Mystery of the Missing Jobs

The U.S. economy is expanding nicely; corporate profits are strong; Wall Street is robust enough that some economists are beginning to worry about another "asset bubble." In short, it's a time when American companies ought to be optimistic about expanding their businesses, building new factories . . . and, yes, hiring more workers.

So where are the jobs? That remains the great economic paradox of this election year, and it deepened Friday with the release of another set of miserable employment numbers. The Labor Department reported that the economy added a paltry 21,000 jobs in February -- and that's at a time when low interest rates and solid economic growth ought to have investors positively roaring with "animal spirits."

But it isn't happening yet, on the jobs front. The U.S. economy continues to experience, as the Democrats have been arguing, an essentially "jobless recovery." As one corporate economist bluntly told the New York Times, "The numbers aren't lying."

But what are the numbers telling us? Why do corporate managers remain so cautious about adding jobs in the United States? Are we seeing evidence of structural changes in the U.S. economy, and if so what should policymakers do in response?

The jobs issue deserves a searching debate in this year's presidential campaign -- not the kind of protectionist rhetoric that the two Democratic finalists, John Kerry and John Edwards, served up during the primaries. Their argument that America can create more jobs by escaping the rigors of the global economy isn't just wrong, it is potentially dangerous to U.S. workers, who would be ravaged by the resulting economic downturn.

I can't begin to answer the jobs question, but I can provide some shreds of anecdotal evidence, drawn from recent conversations with business executives in the United States and abroad.

My sense is that investors and managers are still traumatized by the shocks to the system of the past three years -- a chain of events including the collapse of the high-tech bubble; the attacks of Sept. 11, 2001; a global war against Islamic terrorism; and the fallout from the Enron scandal.

These shocks, taken together, have made investors more risk-averse and cautious. Economists would define it as a change in the mental "discount" rate by which investors calculate how big a return they'll require in the future to part with their cash today. And at the very time investors are looking for this higher risk premium, prospective annual returns have settled back toward historical levels from the 20 percent-plus rates of the bubble years.

Adding to this culture of caution are the regulatory changes that followed the tech collapse, the Enron fiasco and other Wall Street scandals. Hoping to restore investor confidence, Congress passed the Sarbanes-Oxley bill, which required corporate chief executives, in effect, to take personal responsibility for what their underlings were doing in complicated financial transactions. That sounds great in principle, but in practice it has added to the wariness of CEOs, and probably reduced the job-creating dynamism of the economy.

One unintended consequence of the new rules is that they make it costlier for small start-up companies to go public. Ann Winblad, who is one of the principals of a big San Francisco investment firm, Hummer Winblad Venture Partners, estimates that for a company with $50 million in revenue, the extra cost of compliance could total $1 million to $3 million annually -- when you add in the three required independent directors, the outside auditors, the internal auditors, the directors' and officers' insurance, and other costs.

Certainly the venture capital business reflects the new caution: Where 629 venture funds raised a total of $105.4 billion in 2000, last year there were just 113 funds that raised $10.8 billion. Warren Buffett, the iconic figure of American capitalism, expressed the new wariness in his annual report released Saturday. Noting that he's sitting on a company-record $36 billion in cash, he explained: "Our capital is underutilized now. . . . It's a painful condition to be in -- but not as painful as doing something stupid."

It may seem unfair for job creation to be held hostage to the confidence level of corporate executives, but that's part of life in a capitalist economy. President Bush may try to cajole investors with tax breaks, John Kerry may propose new carrots and sticks to make them invest in job-creating ventures, and Alan Greenspan may continue to offer them virtually interest-free loans. The 2004 campaign should debate which mix of policies will be fairest and most effective.

But the reality is that until the post-2000 shocks wear off and real confidence returns, none of these prods are likely to solve the problem of jobless growth.

davidignatius@washpost.com