The immediate crisis confronting the U.S. economy is the jobs deficit, not the budget deficit.
Nearly 14 million Americans are unemployed, another 8.4 million are working part time because they cannot find full-time jobs, and yet another 2.8 million want a job and are available to work but have given up an active search. At 64 percent, the labor force participation rate is lower than it has been in nearly three decades.
The magnitude of this jobs crisis we’re in is best measured by the jobs gap—the number of jobs the U.S. economy needs to add in order to return to its pre 2008-2009 employment level and absorb new entrants to the work force since then. The jobs gap at the end of August was more than 12 million jobs. Even at double the rate of employment growth realized during the last year, it would take more than 12 years for the U.S. economy to close this gap. The U.S. labor market, long admired for its flexibility and strength, is badly broken.
Most American jobs are in the private sector, and private sector jobs have in fact been growing for 17 consecutive months; indeed, the private sector added about 1.8 million nonfarm payroll jobs during the last year. This pace of job creation is faster than during the previous recovery in the early 2000s and in line with the recovery of the early 1990s.
But there’s one major problem: Private-sector job losses were more than twice as large in the recent recession as in the previous two, and job growth has fallen far short of what is necessary to offset these losses. In addition, public-sector employment has been declining in this recovery—this in contrast to other postwar recovery periods, in which such employment has increased. We’ve lost 550,000 public-sector positions in the last year alone, making the jobs crisis even more severe.
Since the private sector creates (and eliminates) most jobs in the United States, and since budget constraints will likely mean more painful cuts in public-sector employment for the foreseeable future, Americans are understandably looking to business for solutions to the jobs crisis. To uncover the business solutions that could work, however, we first must acknowledge the fundamental cause of the problem: the dramatic collapse in aggregate demand that began with the 2008 financial crisis and that triggered huge job losses.
Even with unprecedented amounts of monetary and fiscal stimulus, the recovery has been weak because consumers have curbed their spending, increased their saving and started to reduce their personal debt. And they still have a long way to go. Business surveys confirm that for both large and small companies, the primary constraint on job growth is weak demand, not regulation or taxation. In the apt words of a small business owner, “If you don’t have the demand, you don’t hire the people.”
So what can the business community do to boost demand and job creation?
It can convince Congress to establish a National Infrastructure Bank and pass a multi-year surface transportation bill to boost infrastructure investment. And while it’s at it, business can work with the Obama administration to reduce multi-year delays in the approval of infrastructure projects that would otherwise create tens of thousands of good-paying jobs in the next few years.
It can partner with the Obama administration to achieve the target of doubling exports, supporting 2 million additional jobs, within five years. Securing congressional passage of the three pending trade agreements, combined with meaningful trade adjustment assistance for workers displaced by trade, would be a major step toward this goal.
It can work in partnership with federal, state and local governments to encourage the retrofitting of commercial buildings to improve their energy efficiency—a 20-percent improvement would save business about $40 billion a year on utility bills, money that could be used to hire and train workers.
It can finance partnerships with colleges and universities to provide workers with the skills needed for the jobs that are currently available and for the jobs that are most likely to become available as the economy continues to recover. These include jobs that require high levels of science and technology skills, such as engineering jobs that are currently unfilled because of a national shortage of engineers, as well as jobs that require community college training in specialized areas like manufacturing, clean energy, tourism and health care.
In his recent column for the Washington Post, Professor Michael Useem challenged business leaders to focus not just on what is required for the success of their own companies but on what is required for the success of the national economy. Members of the President’s Council on Jobs and Competitiveness, a private-sector advisory group in which I participate, , are responding to this challenge.
Yet even with innovative ideas and commitment, the business community cannot boost aggregate demand by the amount needed to close the jobs gap. That requires appropriate macroeconomic policies. What should the federal government do? It should extend unemployment benefits and link them to training programs as many European countries do. It should extend the payroll tax cut for employees enacted at the end of 2010 and it should add a payroll tax cut for employers on new hires. Payroll tax relief should be maintained until the unemployment rate falls to 6 percent.
The 10-year yield on U.S. Treasuries has fallen below 2.5 percent, the lowest it has been since the 1950s. There are numerous economically justifiable, demand-generating investments the U.S. government should make in infrastructure, research and education that would pay a higher rate of return and would create jobs now, while also laying the foundation for faster growth in the future. With nearly 25 percent of mortgages under water, a record number of foreclosures and historically low mortgage rates, the government should also explore new ways to make it possible for more households to refinance their mortgages. Refinancing could put tens of billions of dollars of spending power into the economy.
Additional fiscal measures like these would boost demand and job creation. And yes, they would also add to the fiscal deficit. But the most important driver of the deficit in the short run is weak tax revenues, reflecting weak economic performance; and the most effective way to reduce the deficit in the next few years would be putting people back to work. Every one percentage point of growth adds about $2.5 trillion in government revenues.
But even strong growth will not solve the long-run deficit problem. That will require a multi-year balanced plan of spending cuts and revenue increases. That’s why Congress should pair such a plan with temporary fiscal measures to boost job creation–and pass both as a package now. Approving a deficit-reduction plan now but deferring its starting date until the economy is near full employment would reduce the danger that premature fiscal contraction will tip the economy back into recession. It would also alleviate investor concerns about the creditworthiness of the U.S. government, concerns that have been aggravated by recent political brinkmanship over the debt limit and the resulting S&P downgrade.
Unfortunately, the odds that the United States will get the fiscal policy it needs—a combination of countercyclical support now and balanced deficit reduction later—are low. And the odds that Congressional gridlock will increase uncertainty, undermine confidence and endanger the faltering recovery are high. These odds are not good for business, nor are they good for the millions of Americans who need a job.
Laura D’Andrea Tyson was the chair of the Council of Economic Advisers and the head of the National Economic Council under President Clinton. . She is currently a professor at the Haas School of Business at the University of California, Berkeley, and a member of President Obama’s Council on Jobs and Competitiveness.
More from On Leadership on restarting America’s jobs engine:
Bill George: Enough talk about jobs—where’s the action?
Michael Useem: Revising investor capitalism’s mantra
Katherine Tyler Scott: A moral imperative on unemployment