Felix Salmon

When the government outsources employment policy

By Felix Salmon
July 5, 2013

America is creating jobs — but they’re not well-paid jobs, and they don’t seem to be going to the previously unemployed.

Today’s headline figure is certainly impressive: 195,000 new jobs were created in June, in the wake of a super-strong 207,000 new jobs in May. But the headline unemployment rate went nowhere, stuck at 7.6%, while the broadest measure of underemployment, the U6 unemployment rate, saw a worrying and substantial rise, to 14.3% from 13.8%.

Good jobs, like those in government, continue to get cut, while most of the jobs growth came in the most low-wage sectors, like hospitality. And while the data on wages was pretty healthy, remember that wage data applies overwhelmingly to people who have been employed for some time, rather than to people newly entering the workforce. Basically, if you’re employed, you’re doing OK, but if you’re underemployed, the options available to you — the new jobs being created — are pretty underwhelming. Partly as a result, the number of discouraged workers — people who have given up looking for work because they can find nothing available — has gone up, sharply, to more than 1 million.

This report is going to have no visible effect on Fed policy. The Fed has no employment-growth target: the thing it cares about, on the jobs front, is unemployment. So when it comes to measures like tapering and rate hikes, the survey which matters most is the household survey — the employment status of American households — rather than the establishment survey, which measures the size of total US payrolls. Theoretically, the two surveys are two different ways of measuring the same thing, but in practice we’re seeing in the jobs report exactly the same thing that we’ve been seeing for most of the recovery: businesses reporting healthy numbers, with workers in general, and people looking for work in particular, seeing little benefit as a result.

The markets are jittery, on this illiquid holiday weekend, with the yield on the 10-year bond soaring more than 20bp to almost 2.7%. By the standards of recent history, that’s extremely high — but it’s worth remembering that on an absolute level, it’s still very low. The combination of aggressive monetary policy and a very weak economy managed to bring rates down to unsustainably low levels, and the bounce back to something a bit more normal was always more likely than not to be chaotic and weirdly timed.

But that said, the rise in long-term rates will surely only serve to delay, at the margin, any tapering by the Fed. Monetary conditions are already significantly tighter now than they were a month ago; the last thing the Fed needs to do, with unemployment still well above target at 7.6%, is try to make them tighter still by tapering. The doves on the FOMC will of course want to keep the current accommodative stance unchanged, while the hawks will for the time being be placated with the idea that the bond market is doing their job for them.

Ultimately, however, neither Fed policy nor long-term interest rates are actually going to have much effect on the unemployment rate. US corporations are loaded up with cash; they don’t need to borrow money to invest in new jobs, and insofar as they do need to borrow money, most of them have already done so, locking in the low rates we saw a few months ago. As a result, the path that the borrowing rate takes from here on in is not going to determine the velocity with which we reach the key Fed levels of 7% and 6.5% unemployment. (The first is the point at which the Fed starts thinking about tapering; the second is the point at which the Fed starts thinking about raising the Fed funds rate.)

So what’s left? Fiscal policy could help, in terms of reducing unemployment, but it won’t: the sequester is still in effect, and Congress has zero willingness to use government money to create jobs.

Which means that job growth, from here on in, is entirely going to be a function of the private sector. When, and how, will America’s cash-rich and profitable corporations start using the money they’re making to hire Americans who are currently unemployed? The healthy headline figures in the establishment survey indicate that we’re moving in the right direction, albeit not fast enough. And the stock market will help, too: companies will need to start growing in order to justify their current share prices. With any luck, corporate growth will mean employment growth.

As for the government, the base-case scenario is essentially neglect. The legislature will do nothing to improve things, while the Fed will do nothing to hinder the recovery. The ball is in America’s court.

21 comments so far | RSS Comments RSS

“When, and how, will America’s cash-rich and profitable corporations start using the money they’re making to hire Americans who are currently unemployed? ”

It won’t happen until they are forced to. It’s an example of the tragedy of the commons – the economy shrinks when all companies don’t re-invest enough of their profits, and individual companies that do re-invest may be wasting their money if most companies do not, and the economy suffers. They can only be forced to hire more people by changing the tax system so they are penalized for not re-investing or distributing their profits.

“And the stock market will help, too: companies will need to start growing in order to justify their current share prices.”

I don’t know, many seem to be content growing their foreign profits while their domestic business stagnates.

Posted by KenG_CA | Report as abusive

The headline “When the government outsources employment policy” is spin with no justification in the article. The implication is that if only government had some form of its own employment policy then the employment numbers would be better. But where is your evidence?

To put it another way: what are the root causes of lower wages? I can think of several: A) automation reducing demand for less skilled labor; B) Asian factory workers competing with less skilled labor; C) High energy costs depressing economic growth; D) The decline in average skill level brought about by immigration of low skilled workers and their low skilled progeny. But D especially is beyond the pale for the Blue Pill media to discuss.

