Image via Wikipedia
13.7 million Americans are looking for work and if ADP is right, only 38,000 jobs were created in May 2011 -- 79% fewer than economists had forecast. Stocks lost 2.2% of their value and despite the inconclusive state of our national debt and inability to create enough new jobs, investors reflected their confidence in the soundness of the U.S. government by driving down the 10 year bond yield from 3.06% to 2.95%.
Can Washington create jobs? The answer depends on who's doing the answering. If you're a Republican, the job market is weak and there's a Democrat in the White House, then the answer is Washington cannot create 13.7 million jobs and therefore, we need a Republican president who will cut taxes more.
On the other hand, if the number of jobs grew by 22.2 million and there's a Democrat in the White House, then that Republican's answer is that Washington had nothing to do with creating those jobs -- it was all due to the success of the private sector that hired with no help from the White House.
If you're a Democrat and you've just finished eight years under a Republican administration that presided over a record-low, three million added jobs, you'll argue that Washington is responsible and a Democrat needs to be in charge.
When people talk these days about what Washington can do to create jobs, they seem to be turning to the Federal Reserve since there is no appetite for any additional government spending that would create temporary government jobs. The Fed's $600 billion so-called QE2 program was supposed to add more liquidity to the economy that businesses would use to hire people.
Yet it is painfully apparent that this policy does not work. In 2010, companies earned record profits of $1.68 trillion and piled up the cash to the tune of $2 trillion. They did this thanks to not hiring people, getting them to work more and paying them less. How so? In 2010, productivity was up 3.9% while unit labor costs fell 1.5%.
And that's not going to change because companies have excess capacity -- operating at 76.9% of potential -- south of the 80.4% long-term average. As 17 CEOs told me last fall, businesses will not hire until the missed revenue and profit from not hiring exceeds the long-term cost of adding people. And until companies are operating much closer to that long-term average, they will hold back on hiring.
Washington can only create government jobs but there have been lucky cases where government R&D has led to new technologies that spurred private sector job creation. While Bill Clinton was president, the U.S. created 22.2 million jobs. In part, he was lucky that three factors came together while he was in office:
- The Internet went from a Defense Advanced Research Projects Administration (DARPA) project kicked off in 1969 to a set of new industries that changed the way organizations operate -- kicked off by the 1995 Netscape Initial Public Offering (IPO).
- Business invested heavily in the Internet because it both saw the profit opportunity and it feared the loss of market share that might ensure if it failed to invest.
- The Dot-Com bubble created a fever for venture investment in Internet-related start-ups that hired and created jobs. The frequent IPOs of these companies provided capital for further investment and spurred job creation in a range of related industries.
Did Bill Clinton actually contribute to this prosperity? Certainly he has argued that he ended up his term with a budget surplus of over $200 billion and that the path to fiscal responsibility created lower interest rates that encouraged investment.
But a look at the 10 year treasury yield between 1993 and 2000 suggests that the rate started at about 6.5% and ended up there -- with some big fluctuations in between. This suggests that the eye-popping investment returns on Internet start-ups and even publicly traded stocks might have been a bigger spur to investment and job creation.
So where will the 13.7 million jobs come from? Odds are pretty good that many will come from small businesses. Not surprisingly, the Small Business Administration (SBA) reports that 64% of the net new jobs created over the last 15 years came from small businesses. Moreover, the SBA estimates that small businesses hire 40% of high tech workers and are far more innovative -- producing 13 times the number of patents per employee as larger companies.
We could help create more jobs by agreeing to allow more entrepreneurs who are educated at places like MIT to stay in the U.S. and start companies by raising the number of H-1B visas. This would likely create more high tech jobs but not enough to help people without the skills to work in those high tech companies.
No, Washington cannot create 13.7 million jobs but it could take steps to help produce more of them. Whether the current Oval Office Occupant's inability to create all those new jobs will cost him his job is up to the American electorate.
