Jobs

With joblessness still rising despite our historically easy fiscal and monetary policies, the political chatter is full of charges that globalization, especially the role of multinational companies, is costing America millions of jobs. The facts are less clear-cut, and the impact on job creation depends substantially on whether the multinationals are American or based abroad.  

For several years, for instance, Boeing and the European multinational Airbus have been competing for a $35 billion contract to develop and build the next generation of tanker aircraft that refuel other planes in-flight. Boeing is as close to a domestic U.S. company as a large U.S. manufacturer can be these days, with 96 percent of its physical assets located here while maintaining a far-flung global network of suppliers and vendors. The face-off with Airbus pits Boeing against a division of the European Aeronautic Defense and Space Company (EADS), which maintains 96 percent of its physical assets in Germany and France while also depending on global suppliers and vendors. For years, PR flacks for both companies have claimed that each would create many more jobs than the other, if it won the DoD contract.  In practice, Boeing and Airbus will each need roughly the same number of workers, worldwide, to develop and build the new tanker; and in order to be cost-competitive, most of this work would occur at each company’s existing facilities. For an economist or a business person, this suggests that a U.S. based company would create most of those jobs here, where its physical plant is; while a European-based firm would have to produce most of the new jobs in Europe.  

Recently, I tested these assumptions when Boeing asked if my advisory group Sonecon could conduct an impartial analysis of jobs and the tanker contract. I agreed, with certain conditions. First, our study would ignore the PR claims from both sides. Second, we would focus on the new investments in plant, property and equipment provided under the contract, and construct an objective jobs estimate using historical data tracking the relationship for aircraft makers between these new investments and job creation. Finally, we would use only verified, publicly-available data, plus the two firms’ formal proposals to the Pentagon. 

In its formal submission, Airbus proposed to partner with the U.S.-based Northrop Grumman, a common arrangement for foreign multinationals competing for Pentagon contracts. Airbus’s plans also showed, as expected, that it planned to develop and produce most of the new planes at its existing facilities in Europe, with Northrop-Grumman mainly assembling it here. Furthermore, reams of government data established that U.S. subsidiaries of foreign aircraft makers are not only much less invested here than their U.S. counterparts. Those subsidiaries also generate substantially fewer new U.S. jobs for every dollar of new investment here, which means they do the more labor-intensive tasks back home.  

Whichever firm ultimately wins this contract will use a substantial share of the funds to pay outside vendors and suppliers, as suggested earlier, and these payments will also create thousands more jobs, indirectly. But there are no public data on where the myriad parts of each company’s global supply chain are located, so no one can say how many new U.S. jobs will be created indirectly by either rival in this way. We might plausibly assume that the supply chain of a U.S.-based firm is more concentrated here than the supply-chain of a European-based firm; but since we don’t have the data to test that assumption, we set it aside.

These facts and factors produced some definitive results: We found that over the 18-year life of the contract, we should expect Boeing to produce 10 times as many U.S. jobs – roughly 3,500 to 4,000 jobs per-year – as Airbus-Northrop-Grumman. In fact, since the study was completed, Northrop-Grumman pulled out of the competition, leaving Airbus to face Boeing alone.  

These findings throw additional light on other common concerns about multinational companies. Perhaps most important, as Airbus’s case suggests, new investments and job creation by a multinational in its home economy are often accompanied by new investments and jobs by its foreign subsidiaries. That’s just the way that multinationals do business. For example, when Ford or Dell build a new plant abroad, the operations of that facility will generate new business back home, including investment and jobs, because the headquarters will continue to provide its subsidiaries with more advanced services and produce the most advanced parts. That makes the economic impact of multinationals here largely “distributional.” The worldwide networks of multinational companies shift many thousands of basic service and basic production jobs abroad, while creating a smaller number of more highly-paid, more advanced service and production jobs here.

