Saturday, July 2, 2011

Why the Old Jobs Aren't Coming Back

By: Michael spence

The Wall Street Journal

June 24, 2011

Many have expressed shock at the recent U.S. employment data. But 9.1% unemployment shouldn't be a surprise. To address the jobs challenge, we must stop pretending that this is only a difficult cyclical recovery. The root of the problem is structural.

During the two decades before the crisis of 2008-09, the U.S. economy added 27 million jobs, primarily in government, health care, construction, retail and hospitality. This employment growth was almost all in the "nontradable" side of the economy—sectors generating goods and services that must be consumed where they are produced. But several factors will depress these sectors. Government budget woes, a likely leveling-out of the dramatic growth in health-care consumption, and a permanent reduction in domestic consumption as asset prices reset downward and debt-financed purchases are reduced, will all have effects in the short-to-medium term.

The "tradable" side of the economy (which includes exportable goods and services) has its own set of issues. While finance, consulting, computer design and managing complex international businesses all fueled job growth for 20 years, these gains were matched by declines in the manufacturing jobs held by the middle class. The very things that propped up our tradable sectors through the export market—high growth rates in emerging economies and a more educated consumer class in those countries—have challenged middle-class U.S. employees on the job front. Emerging markets are now increasingly moving up the value chain with improved skills, and it's likely that higher-paying jobs—including design and even product development—will move abroad in ever greater numbers.

Multinational companies have benefited from these global supply-chain opportunities and from growing emerging-economy markets, but the effects for the U.S. have been mixed. Growth may be coming back slowly, but it is not bringing jobs with it.

A stimulus package that temporarily restores elements of precrisis demand is unlikely to generate the escape velocity needed to get out of the jobs hole. Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer.

Rebuilding the employment engine requires shifts in policy and process. On the policy side, we must expand the scope of the tradable sector. A short list of steps would include investments in infrastructure and education reform that emphasizes teaching productive skills, for example in advanced manufacturing sectors. Tax reform should aim for simplification and the elimination of biases against domestic investment for our multinational firms. It should also aim to help raise savings rates so we can finance our own investment. A value-added tax with an exemption for exports would enhance competitiveness. An energy policy focused on efficiency and security would create opportunities for investment and growth.

In terms of process, business, government and labor must identify what each has to offer and needs to help expand the tradable sector. What will it take to keep more jobs in the U.S.? We might have to accept a period of lower income growth in order to restore competitiveness.

A useful model is Germany, which limited wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries.

In addition, a broad public-private investment in advanced manufacturing and in energy- efficiency technologies can advance relatively high-income, capital-intensive job creation. Government co-investment can lower the private sector's cost and expand the employability of domestic citizens in the tradable sector.

These structural solutions won't work, of course, without a plan to restore fiscal balance. A sovereign-debt crisis will abort any recovery. Right now, however, the policy discussion oscillates between balancing the budget and supporting a fragile economic recovery—mixed with puzzlement that employment figures are disobeying the rules of a normal cyclical recovery. Having a credible five-year fiscal plan would help avoid an excessively rapid withdrawal of government expenditure and investment from the demand side of the economy.

Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice.

Mr. Spence, a 2001 Nobel laureate in economics, is the author of "The Next Convergence: The Future of Economic Growth in a Multispeed World," out last month from Farrar, Straus and Giroux.

Sunday, May 29, 2011

The Building Blocks of a GOP Agenda

BY: Daniel Henninger

The Wall Street Journal

May 26, 2011

Leading governors and members of Congress know them: entitlement reform, fiscal restoration and lightly taxed long-term economic growth.

The "smart money" says Barack Obama is cruising to re-election because of Republican disarray. Pick up a paper, visit a blog, turn on the TV or radio, and reports of Republican misadventure will engulf you:

Mitch Daniels just said no. Newt Gingrich says too much. On Tuesday, voters in New York's normally Republican congressional district 26, near Buffalo and Rochester, "shocked" the political world by electing a Democrat. The smart money now says NY-26 means that if the Republicans run on Paul Ryan's Medicare reform proposal, they risk losing the presidency.

