not just GM! I know you will not understand but I was a prime mover in a Dow 30 company that saved billions with this approach.The media,economists and wall street never understood this.And stops at productivity rather than the next step- improvement process and not just computers.T he Deming chain reaction – work on quality,especially customer,and costs drop,productivity improves,market share goes up. We added and you will have happy,dancing employees. Productivity is an output!
I tend to agree that low interest rates divert resources to capital instead of labor. The problem is that all politicians are convinced that we must give businesses every break possible including lower taxes. Lower taxes, it seems, does the same as lower interest rates. In 1982, and even later, tax rates were higher than proposed today.
Lower interest rates also decrease consumer spending. I believe businesses expand when there is demand for products and services.
I have a question on MARTIN HUTCHINSON, Contributing Editor, Money Morning, comment:
The US has been exporting jobs overseas to exploit lower labor costs; however, no mention of this expanded globalization of labor is mentioned in the report. Why not?
Moreover, lower labor costs in emerging markets is probably going to persist for a long time. What is the solution to the fundamental loss of jobs to other countries?
Sorry folks, No cigar! China has nuclear/electric powered, electric bullet train networks and their associated infrastructures, complete with ultra-modern nuclear powered factories, and whole nuclear/electric powered societies, all the folks there live on cheap, sustainable, veggies and rice diets, and produce, oil free, the very best, and the very cheapest products the modern world has ever seen.
America, straddled with the cost oil baron parasite nations, OPEC and the Saudis, and encouraged by powerful lobbyists to remain totally oil dependent, presents the situation with the "McMansion in the 'burbs by the factory door, pavement jungle, strip mall, gasoline guzzler cars, and fat, lazy indolent insolent, entitled, unionized labor" situation. Naturally Americans cannot compete at all!
America is locked in on a pattern of failure. Without revolt, rejection of oil for energy, and a Manhattan Project style turn-around towards Solar, Wave. Wind, Hydro, Tidal, Geothermal, Nuclear, Bio-mass, Humanure-to- methane energy revolt, America will remain on the same sorry-ass pattern until the last dollar is discounted to toilet paper values and Third World condition prevail. America can hardly expect massive change, even in unemployment numbers, without a massive change in their methodologies Einstein once said, to do the same thing over and over again, and expect change is the definition of insanity. America, all your paper-shuffling amounts to this!
This article stares straight up America's ass-hole and sees the blockage alright, but hardly proposes drastic, radical, out-of-the-box, untried sweeping, large scale, hard ass, fist in your face,or even effective remedies.
For the first time, I disagree with Martin Hutchinson. Martin, in the 1980's we did not all have computers and pocket sized cell phones. The revolution in computerization is responsible for the increase in productivity of labor, not the cheap cost of borrowing. I had an insurance agency in 1982 and I remember that in order to computerize my billing, I would have had to spend about $20,000 for a computer that would take all night to print out the monthly invoices. That is $20,000 in 1982 dollars. Today an insurance agency can buy a computer that will do the same thing in 15 minutes, for a fraction of a fraction of the 1982 cost. In 1982 it was cheaper for me to hire a clerk to type out the invoices than it was for me to buy a computer. And when fax machines came out, my courier bill dropped from about $200 per month to about $20 per month.
What’s the mystery? Just go to the store and compare the products “made in USA” to those imported. You’ll find that the domestic products are generally those made in highly automated facilities, such as molded plastic, automated machined parts, chemicals. Products that are labor intensive (e.g., with a lot of assembly or hand finishing) have mostly moved offshore. We’ve seen this trend for decades, but it has really picked up speed with the modern era of cheap capital.
But there is more to it than labor. Consumers became aware a century ago that their consumption was supporting labor abuses, environmental pollution, and unsafe products, so they applied pressure to both government and business to make changes to the regulations and standards of manufacturing practices. Consumers slowly accepted the increased prices in order to add a moral dimension to their consumption. But that moral dimension has been eroded as Corporate America has chosen to sidestep standards by outsourcing the manufacturing to less-developed countries.