The Pentagon should award its contracts to those firms that can most credibly and efficiently produce the new systems required for American national security. That said, the impact of those contracts on job creation cannot be considered a matter of indifference, especially in a period when American businesses are capable of producing new jobs only at much lower rates than previously.

With the FCC preparing to issue new rules and policies to promote universal broadband access, Washington’s hive of think tanks and foundations (and lobbying shops that masquerade as one or the other) have issued a flurry of new studies on broadband’s impact on American jobs. It’s a marriage of two genuinely vital matters: Ensuring that every American has access to the wired world that increasingly permeates most people’s economic and social opportunities; and finding ways to restart job creation across the economy. Perhaps most important for the FCC’s deliberations, the new studies point to the different jobs impact of the network’s two principal parts, the companies that build the broadband infrastructure and those that provide its content.

In the most rigorous new study, Robert Crandall of the Brookings Institution and Hal Singer, a consultant, calculate the new jobs that arise directly from the tens of billions of dollars in new investments undertaken by broadband providers, laying cable, fiber and DSL lines, putting in place new connections, and building out wireless and satellite-based broadband networks. From 2003 to 2009, these direct investments created some 434,000 jobs; and over the next five years, the same process should produce more than 500,000 more jobs. And as we will see, these effects dwarf the job gains linked to the companies providing the content.

But the power of a market-based economy lies in the ways that a basic infrastructure such as broadband stimulates additional economic activity, much as highways and railroads once did. Building out these networks creates a platform for the development of thousands of new applications, and the combination creates new demand for the computers, software and other IT equipment needed to use the network and its applications.

Consider the iPhone cited in another new study from the Democratic Leadership Council. Without the broadband network, the iPhone would be just another cell phone. With it, Apple sold 43 million units in three years, its’ users downloaded 1 billion applications, and other mobile device makers scrambled to develop competing devices. And the people newly employed to produce these computers, software and other equipment earn wages and salaries, which enable them to buy more goods and services that yet more workers have to produce. Altogether, economists figure that these dynamics created another 430,000 jobs per-year from 2003 to 2009.

But there’s a big catch. As millions learned when the New Economy bubble burst in 2001, new technologies create enduring wealth and jobs only if they enable us to either do something entirely new or do more efficiently something we already do. Otherwise, the technology mainly moves around demand and the jobs linked to it: When we get our news from the Internet, it creates jobs on those sites while costing jobs at newspapers and magazines. This tradeoff happens especially when the economy is growing smartly and different companies and sectors have to compete for investment capital. So, we have to recognize that the cheering investment and job numbers for broadband don’t usually take account of the jobs that weren’t created when investment in other areas slowed — and that’s why economics is called the dismal science.

This caveat, however, also points to broadband’s real potential to create new efficiencies and new economic value — and the jobs that go with those gains. First, there are “spillovers” to other parts of the economy. So, as the use of broadband and its applications expand, other sectors from hotels and manufacturing to retail trade and educational services have to keep pace; and that requires that they increase their own investments in computers, software and so on. Those investments create new jobs not only to produce those technologies, but also to operate them once in place. One recent study estimated that for every one-percentage point increase in broadband penetration, several hundred thousand more new jobs are produced — and broadband access has been rising by several percentage-points per-year.

Combinations of broadband and advanced applications also can generate entirely new savings which allow people to spend more on other things, and so create additional jobs not counted in all of those studies. We see this happening in telecommuting, which saves transportation and other energy costs, as well as in telemedicine, which can not only reduce transportation and energy costs but also make the practice of certain areas of medicine more efficient and more effective. And if telemedicine saves people’s lives or reduces how long they’re sick, the economy gains all of the productivity which otherwise would have been lost.

There is one more catch in all of this good news: These various gains are not distributed evenly across the economy or equally across the society. It’s not just a matter of much of the gains going to workers in industries that develop and sell the fiber, cable, satellites, computers, cell phones, software, and so on. Beyond that, a recent study by the Public Policy Institute of California found that communities with new access to broadband — and parts of communities — experienced average job growth 6.4 percent greater than before they had broadband. To begin, much of those gains will be captured by workers with sound IT-related skills. Furthermore, this suggests that communities without such expanded access — and parts of cities where most residents remain not wired — will lag behind even more than before.