The smart money is often stupid.

Standing against the tornadoes of political spin isn't easy. But if the Republicans will step back from these storms, they'll see that the GOP prospect is in better shape than they think. A clear and defensible agenda for 2012 is being assembled outside the presidential campaigns.

One Republican analyst of the GOP's NY-26 defeat said the takeaway is: "2010 is over." This is the opposite of the truth. That 2010 vote was the American public screaming at their elected officials to stop the country from hurtling toward fiscal and economic calamity.

They're still screaming. A Washington Post poll out yesterday buttressed this core concern: Voters across the spectrum say their prime worry is what happens if Congress expands American indebtedness beyond $14.3 trillion. In their wisdom, the people suspect what will happen won't be good. Their vote in 2010 was the basis for a genuine Republican reform movement.

Normally when the presidential entrepreneurs take over our politics, the parties recede. This means the parties end up yoked to whatever random, variable ideas their nominee patches together. The smoke-filled room has been replaced by hot-air trial balloons.

Something new is happening this time. Since 2009, the Republican Party's best members have been constructing the building blocks of an agenda distinct from what Barack Obama represents.

The most significant figure in this process is not Paul Ryan but Chris Christie, New Jersey's charismatic governor.

Before Chris Christie, nearly every Republican would bend to the conventional wisdom of doing deals with the public unions, raising taxes, and rolling debt obligations into the future. Chris Christie blew the whistle on this nonsolution. He gave the Republicans the courage to say the most basic truth in American politics: We are going broke. Chris Christie made the sources of fighting fiscal ruin popular, even cool.

Along with Mr. Christie, Govs. Bob McDonnell of Virginia, John Kasich of Ohio and Scott Walker of Wisconsin have made fiscal restoration the cornerstone of the new Republican Party. Mitch Daniels's appeal was that he was a member of this new movement.

Fiscal rectitude, of course, can be its own form of conventional wisdom, expressed by raising taxes to "balance" the budget. Last month, another significant Republican derided the tax-and-balance solution. The man who called this "root canal economics" is the Speaker of the House. This too is new.

When it came to pass that John Boehner would assume the speakership, one would have thought the party was inheriting Millard Fillmore. Instead, Mr. Boehner has been using his office to lift another building block atop the GOP's restored fiscal foundation—the primacy of the private sector.

A speech Mr. Boehner gave last month to the Economic Club of New York was an important defining statement. Mr. Boehner ran straight at what is probably the most unshakable conventional wisdom in politics: "The big myth of the current budget debate is the notion that in order to balance the budget, we have to raise taxes. The truth is we will never balance the budget and rid our children of debt unless we cut spending and have real economic growth. And we will never have real economic growth if we raise taxes on those in America who create jobs." No speaker has so categorically repudiated using taxes to bail out Washington.

To Paul Ryan fell the job of reshaping the heaviest stone of all—entitlements. For saying the entitlement status quo is fake and false, Mr. Ryan has earned ridicule from the current president and derision from Republican pragmatists who say he's destroying the party by attempting Medicare reform.

But without entitlement reform, these other GOP building blocks—fiscal restoration and lightly taxed long-term economic growth—are unstable. Notwithstanding the results in suburban Buffalo, an electorate that understands the danger of $14.3 trillion in debt surely can be made to understand by November 2012 the risk of many trillions more in future entitlement obligations.

The campaigns of Mitt Romney, Newt Gingrich and Jon Huntsman no doubt will still try to fashion a campaign from whole cloth. Tim Pawlenty, the former Minnesota governor, looks for now to be closest to building out from the structure of economic reform that the Republican governors, the House speaker and the Wisconsin congressman have been creating for their party.

This is still presidential politics. Some people will never vote for any of this, and the person atop the ticket matters. But Republicans despondent about an election 18 months off need to see they are not fighting the incumbent with nothing. A coherent opposition exists, one that fits with an electorate justifiably anxious about the future of what was once the world's most prosperous private economy.