We need to reinstitute morality to our consumption by applying the same standards to imports as we do to domestic products. Until we do that we are simply hiding the effects of our immoral consumerism in distant lands.
Elementary Watson… very very elementary thingking! :-)
Job Creation comes from small business. Small business is not hiring because of the looming tax increase and the healthcare tax increase. If you don't believe this ask any small businessman that employs 20 to 100 full time employees. Unless they are operating with ridiculously high margins (which most small businesses do not). They cannot and will not watch their money go to the government and end up closing their business. They're just trying to survive.
I have to agree with Jeff Pluim here. The advances in computer technology and automation have been the major difference between then and now. Remember too that the move from manufacturing to financial services meant the demise of expertise, infrastructure and a generation of graduates who did not see manufacturing industry as a viable career option. Unfortunately the Western way has been to create wealth on the basis of cheap off shore labour which, while making many people wealthy has destroyed the domestic labor market. This feeds through to lower domestic spending which effects retail and other service industries. Even with interest rates so low now lenders are unwilling to lend. Raising them will not make it any easier for industries to raise capital as people are fearful that any money lent will not be repaid as more and more businesses go broke.
1. Outsourcing killed millions of blue collar jobs.
2. Loss of high-paying jobs led to layoffs in service sector as well.
3. Improved robotics killed more jobs.
4. Government growth soaks up capital that would previously fuel private sector growth.
5. Globalization has led to wealth concentration, mostly in corporate headquarter cities rather than the hinterlands.
6. Big box retailers and franchises (Walmart, Costco, McDonalds, etc.) soak the wealth from smaller communities and export it to corporate cities. It doesn't return.
7. Illegals take jobs for lower pay than existing wage earners can afford to take; then remit cash beyond our borders, further hurting our economy.
8. Cash spent on imported merchandise is cash that previously fueled our economy; now enriches competing foreign workers and is rarely recycled here in America by those workers.
As usual, the comments from readers tend to trump the pap we have been getting from "experts" and Government spokespersons. We deserve more from our representatives than we have so far received. Its time things change to more openness and honesty from Govt. and Big business.
Uncle B is right in the idea that what we need is a new material that universially is able to intergrate into all levals of commerce undercutting the foriegn markets and enabling new markets to sprout. This is out there but fear is stopping the bankers from working outside the box and venture capital is conditioned on guarranteeing they get all the profit to spend making all of us the slaves of their sweat.
Others out there are never getting out of the box because they can't see thru the box. I for one am ready to throw in the towel if we don't start to declare where the boxes are and how the costs can be covered and let the inventors actually have some pie cause they made it.
Richard Lefcourt,
Point number 3) Improved robotics killed more jobs, is false. When an easier and cheaper way to do business is created it should be embraced. For example, the machines in auto plants that move parts around, assemble and paint the cars actually create more jobs.
Sure the guys who used to do these things lost their jobs but the demand for the machines now creates more jobs. People who need to maintain these new machines get jobs, plants that assemble the machines need to be built which stimulates construction, programers for the machines are hired, more metal is needed to make those machines which stimulates the mining industry.
My point is that yes some people will lose their jobs because of technology but many more will benefit. We can't stop technology just because a few people lost their jobs. If we did that then we'd still be using horse and buggy's because the rancher was going out of business. Progress, if we didn't have it then I wouldnt be able to post this message for the entire world to see.
Another in a long line of non-answers to this question. Your discovery is junk. But in light of needing help for our fellow Americans I will tell the answer. It is very simple so hang in there.
You have 2 problems
(1) The Citizens of the USA are highly taxed. Their foreign competition through the trade deals is not taxed. This is a FORMAL TRADE WAR by the US Government against its own citizens and it is working.
(2) The "Baby Boom" generation stomped on the cohorts following after them. They prevented them from obtaining Pensions, Retirements, Good Wages and even Sick Leave and or Holidays claiming it cost too much. Now the "Baby Boom" is selling at the realestate auction their properties and the bidders are the ones who were stomped on. At Auction the bidders are broke. The efforts to claim laziness have worked. With pennies in their pockets that is all that is bid on the dollar for value.