Posted by RandallParker | Report as abusive

@Felix, you are blind if you think the stock market will help (or perhaps you don’t spend enough time looking at corporate reports). In the present economic and market environment, companies are penalized for investing and rewarded for cost-cutting. How do you think we got into this situation in the first place?

Posted by TFF | Report as abusive

This article argues that although thousands of new jobs were created, these jobs mostly represent very low paying jobs that are below the level of many people that are currently unemployed. This issue is a big one for many people who are currently unemployed or underemployed. Government jobs, while they often pay less than similar private sector jobs, often come with much better healthcare and retirement benefits than similar private sector jobs. There are still higher paying jobs out there if you know where to look. Using a variety of resources is crucial in any job search today. Using sources such as the newspaper, the internet, websites such as granted dot com, and local community job boards are all good starting points.

Posted by aostler | Report as abusive

There are multiple cores to the problem. First, with taxes low on high earners, there is every incentive to rape companies. With taxes high on median to low wage earners, there is nobody to sell to really, except for necessities.

Posted by EllenJHunt | Report as abusive

Talking about a taper was very premature and was probably extorted by the hawks. With 1% inflation and falling nominal growth, the data calls for faster money growth. But it will take a new chairman to try anything new.

Posted by nixonfan | Report as abusive

@KenG_CA “It won’t happen until they are forced to.” If you support that kind of policy I hope you can time travel yourself to Germany circa 1940 or the USSR of the 1950′s… Let me know how your strategy works out will you?

@TFF- “In the present economic and market environment, companies are penalized for investing” -I think if you look into it you will find that capital investment in the United States hit an all-time record in 2012. Of course we would both like to see even more.

Lastly @ Felix- Are we not on the path of the modern progressive enlightenment? Did we not wake up and realize that Americans are born no better than our brothers and sisters in Mexico or India? If capital is free to move, do you ever expect the bottom 10..20..30% of western workers to earn 3 or 4 or 5x what the well educated well trained well equipped 80th percentile workers in developing economies make?

If we did all the things Tom Freidman says we should… as a country we’ll tread water for another few decades while our friends catch up. That my friends is as good as it gets…

…so make sure your kids get the best possible education and invest as much of your earnings as you can. If your place on the American economic continuum stays the same, (ie 65% of U.S. household income) than your standard of living is going to fall… thems the facts.

And another thing… don’t whine about it while you’re still better off than 80 or 90% of your fellow Earthlings. People lie, cheat, swim rivers, climb fences, and walk through deserts to give their kids half the chance mine has just for being born here!

Posted by y2kurtus | Report as abusive

I’m more optimistic than y2kurtus, but I find structural factors to be a glaring omission in this discussion.

The broad push of U.S. policy over the past 50 years or so has been for big investment projects – both private and public – to take longer due to various approvals at the federal, state, and local level; to put in place an increasing number of labor regulations that take effect as businesses pass certain employee thresholds; to increase the prevalence of occupational licensing and similar state/local restrictions on competition (the local taxi rules that Uber is challenging are an example); and to favor certain sorts of spending and investment through the tax code (healthcare spending and housing are 2 of the most notable beneficiaries).

We therefore shouldn’t be surprised that a large redirection of economic activity – after the housing bust – is taking longer than we’d like. Macroeconomics (fiscal and monetary policy) matters, but so does microeconomics.

Posted by realist50 | Report as abusive

y2k, I don’t mean they should be forced directly, but indirectly by the tax system. I am in favor of a tax system with high nominal rates and tax credits for investment in new ventures, capital spending, R&D, education, etc. When companies return a bigger share of their profits to the economy, there will be no choice for the economy but to add jobs.

I don’t believe you can legislate forcing companies to invest more, but the tax code can be modified to give them less options for accumulating profits.

People clamor for lower taxes, but lower taxes does not always yield increased investment. People should be rewarded with lower effective tax rates only after they invest, and not in hopes of them investing.

Posted by KenG_CA | Report as abusive

“I think if you look into it you will find that capital investment in the United States hit an all-time record in 2012.”

Not sure where I would look, but that isn’t what I’m seeing in the corporate reports. Perhaps the investment is coming from smaller businesses? I’m obviously focused on the blue chips — and they have been in cost-cutting mode for several years now.

Posted by TFF | Report as abusive

Capital Investment of a few Blue chips:

GE: 2012 =15B 2011=12.6B 2010=9.8B
IBM: 2012=4B 2011=4.1B 2010=4.2B
BRK: 2012=9.8B 2011=8.2B 2010=6B
CAT: 2012=5B 2011=4B 2010=2.6B
BA: 2012=1.7 2011=1.7 2010=1.2B
MMM: 2012=1.5 2011=1.4 2010=1.1

…humm this is getting tedious and it’s not quite as obvious as I thought it would be… I also thought I could find a link or chart to back me up but capital investment doesn’t seem to be an easy graph to find… still though Warren Buffet said it so it must be true.

