Pending Trade Pacts Will Continue the Downward Trends in Number and Quality of U.S. Jobs

Pending U.S. – South Korea Trade Agreement

“Most strikingly, KORUS will open Korea’s service market to U.S. exports, allowing the United States to exploit its competitive advantages in financial services, education and information and communications technologies.

The agreement also will lead to increased imports from Korea, which in turn will help the United States achieve greater economic specialization. The likely effects of more specialization—and of increased Korean investment in the United States—include greater U.S. efficiency, productivity, economic growth and job growth. Meanwhile, U.S. investors will gain new opportunities in the increasingly active Asia-Pacific region.

KORUS supports market access for U.S. investors with investment protection provisions, strong intellectual property protection, dispute settlement provisions, a requirement for transparently developed and implemented investment regulations and a similar requirement for open, fair and impartial judicial proceedings.”

Pending U.S. – Columbia Trade Agreement

“COL-US improves the investment climate in Colombia by providing investor protections, access to international arbitration and improved transparency in the country’s legislative and regulatory processes. These provisions will reduce investment risk and uncertainty.

With considerable investments, Colombia would be able to compete with East Asia for these higher quality jobs, swaying people away from black markets and other illicit activities.”

Pending U.S. – Panama Trade Agreement

“Panama’s $21 billion services market for U.S. firms offering portfolio management, insurance, telecommunications, computer, distribution, express delivery, energy, environmental, legal and other professional services.

A fair legal framework, investor protections and a dispute settlement mechanism, all features of the PFTA, are almost certain to increase U.S. investments in Panama.”

All quotes from Mauricio Cárdenas and Joshua Meltzer, Korea, Colombia, Panama: Pending Trade Accords Offer Economic and Strategic Gains for the United States, Policy Brief Series, # 183, The Brookings Institution, July 2011.

———————–Comments———————–

About improved investment climates.  These agreements add three more places in the world where U.S. corporations can invest with confidence.  U.S. banks, mutual funds, and other financial institutions will find it easier to use the money in our savings accounts and retirement funds to expand economic activities and create jobs outside the U.S.

By some estimates, U.S. corporations are sitting on about $2 trillion in cash and banks have returned to profitability, so a lot of money is sitting idle, waiting for profitable investment opportunities.  Economists have noted that there is considerable evidence that the growth of consumer demand is too anemic in the U.S. to spur much investment here, so the investment eye is on the emerging markets of the world where real incomes and consumer demand are growing.

About increased access to service sector markets.  The list of U.S. industries that will benefit include industries that are critical to increasing a nations competitive position in the world economy, and thereby nourish economic growth and enterprise profitability.  Thus, expansion of service sector sales will complement U.S. capital investment in South Korea, Columbia, and Panama, helping to insure the profitability of both U.S. and local investments and thus helping to insure that competitiveness and job growth increase in those nations.

About increased economic specialization in the U.S.  The impact of increased economic specialization on jobs in the U.S. will be a further narrowing of the base of industries and thus a further narrowing of the range of jobs available to U.S. citizens.  This means more workers will have to go through the emotionally painful, family disrupting, and financially costly process of being displaced and retrained for other work because their existing skills are no longer needed.

The record for career displacement and re-employment in a new industry is not good.  Far too many of the new jobs displaced workers end up with pay less and offer lower value in benefits.  Incomes and family welfare decline.

Likely Impact on Global Job Growth. Under existing global conditions of increasing numbers of competing businesses and stalled expansion of global consumer demand, large parts of the new investments to be facilitated by these trade pacts will very likely go into labor saving production, distribution, and management technologies.

Global productivity will increase, so jobs gained in South Korea, Columbia, and Panama will not be greater than the jobs lost in those nations from which South Korea, Columbia, and Panama win market shares.  More likely, the net effect on global employment will be negative.

Likely Impact on U.S. Jobs and Income.  Although jobs will be added in select U.S. industries, and thus in limited parts of the U.S., the net effect will be negative because profitability in sectors of the U.S. economy that have to contend with stronger competition from South Korea, Columbia, and Panama (and all the other nations where U.S. capital is nourishing productivity growth) will decline.  Investment in those sectors will further decline in response, putting more people out of work.

More people competing for work globally and more Americans competing for jobs in the U.S. can only put more downward pressure on U.S. wage and benefit levels.

Tax Cuts, Stimulus Spending, Low Interest Rates Do Little to Create Jobs

“In carrying out its QE2 purchases, the Fed had to follow standard operating procedure for “open market operations”: it took secret bids from the 20 “primary dealers”authorized to sell securities to the Fed and accepted the best offers. The problem was that 12 of these dealers — or over half — are U.S.-based branches of foreign banks (including BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and others), and they evidently won the bids.

…According to Scott Fullwiler, Associate Professor of Economics at Wartburg College, the money multiplier model is not just broken but obsolete.”