Now as long as the policy floods the market for labor and suppresses wages the bidding market for companies and for homes will be fairly flat. As long as the taxes are formed the way they are, the only thing that can happen is poverty.
There are the facts wake up people!
Interesting, but how can you say that "First and foremost, the budget deficits of the 1980s primarily reflected tax cuts reducing the marginal rate of tax on upper incomes. Today, however, they mostly represent "stimulus" spending and other public-sector commitments."
Most of today's deficit is due to the Bush tax cuts and the wars in Iraq and Afghanistan. Stimulus spending, which is temporary, pales next to those factors.
Congratulations. Your analysis required to go a little further than "cheap money will create productive investments" by asking one self "into what?". You suggest it went into labor cutting equipments.
I suggest to go even a little deeper.
Combined increased automation and the associated labor productivity increase (by regaining the old production levels with less people) should result in throughput increase and GNP growth. DID IT?
If it did you've hit it on the nail: cheap investment money can make the "economy" grow
but only entrepreneurs will benefit (provided they are exporting because internal demand is lacking due to a perduring high unemployment rate) and the gap between have's and have not's will unjustly (see further) grow.
Another example of a misplaced gvt investment when not controlled is one often suggested in Europe due to its high social benefit salary costs. Reducing this load does not necessarily induce employment increase. Because entrepreneurs often just keep the cash…
But, in the end, "delocalisation" is the ennemy. All products whose manufacture was delocalized because of low unskilled labor costs abroad should be charged heavy barriers when coming back into the developped country. These products meant to satisfy the unabatable appetite for consumption of our middle and upper classes are after all made available on the back of the planet's (evryone's) health because of the high energy consumption they entail with all their nonsensical transportations accross the globe.
Contrary to a widely held belief, tariff barriers are a proper way to regulate one's economy.
And they justifiably offset the difference in playing field between the gvts which offer decent working conditions and the others. To hell with the WTO and its "no barriers" goal.
Dr Michel V.J. Culot, MSME, PhD. Waterloo, Belgium
Very good article.Some additional remarks:
1.The US economy was more competitive.
2. The defense industry has been playing a very important role.
3. Japan, and Europe have been in a better shape.
4.US consumers were more confident
5.The role of information technology and the industries based on it started expanding fast.
Rubbish…the biggest factor and difference is that the labour intensive industries have all moved off-shore. Blind freddy can see that and would take twice the stimulous of that in the 1980's to create the service sector jobs today. Service sector jobs are first to go in any downturn.
Corporate america has sold its country out for an extra dollar, as have all western countries.
Not disputing this finding as a factor but demographics also play a part. The greying of the Boomers suppresses aggregate demand and will do so for years (decades ?) to come. It is unlikely that a single factor such as monetary policy is responsible on its own. It is more likely to be a confluence of factors that include monetary policy.
You miss the biggest part of the equation. THE UNIONS, Obama in response to the millions he has recieved from them. Obama has issued executive orders to heip unions take control of bussiness's. The unions at one time in our history were a good thing, but have morphed into the largest single killer of jobs in the US. If you put your heart and soul and every dime you can scrape together to build a business and then have the president tell you he wants to help the unions take control of your business, you simply keep the number of workers to a minimum and hire temps when needed. Only a small business person can understand this. But this is what is happening now.
As one commenter has already stated, no allowance is made in your calculations for the number of jobs created or transfered overseas by U.S. companies since the depths of the current recession. And I wonder how many of these full-time or part-time overseas jobs were created by stimulus money. Outsourcing was nowhere nears as significant in the early to mid-1980's as it is now. You need to factor this difference into your calculations.
Interesting theory, and I am sure it has some merit.
However I was watching an interview with Lou Dobbs a few months back, just before the election, where he was sharing his view on jobs. He mentioned how during the Bush administration well over 5 million manufacturing jobs left the country as factories closed in the US and opened in other countries. Those jobs are may be gone forever, unless US firms decide to invest in the US.