Posted by y2kurtus | Report as abusive

y2k, corporate cash hoards are also at an all-time high, which means even though they may be spending more on capital expenditures, they are either reducing expenses (like employee compensation) elsewhere or just making a lot more money. If they weren’t hoarding so much cash, more money would be in circulation, which means either personal income would be up or unemployment would be much lower.

If a larger percentage of corporate revenue was used by corporations, instead of just put in a zero interest bearing account, something would have to be done with that money. But it’s not.

Posted by KenG_CA | Report as abusive

GE: $13B in 2004, $15B in 2012
IBM: $4.4B in 2004, $4.1B in 2012
JNJ: $2.2B in 2004, $2.9B in 2012
PG: $2.0B in 2004, $4.0B in 2012

Some have increased capex, others have not. Some have more than doubled revenues (through growth and acquisitions) while keeping capex steady. PG may be the only one of these four that has a true increase, relative to revenue.

Thinking further, at least some of the increasing cash hoard has come from borrowing. Companies locking in cheap cash, because why should they not? And major corporations sometimes acquire capital investment rather than spending it themselves. So a difficult question to answer.

Also, looking at a few charts, the last few years are trending upwards again. Perhaps my slander is a couple years out of date?

Posted by TFF17 | Report as abusive

TFF, your slander is not out of date. 2004 would be a better benchmark year, as the ’08 crisis resulted in a big drop in spending, from which they have only been recently recovering from. Eight years of even modest growth for these companies means they should have increased their capex by around 50%, yet only one of them did. And, as you mentioned, they have also cut spending, usually in operating expenses, and those reductions offset any employment gains that result from their modest capex increases over the last 4 years,

If corporations had been investing more of their profits, the economy wouldn’t have atrophied to the point where the government needed to provide stimulus, whether in the form of spending or printing, just to keep from sliding into depression.

Posted by KenG_CA | Report as abusive

Also, KenG, these are global figures. Some corporations (e.g. KO) are investing heavily in Asia while milking their US operations. On one level, that is simply smart management. They are growing rapidly in China, and need to build out resources to support that. Obviously doesn’t make sense for them to build in the US for new markets in China. On another level, it doesn’t do anything for the US economy.

It ends up being a bit circular. Companies aren’t investing much in the US and Europe because those economies are not growing much. Yet the reason those economies aren’t growing is because companies are not investing there.

Your ideas for creating tax incentives for domestic investment may need to be fleshed out in greater detail, but something along those lines is needed.

Posted by TFF | Report as abusive

TFF, I agree with most of what you say, except for the “smart management” part. A market economy is filled with positive feedback loops and self-fulfilling prophecies; when enough large companies believe the economy will be weak and not worthy of investment, then that’s what will happen, because they reduce investment. They are missing an opportunity to grow both the domestic economy and their business, which is why I don’t think they are smart, but just risk-averse members of the corporate sheep herd.

The U.S. has many advantages over other economies for justifying investment. In spite of recent declines, we still have a (relatively) good education system. In spite of insufficient maintenance, we still have the most developed transportation infrastructure (a self-healing network of highways may not be the most efficient transportation system, but it allows for the most advanced distribution channels in the world, save for maybe the people in China who deliver lunches door to door on the same day). Our financial system has many flaws, but it’s more evolved than most, and allows for all kinds (too many, IMO) of financing options for consumers. Our communications infrastructure is far from the best (and is a perfect candidate for increased investment), but it reaches almost everywhere. Electricity and clean water are available everywhere. All of these ecosystems not only combine to create an attractive environment for investments, but they also represent good places to invest capital. Those ecosystems are aging and need to be updated and maintained, and investment here will only make them more valuable. Smart management would recognize this. Clueless management abandons our economy and will see their misguided assessment become reality.

Posted by KenG_CA | Report as abusive

Prisoner’s Dilemma,KenG. No one company (no ten companies) is enough to drive those positive feedback loops. The government has the power to change the rules, but as presently set companies are rewarded individually for cutting costs, even if that results in a sub-optimal outcome for the whole.

Posted by TFF | Report as abusive

No argument there, TFF, but the people earning 10-digit salaries for managing those F500 companies should be leaders, not caretakers. If all they (corporate boards) want to do is minimize risk, I’m sure some startup can develop software to do that, for a fraction of the cost of a conventional wisdom-driven CEO.

Posted by KenG_CA | Report as abusive

There you go, KenG, that’s your next project. RoboCEO. Can you please program it to avoid ego-driven takeovers at exorbitant valuations? More often than not, that is all corporate CEOs are good for.

Posted by TFF | Report as abusive

TFF: -:)

Posted by KenG_CA | Report as abusive

QE has been pushing on a string because almost none of it has made its way into the money supply. Money growth has been retarded by credit contraction following the Minsky Moment. However, private sector credit has finally begun to grow, especially for businesses. Household credit contraction has ended but hasn’t yet begun to grow. Once HH credit starts to grow, you will see money growth accelerate, thus raising NGDP.

Posted by nixonfan | Report as abusive

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