And within the broadband universe, the direct job gains associated with higher investments are also concentrated. Dividing that universe into the broadband providers such as AT&T or Verizon and the content providers such as Google and eBay, studies and SEC data show that, first, broadband providers invest three-to-four times as much as the content providers. Moreover, studies also find that each dollar invested by broadband providers creates about twice as many jobs as each dollar invested by the content providers.

These studies suggest several takeaways for the FCC. First, the FCC’s goal is the right one: Universal access to broadband is critical to promoting more job opportunities and economic growth across the economy. Second, the central element for job creation here are the investments required to ensure universal access — not only now, but also as broadband technologies continue to advance. The FCC should promote these investments in every way it can. At a minimum, the Commission should be extremely cautious about policy changes which could weaken the incentives for those investments — i.e., reduce their returns — or raise the price for people to access broadband.

The inconvenient truth that lies behind this week's White House jobs summit is that there are no magic bullets for an economy thrown over the cliff by a huge financial crisis.  Even with all of our stimulus, bailouts, tax breaks and special Fed lending programs, job losses continue to mount, dampening investment and overall demand.  That's not all: Despite the administration's efforts to stem home foreclosures, they continue to rise and so pull down more mortgage-backed securities and their derivatives, which in turn also dampens business lending and jobs.  We're also seeing mounting losses in commercial real estate, propelled by higher vacancy rates and more tenants simply unable to pay their rents, which are driving up failures by the banks which lent out the money to develop those buildings.  Those failures also eat away at demand, investment and jobs.

And we're still highly vulnerable to more damaging shocks.  So, stock markets around the world fell sharply this past week when one of the world's largest commercial real estate companies, the government-owned Dubai World, announced that it couldn't pay its lenders.  For many, Dubai World's problems raised the scary possibility of sovereign debt defaults, which would be another blow to financial institutions around the world, which hold most sovereign debt.  And nations aren't the only sovereigns whose bonds could be in trouble: The largest real estate bubble and worst recession in 80 years could also compromise the debt status of the world's seventh largest economy, the state of California. 

While large fiscal and monetary stimulus will always help an economy in free fall - we saw that in the modest rebound in third quarter GDP - the number of Americans working could continue to fall for at least another year, because the economy had serious problems with job creation before the crisis hit.  After the 2001 recession, the briefest and mildest on record, the number of people working continued to slump for two years; and over the course of the 2002-2007 expansion, American businesses created jobs at less than half the rate of the previous two expansions.

So, the country has a serious problem with jobs, one which requires serious responses.  A little more stimulus can play a role here, especially targeted to state governments whose labor forces are being squeezed between their falling revenues and balanced budget requirements.  The cure for the private sector will have to involve stronger and more permanent measures that can directly reduce the cost to businesses of creating new jobs.  Here's a start:  Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces. Since it would be a permanent measure that would reduce social security revenues, we should pay for it and use the new revenues to make the social security trust fund whole.  We can do that by enacting a small "Tobin tax" on financial market transactions, equal to, say, one-quarter of one percent of the value of trades, and pressing other major countries to do so as well.  James Tobin, the Nobel laureate who first proposed such a tax for currency trades, noted it could help reduce destabilizing currency speculation.  Given the recent crisis, slowing down speculation seems like the right medicine for stocks and bonds today.  And at such a low rate, it shouldn't affect long-term investment, especially if other financial-center countries go along.  And if we don't take strong measures, we will almost certainly find ourselves grappling with serious problems with job creation for many years. 

As Congress returns from its holiday vacation, it and President Barack Obama need to address a number of challenges facing the country from health care reform to jobs and what strategy to pursue in Afghanistan.  How the Democratic leadership deals with these issues may well determine the future loyalty of an entire generation of new voters, and with it the future of the Democratic Party.