In the 80's it was as simple as hiring people back into US factories as the economy and work expanded. Now there are fewer factories to employ people, and as the economy expands the hiring is elsewhere. I am certain this at least part of the picture.
One of the main problems that I am looking at is that we as american's are using our money to buy things made in China when we should be thinking that every dolar that we spend on things made in China all we are doing is sending our money to China which in the long run creates jobs for China and not in the US. If we are blaming the government for all that is happening with our jobs, we should start by blaming our selves for not buying american made products. No one is telling the american people to (buy american) that is one way to force these companies that went to another country to make more profits to think of what they are doing and in the long run they will start to come back to the US to produce their product. If we do this the job growth will start to decline and the economy will start to grow.
Interest rates may have some effect but I don't think a community organizer has the broad expierence required to run a organization as large and complex as the United States of America. Along with no experience I'm not sure he has the interest or will to do the obvious
As usual, you put a slant on the "discovery " of where the jobs went to a self-serving hypothetical rant about the debt problem. Obviosly this is a factor in many subtle ways,as is demographics and our poor educational and health delivery systems and our deteriating infrastucture problems in our once great country. However, there is 1 central point that you completely missed and is the root problem of all of the problems listed above and the methodical elimination of the middle class and that is the "exportation of highly payed manufacturing jobs from this country to other countries and the replacement of low paid service positions to replace the manufacturing jobs that were always ramped back up after a downturn. This time they are not there to provide the extra stimulas and job creation! Fair trade—NOT free trade is what this country needs!
Your "solution" is more of an oversimplification driven by partisan political views.
Deficit spending continued throughout the 80's, ending up with the downturn of the early 1990's. The national debt nearly tripled during the 1980s. The U.S. went from the world's biggest creditor to world's biggest debtor nation.
Also, during the 1980s corporations were not holding trillions of dollars in profits and government stimulus funds. CEO's made approximately 30 times the wages of working people. Today's big earners make nearly 300 times what working people are paid.
Also, during the early 1980's, international competition – especially from emerging markets – was nothing like today's global economic landscape.
There is a lot more that can be said on differences between the early 1980's and today.
Like I said, your solution is an oversimplification.
The real problem is that many Americans are lazy, unmotivated and looking for handouts. Also, many of us are arm chair warriors. People love to discuss these matters, but they won't take a stand and try to make real change.
Donald Trump said that Korea and China think we are a joke. He said he purchases products fom them and knows that they think we are a weak nation that is too stupid to stand up for iteslf. For example, Donald said we need to immediately tax all imported goods from China at a rate of 25%. He said this will allow American companies to compete.
Also, the government should not subsidize any companies that pay executives 300 times what ordinary Americans earn.
However, we are all like sheep who are dispersed when the sheppard is stricken. Why should the government listen to us. We never do anything but complain. We never take any action, other than voting for a diiferent party. By the way, both parties are the same guy.
as i travel around the world i see a lot of people that have to work for whatever pennies they can get, just to survive,most of them seem mentally and physically in better shape than most americans,do they have food stamps and gov,t handouts, i think not,they will survive,but this overweight economy won,t
Even if your comments on the low level of new job creation are correct, the figures given show how politicians love to praise themselves for anything going. Both the demographics and social policy have played their part. And for the next years will continue to do so. Counted as "unemployed" are only those who still receive benefits. Those made unemployed by the crash and still unemployed are now conveniently dropping out of the statistical radar, at the same time as the older baby boomers are retiring.
And still the unemployment rate is double digit.
Here in Gernamy, in spite of some banks catching New York influenza, "unemployed" are all those registered as seeking work, however long they have been unemployed. In the Munich area we at worst were around 6%, and now have through the winter had 4%. Looking towards the seasonal up-swing, we are approaching the "crisis level" forecast by Lord Beverige in his planning in 1943 of the UK's welfare state, where labour shortages start to stifle expansion.