Ellen Brown, Why QE2 Failed: The Money All Went Overseas,  Huffington Post, July 11, 2011,

In the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now. … in years when the top marginal rate was more than 90 percent, the average annual growth in total payroll employment was 2 percent. In years when the top marginal rate was 35 percent or less—which it is now—employment grew by an average of just 0.4 percent. … if you ranked each year since 1950 by overall job growth, the top five years would all boast marginal tax rates at 70 percent or higher. The top 10 years would share marginal tax rates at 50 percent or higher.

Michael Linden, Rich People’s Taxes Have Little to Do with Job Creation, Center for American Progress, June 27, 2011,

“Of particular note, we find that fiscal policy is less effective in lifting recovery growth in more open economies. In open economies, fiscal stimulus may spill over to higher growth in partner countries by increasing demand for imported foreign goods and services. This finding suggests the need for more coordination in fiscal stimulus across countries, so that the spillover to other countries is offset by equivalent increases in foreign demand for domestic goods and services.”

Cerra, Valerie, Ugo Panizza, and Sweta C. Saxena, International Evidence on Recovery from Recessions, Working Paper, International Monetary Fund, 2009.

———————–Comments———————–

In the current U.S. open economy environment (put into place over decades of pro-globalization policy shifts) neither larger tax cuts for consumers nor larger tax cuts for corporations nor lower taxes for the wealthiest Americans nor Federal Reserve actions to lower borrowing costs for banking institutions have had the positive U.S. job growth effects we desire.  Millions of working people are unemployed and most U.S. families are experiencing either stagnant income levels or falling incomes.

  • Consumers do buy more with their tax cuts, but a large part of the job creation effect goes to other parts of the world because so much of what we consume is imported
  • Banks do increase their lending, but a large part of the lending is used to finance projects outside the U.S.
  • The corporations do use their tax breaks to increase investments in new plants and facilities, but an increasingly large part of those investments go into emerging market areas of the world
  • Wealthier Americans do use tax savings to increase stock holdings, and thus contribute to the pool of investment funds, but more and more the wealthy purchase stocks in corporations that are expanding operations in emerging markets because that is where the highest returns are being obtained.

U.S. job creation and income distribution policies are out of date.  They were designed for the affluent manufacturing nations operating in the much less economically integrated world of the mid twentieth century.  Major changes in the U.S. policy approach to creating jobs and distributing income will be required to put things right for U.S. families.

U.S. Private Sector Investment Strategies Do Not Favor U.S. Employment Growth

“At GE, our success is predicated on accurately assessing the dynamic forces that are reshaping our world and having a strategy in place to make the most of the opportunities they present.”

Our Viewpoints, GE Website

“International revenues from Industrial (ex NBCU) were $13.4 billion, up 23% representing 59% of total Industrial revenues. GE revenue for the Industrial segments accelerated in growth regions, including double-digit increases in India, China, Southeast Asia, Africa, Russia, Australia, Canada, and Latin America.”

GE Corporation Press Release, July 22, 2011, GE Website

According to a Fox Business story, GE had a worldwide workforce of 287,000 at the end of 2010, of which the U.S. share was 133,000.

Bob Sechler, GE’s Worldwide Workforce Down 5.6% In 2010 At 287,000, February 25, 2011, Dow Jones Newswires.

———————–Comments———————–

Burdening the U.S. private sector with creating enough job growth to achieve something close to the frictional rate of unemployment (unemployment due mainly to brief periods of unemployment between jobs) is misguided in the current world economic context.

First, U.S. corporations are legally required to pursue the investment strategies that best serve their stockholders.  Many more opportunities for profitable investments in facilities and workforces are emerging in other parts of the world than in the U.S.

Second, neither U.S. corporations nor other U.S. businesses are legally required to create jobs for U.S. workers, except to the extent they have entered into contractual agreements to do so.

Private sector job growth must be supplemented by government programs to produce public sector jobs and/or to reduce demand for jobs by engaging potential workers in paid alternatives to private sector employment.  Such activities might include paid educational leaves, paid parental leaves for up to a year, career change leaves, longer annual vacations, etc.

Only by creating such a combination of socially recognized entitlements to income can we restore the U.S. middle class to good financial health and again produce success in reducing the number of Americans living in poverty.

Global Investments in Agriculture Technologies and Growing Demand for Paid Work

Today, a single person driving a huge $400,000 combine, burning 200 gallons of fuel daily, guided by computers and GPS satellite navigation, can cover 20 acres an hour, and harvest 8,000 to 10,000 bushels of wheat in a single day.”

 Christian Parenti, Reading the World In a Loaf of Bread: Soaring Food Prices, Wild Weather, Upheaval, and a Planetful of Trouble.

“MOLINE, Illinois (May 18, 2011)  – Deere & Company said today it will build a new manufacturing facility in northeast China to support the increased demand for large agricultural products in the region. The factory will build mid- and large-sized tractors, sprayers, planters and harvesting equipment. Deere said its initial outlay for the project is approximately $80 million.”

John Deere Press Release, May 18, 2011.

