February 13, 2013

Robert Shapiro is chairman of Sonecon, an economic advisory firm based in Washington. He was undersecretary of commerce for economic affairs in the Clinton administration.

As President Obama said Tuesday: The hardest economic challenge facing the country doesn’t involve tax reform or fiscal cliffs. The critical question is: What has happened to the strong job creation that was the economic norm in the United States from the 1950s through the 1990s?

For many on the left, the blame lies in slow growth. If only demand were stronger — cue, more stimulus — jobs would come back in large numbers. For many on the right, the fault lies in deficits and regulation. As Sen. Marco Rubio argued in the Republican response to Obama’s State of the Union address, businesses will hire in large numbers again only if Washington will do less of everything. But analysis shows that over the past decade, neither stronger growth nor unfettered markets has been enough to prod U.S. companies to create jobs at anywhere near the rates seen in previous decades.

Weak job creation has dogged both the Obama presidency and that of his predecessor. Since the current recovery officially began 44 months ago, in June 2009, the number of private-sector jobs has grown, on average, 1.25 percent per year. These meager gains have confounded Obama’s economic advisers, whose forecasts in early 2009 show they expected a normal rebound in jobs after U.S. businesses shed nearly 9 million positions in 2008-09. But slow job growth appears to be the new norm: Over the first 44 months of the 2002-07 expansion, under President George W. Bush, private-sector employment grew even more slowly, expanding an average of just 0.72 percent per year.

Both records represent real and disturbing change. In the first 44 months of the expansions of 1982-89 and 1991-2000, the number of Americans holding private-sector jobs grew at average annual rates of 3.7 percent and 2.3 percent, respectively. The basic relationship between how fast the economy grows and how many new jobs businesses will create has undergone a sea change.

We can identify this change by comparing how many jobs would have been created under Bush or Obama had the economy expanded at the same rate of growth that occurred in the 1980s. In the first 44 months of the Reagan expansion, for example, gross domestic product (GDP) grew an average of 5.5 percent per year — compared with 3 percent per year over the comparable period of the Bush expansion. If the job-creation rate for the first 44 months of the 2002-07 expansion is adjusted for the strong economic growth over the same period of the 1982-89 expansion, job creation under Bush would have been higher — 1.3 percent as opposed to 0.7 percent. Much the same thing happens when job gains over the past 44 months are adjusted for the GDP growth of the early 1980s: The average annual rate increases would have been 2.8 percent, not 1.25 percent.

But those higher rates are still just a fraction of the rate of job growth in the 1980s. This tells us that even if growth accelerates in Obama’s second term, job creation will remain substandard — unless Congress and the president adopt policies designed to address this new reality.

The most powerful forces at work here are globalization and technology. As globalization has created tens of thousands of new businesses around the world, competition everywhere has intensified. The spread of information and Internet technologies across much of the global economy has also given consumers and businesses access to countless new outlets and suppliers, further intensifying competition. The result is that businesses have lost a lot of what economists call their “pricing leverage.” That means that when a firm’s costs rise — as they have steadily for energy and health care over the past decade — businesses cannot pass on all of their additional costs in higher prices. That, in turn, means businesses have to cut other costs — and they have started with jobs and wages.

What policies can help under these new conditions? On Tuesday the president suggested public-private institutes to develop new manufacturing technologies, access to training in advanced technologies and more funds for infrastructure. But the best approach would be to directly reduce the cost for business to create more jobs. Congress could, for example, permanently cut the payroll tax rate for employers and make up the difference for the Social Security trust fund with a modest carbon or value-added tax.

This new labor-market terrain also provides a new impetus to better control employers’ fast-rising costs of health coverage. Congress could strengthen provisions of the Affordable Care Act designed to slow health-care inflation. Start by expanding prevention programs and accelerating the shift to uniform electronic medical records. Even more powerful steps would include new rules and incentives for all providers to base reimbursements on results rather than services provided, and to adopt “best practices” that deliver the same results at less cost.

Sadly, the day has passed when U.S. businesses responded to strong growth by generating jobs for everyone who wanted to work. Over the past decade and two expansions, our job creation rate has fallen sharply compared with previous decades. Policymakers in both parties have to face this new reality and, with the president, devise approaches to actively promote stronger employment.

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