A recent study by two economists, Paola Giuliano and Antonio Spilembergo, entitled "Growing Up in a Recession," suggests that experiencing an economic recession during the impressionable ages of 18-25 can have lifelong effects on a person's attitude toward government and its role in the economy. The Democratic Party's most enthusiastic and loyal new constituency, Millennials (born 1982- 2003), have had their young lives thoroughly disrupted by the current economic downturn. With their level of unemployment exceeding 25%, what is for other generations a Great Recession is for Millennials their very own Great Depression.  Such an experience is likely, according to the new study, to increase Millennial support for policies that favor government redistribution of income and other liberal economic ideas.

However, Giuliano and Spilembergo also demonstrate that this same experience often makes young people less trusting of government institutions. Conservative columnist Ross Douthat suggested recently that the difference between the Democratic New Deal loyalties of the GI Generation that came of age during the Great Depression and the greater Republican orientation of Generation X that experienced Jimmy Carter's stagflation economy in the 1970s is the degree to which government dealt effectively with the economic crisis of their youth. "When liberal interventions seem to be effective, a downturn can help midwife an enduring Democratic majority. But if they don't seem to be working - or worse, if they seem to be working for insiders and favored constituencies, rather than for the common man - then suspicion of state power can trump disillusionment with free markets."

This raises the stakes for what Congress does in the next six months to new heights. Millennials, more than one-third of whom lack health insurance, will be watching closely to see if their needs are addressed in the final version of health care reform, something Millennials support to a far greater extent than any other generation. Of course, failure to pass meaningful reform may well sound a death knell for the emerging Democratic majority that the Obama campaign created last year. 

But Millennials care even more about jobs and the health of the economy.  With record unemployment among members of this generation, any jobs package Congress puts forward must specifically meet the concerns and needs of Millennials. In particular, Congress must deal with the high cost of education (something Millennials still see as the ticket to future economic success), the lack of job opportunities even at the intern level for those just entering the work force, and the lack of access to fundamental job skills training that community colleges can provide to those ready to go to work soon.

While the Democratic leadership often believes that today's youth thinks about issues of war and peace in the same reflexive way that young Baby Boomers did four decades ago, Millennials are more likely to want to understand the mission and strategy for success in Afghanistan before making up their mind on whether or not to support a deepening American involvement in that conflict. With Millennials providing the overwhelming majority of front line troops, however Congress chooses to pay for that campaign, it must ensure that those who do go to fight are better equipped than the military force George W. Bush initially sent to Iraq.

The effectiveness of any legislation Congress adopts over the next six months will not be known for years, but the way Congressional Democrats approach their policy decisions will be clear enough to Millennials.  The stakes are large and will have long-reaching impact. If the decisions are made by cutting deals with special interest groups, none of which represent this generation and its financial concerns, or by compromising Millennial principles of equity and social justice, members of the generation are likely to sit out the 2010 midterm elections and wait for their favorite messenger, Barack Obama, to return to the ballot in 2012 before making their future preferences known. If that happens, the results in the gubernatorial elections in Virginia and New Jersey last month will only be a prelude for a much bigger Democratic disaster next November.  If, instead, Democratic leaders take off their generational blinders and recognize that the base of their party is now made up of an overlapping core of Millennials, minorities, and women and respond accordingly, they will help to solidify the Democratic loyalties of America's largest generation for decades to come. 

For more on this subject, see Winograd & Hais' previous essay, For Millennials, It's The Economy, Stupid.

America's vaunted job-creating machine has been breaking down, and the administration is finally noticing. 