“All business is local. To understand and respond to our many customers’ needs and requirements worldwide, we must live where they live. Work where they work. That’s why John Deere reaches out across the world with factories, offices and other facilities in more than 30 countries…”

John Deere web page, Worldwide Locations http://www.deere.com/wps/dcom/en_US/corporate/our_company/about_us/worldwide_locations/worldwidelocations.page?%09%09%20%09

———————–

Displacement of families from agricultural lands by agricultural businesses with machines has long been a key driver of the demand for jobs in cities and suburbs, and continues to be in some areas of the world.  Agricultural workers, often non-paid family workers, whose work is taken over by machines migrate to cities and seek jobs in the manufacturing, service, and government sectors.  From growing food and feeding themselves, families on agricultural lands become dependent on jobs for the money to buy food produced by the remaining few workers on factory farms.  Without jobs, they become dependent on public and private handouts.

Despite the world’s need to produce more and more food for a population projected to reach 10 billion by 2100, agriculture will not offer more job opportunities.  Instead, the world’s agricultural regions will send even more millions to cities in search of paid work.

Economists Discover Consumer Demand Problem. It’s About Time!

“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.”

Phil Izzo, Dearth of Demand Seen Behind Weak Hiring, Wall Street Journal, July 18, 2011

(See my post on July 14 for an estimate prepared by Moody’s Analytics of the dollars that will be drained from U.S. consumer demand by the end of this year because of changes in government programs.)

The political fight over the deficit is off target.  The political fight over the size of government is off target.  The traditional public-private system for equitably distributing the wealth we produce (a substantial level of high wage private sector employment supplemented by government employment and targeted income entitlements) is badly broken because the private sector can’t create enough jobs, much less enough quality jobs for the old system to work.

Given investment trends now at work in the world economy, and given the weakness of the labor movement, the U.S. private sector will necessarily play a much smaller role in equitably and rationally distributing the vast amount of wealth produced in the U.S. every year than it did in the past.   It will not produce enough jobs and high enough earnings to do the wealth distribution job that must be done.

Government will have to play a bigger role or we will have to give up a lot more economic security and wellbeing than we already have.

Unemployment Insurance Initial Claims Not a Guide to Unemployment Trend

Most news stories on the reduction in Unemployment Insurance (UI) initial benefit claims in recent weeks, suggest that this decline indicates better unemployment news in coming months.  Such speculation is unwise.

Chart-UI Recipiency Rate Trend
This chart shows the proportion of total unemployed filing for UI benefits, commonly referred to as the recipiency rate. (Data source: U.S. Department of Labor, Employment and Training Administration website. http://www.ows.doleta.gov/unemploy/content/data.asp)

The UI initial claims trend is not a very accurate indicator of the unemployment rate trend.

  • With budgets tight and competition for investments among states intense, some states have been changing their UI eligibility rules, some have been easing UI coverage requirements for certain industries, and some have been reducing UI tax rates.  Such changes produce increases and decreases in initial UI claims independent of the direction the unemployment rate is taking.
  • Characteristics of the newly unemployed can also have an impact.  State UI eligibility rules tend to favor certain categories of workers (e.g., full time workers) and disfavor other categories (e.g., seasonal, intermittent, and part-time workers), so initial claims will rise and fall depending on which categories of workers are seeing the greatest change in unemployment rates.

Bottom line: reductions in initial UI claims in the last few weeks should be ignored for now.  There are no signs that U.S. investors are about to lose their growing interest in profitable investment opportunities in Brazil, Russia, India, China, and other emerging markets.  Nor are they losing their interest in expanding business relationships and partnerships in parts of the world where labor and regulatory costs are lower.

Private Sector Role in U.S. Job Growth Overstated

“Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics… By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.”

Motoko Rich, Economy Faces a Jolt as Benefit Checks Run Out, New York Times, July 10, 2011

“In terms of jobs, between 2000 and 2006, the number of federal contract workers increased from 1.4 million to 2.0 million. This compares to 2.7 million federal employees. In short, 43% of all employees who do the government’s work are actually employed by private businesses.”

Kathryn Edwards and Kai Filion, Outsourcing Poverty: Federal contracting pushes down wages and benefits, Economic Policy Institute, February 11, 2009.

———————

During the last half of the twentieth century, U.S. unemployment was kept generally low by a combination of private sector investment flows, the expansion of public sector employment at all levels of government, public sector investments in programs that increased private sector hiring (like the interstate highway system, Medicare, Medicaid, and the space program), and public sector investment flows into programs that diverted large numbers of potential workers from the private sector labor pool for varying periods of time (funding to increase high school attendance, programs like the GI Bill for diverting workers into educational activities, the federal welfare system, and generous government pension programs and increased funding for Social Security that intice older workers to leave the workforce and to leave earlier).

Taken together, all these elements of government spending substantially reduced the number of workers who were seeking jobs but could not find them – the definition of unemployment.

The private sector did only part of the work of reducing unemployment in the past and it can only do part of the work now.