Category: U.S. Workforce Trends

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.

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.

Corporations and Their Tax Breaks

So, how are corporations using their tax breaks? 

Answer A. To actually hire more of the unemployed workers whose neighbors are paying for the tax breaks?

Answer B. To replace more U.S. workers with machines and hire more workers in the emerging markets around the world that all are competing for?

This question should be making a lot of policy makers a bit nervous!

—————-

“To the extent they are hiring, companies like 3M and General Mills are adding more people abroad than domestically. [emphasis added] Connie Pautz, a spokeswoman for Hutchinson Technologies, which will cut about 600 people — or nearly half its Minnesota staff — over the next 12 months, said the company had automated much of its operations. ‘So we don’t need as many people,’ [emphasis added] she said.”

Motoko Rich, Encouraging Numbers, at First Glance,  New York Times, May 13, 2011 (May 14 print edition).

“Still, consumer spending in the United States has been surpassed by business spending.  ‘The recovery, such as it is in the United States, is really a commercially driven, as opposed to a consumer-driven thing [emphasis added],’ Timothy H. Murphy, the chief product officer for MasterCard, said at a recent investor conference.”

Christine Hauser, Recovery Seen in Rising Use of Credit Cards, New York Times, May 13, 2011 (May 14 print edition).