It was 2003 when I first asked myself whether the dynamics that normally produce lots of new jobs when the economy expands were changing in some fundamental way.  I had noticed that job losses during the mild 2001 recession were five to six times as great as expected, given the modest drop in GDP.   Then we saw that in 2004, two years after the recession ended, the number of employed Americans was still falling, compared to the two months it took for job creation to turn around after the 1981-82 recession and the 12 months it took after the 1990-1991 downturn.  The evidence that America's labor markets were undergoing structural changes of a nasty sort continued to accumulate.  Just as employment had fallen several times faster than GDP during the 2001 recession, so once job creation finally picked up in 2004, private employment gains remained weak.  Over the same period that saw 14 million new jobs created in the 1980s expansion and 17 million new jobs created in the 1990s expansion, U.S. businesses in the last expansion added just 6 million new jobs.   Manufacturing was hit especially hard:  From 2001 to 2004, manufacturing lost more jobs than during the entire "deindustrialization" years from the late 1970s through the 1980s, and those losses continued throughout the entire 2002-2007 expansion.  

With job losses in the current recession already two to four times greater than seen in the downturns of the early 1980s, 1990s and 2001, these dynamics are finally getting broader attention.  Late last week, Larry Summers, the President's chief economic advisor, acknowledged publically that what's known as Okun's Law has broken down.  Arthur Okun, JFK's economic advisor, observed in the 1960s that employment during recessions regularly fell by about half as much as GDP, in percentage terms, which he attributed to the costs employers bear when they fire workers and then have to hire and train again once the downturn ends.   Nobel laureate Paul Krugman also weighed in last week, positing that recessions triggered by bursting bubbles - that would be 2001 and this one -- affect jobs much more than those triggered by tight monetary policies to fight inflation (the 1974-1975 and 1981-82 recessions, for example).  It's an intriguing thought, but it doesn't appear to really jive with the evidence.  The IT-Internet bubble that burst in 2000 certainly helped trigger the 2001 recession, but the downturn's job losses and the subsequent delayed and slow job creation swamped the direct and indirect declines in demand that followed from the implosion of so many Internet and IT companies. 

It's much more complicated than that -- and consequently will be much harder to address.  To begin, the changes in the way our labor markets work also have affected everyone's wages.  During the 1990s expansion, productivity increased by about 2.5 percent per-year, and average wages rose accordingly by nearly 2.0 percent per-year.  That's the way free labor markets are supposed to work: As workers become more productive, employers become willing to pay them more (and which competition forces them to do).   But in the 2002-2007 expansion, even as productivity grew 3 percent per-year - the best record since the 1960s - the average wage of American workers stagnated.  And the most popular political explanation, blaming U.S. multinationals for outsourcing jobs abroad, doesn't hold up here:  Over this period, the number of workers abroad employed by those multinationals hardly rose at all.

This change is also getting more official attention.   Last week, President Obama reminded everyone that economic expansion isn't enough - and we're still quite a way from any real expansion - since most middle-class Americans weren't doing well even before the crisis hit and the economy tanked. 

The administration's agenda could go a long way to addressing these structural changes, if it's done right.   The most plausible explanation is that American jobs and wages are being squeezed by a combination of fierce competition created by globalization and our own failures to control health care and energy costs, two big fixed cost items for most businesses.  The competition has made it much harder for businesses to pass along these higher costs in higher prices - an important reason why inflation has been so low for more than a decade, here and around the world.  But that also means that when companies face higher health care and energy costs that they can't pass along, they have little choice but to cut other costs.   And the costs they've been cutting are jobs and wages.

The only way to ensure that the next expansion won't be like the last one, but instead will create more jobs and bring higher wages, is to make medical cost containment the center of health care reform and make the development and broad use of alternative fuels, from biomass to nuclear, the center of energy and climate policy.  That's not where Congress seems headed.  The House-passed climate bill will do little to drive alternative fuels for at least another decade, when a simple, refundable carbon tax could do the trick.  And the most promising aspects of health care reform for cost-containment - a public insurance option and performance-based reimbursement -- are both under serious congressional attack.   If the President hopes to see more job creation and wage gains than under George W. Bush, these are the places where he should take his stand.