It's Time for Washington to Get Serious About Job Creation

In recent weeks Federal Reserve Board Chairman Ben Bernanke has repeatedly expressed worry about the state of the U.S. job market.  His concerns are well founded.

Simply put, the last jobs report was dismal. Consensus forecasts of 148,000 new jobs collided with a reality of 36,000 new jobs. The unemployment rate fell only because half a million discouraged workers stopped looking for jobs and left the labor force.

The labor-force participation rate of 64.2% is the lowest it's been since 1984, and the employment to population ratio - at 58.4% - is the lowest it's been since 1983. Total employment in January 2011 was 139,323 million, which means 555,000 fewer workers had jobs than in June 2009, when the National Bureau of Economic Research deemed the recession over.

Even if the workforce had grown by the anticipated 148,000 last month, there still would have been 443,000 fewer people working than in June 2009. America's Great Job Creation Machine is sputtering at best.

More jobs were lost in the last recession than the three previous ones combined. Despite massive fiscal stimulus and expansionary monetary policy, jobs continued to disappear even when the recession was said to be officially complete; leaving roughly 8.8 million workers out of work. In contrast, in the ‘80s, ‘90s, plus the early part of the decade just passed, job growth resumed relatively quickly. Eighteen months after the end of the recession, employment had reached pre-recession levels.

Between dips in the ‘80s, the American economy was adding an average of more than 2 million net new jobs per year. The trend continued throughout the ‘90s, and from November 2001 to December 2007, more than 10 million net new jobs were created. Why then, is this recovery so disappointing?

To be sure, the nature, depth and breadth of the last recession was extraordinary. The bursting of a credit bubble entails long periods of deleveraging and weak demand. Additionally, discomfited investors focus on cost cutting rather than job expansion, and businesses learn to operate with fewer, more productive workers, not to mention improved production processes.

And while governments routinely direct their attention to stabilizing financial markets as a way of averting further disaster, in this latest iteration fear of recurring crises and the politics of blame supplanted policies to truly stimulate growth and job creation. "Temporary, timely , targeted" stimulus replaced true reform and caused the Obama administration to admit that there were no "shovels" and there was no "ready". Worse, protracted debates about health care, ambiguous signals about cap and trade and card check, and poorly designed housing finance programs were luxuries an anemic job market could not afford. Recent budget proposals to hike payroll and corporate taxes can only fuel uncertainty and dissuade hiring.

In actual fact, we are making no real progress in advancing the debate about job creation.

Of course Washington offers up platitudes about helping small businesses, the so-called engines of job creation, and without a doubt small businesses are integral to a healthy U.S. economy. But new business formation is similarly essential to job growth. Indeed, size is not the defining criterion, instead the age of a company is.

As was pointed out in a recent National Bureau of Economic Research study, "the younger companies are, the more jobs they create", and this is true irrespective of size. A ten year-old small business does not create more jobs than a large company of the same age. Rather, it is young, thriving firms that create 20% of new jobs in the U.S., and they are the most vulnerable to excessive paperwork, high taxes, and costly regulation.

Notably, new businesses are highly dependent on credit cards, home equity or local bank loans for their start-up capital. These sources of capital disappeared during the financial crisis, and new restrictions on consumer credit combined with prolonged weakness in housing make them unlikely to re-emerge.

In that case, private alternatives must be encouraged if vigorous business formation and experimentation are to be revived. Will one of the hundreds of agencies being created under the Dodd-Frank bill consider this issue?

Improving education is another laudable and necessary objective invoked by all our political leaders to prepare workers for the evolving job market. Sure enough, technology, globalization and competition portend much steeper returns to education that will punish the poorly trained.

Not discussed enough here is that public education is dominated by governments at all levels - local, state and federal - and it does not prepare students for an increasingly knowledge-based job market. If a business had treated its shareholders the way governments treat students, it would have been vigorously prosecuted, and rightly so. Nevertheless, the same approach is being replicated in job training programs with 47 different federal programs making no dent in the duration of unemployment. Today, 43% of workers have been unemployed for 6 months or more, almost twice the share of a year ago. The long-term impact on skills and wages is unquestionably enormous.

Meanwhile, workers who might find jobs cannot move because they are unable to sell their homes, or lack the confidence that their spouses or partners can find jobs in new locales. Seeking to mitigate the latter, the government has implemented fourteen programs to assist in housing finance with no more success that it has shown in education or the postal system. The proverbial flexibility and mobility of American workers has been seriously impaired, and failure to repair housing finance has exacerbated the problem.

There is no magic bullet here, but governments must stop hiding behind the financial nature of the recession and come forth with policies that actually steer growth toward a more vigorous course. Unemployment is hurting the lives of too many Americans.

The challenge, at the very least, is to do no harm. In that case, every existing or new initiative, program, law, regulation or budget proposal must be submitted to the same litmus test: its effects on growth and job creation.