Check out the Catalyst Investors blog for my post predicting ten big growth trends for the next decade.
This opening skit in last week's Saturday Night Live nails the economic relations between China and the US. Funny stuff. Deficits, health care, cash-for-clunkers, stimulus jobs…nothing is safe.
Clearly, today most Americans would identify the weak job market as the biggest problem facing the country today. While the job market will recover on its own eventually, there is a desire in many quarters to roll out a second stimulus package to promote job growth. As Paul Krugman noted in a recent NYT opinion piece, the standard American approach to stimulus is to focus on expanding the economy as a whole with the assumption that jobs will follow. The traditional approach makes a great deal of sense during a run-of-the-mill recession. The problem today is that some of the dislocations in the economy and job market are so large, it could take many years to retrain and relocate the unemployed, particularly among the large pool of unemployed manufacturing and construction workers. In addition, the downturn in employment in construction and manufacturing are the result of long term or secular trends, not purely cyclical unemployment. To stimulate jobs among this large pool of unemployed workers, we should increase our investment in infrastructure on a sustained, multi-year basis.
"Blue collar" job losses
Of the 6.7 million jobs lost in the United States since 2007, nearly 58% were lost in construction and manufacturing. These largely male, "blue collar" occupations have seen such large losses that women now make up more than 50% of the workforce for the first time in history. Over 2.2 million jobs have been lost in manufacturing, but as can be seen in the chart below, the decline of manufacturing (dark green line) as a share of employment is in line with the historical trend. Manufacturing employment as a percent of total non-farm employment has fallen pretty much in a straight line from about a third at the end of World War II to under 10% today. As I have written previously (see here), this decline is due primarily to the consistent increase in manufacturing productivity. Manufacturing production has continued to grow and has largely maintained its share of GDP, even while employment has plunged. In other words, even if there was a large rebound in manufacturing, the vast majority of manufacturing jobs that have been lost in the last decade are never coming back.
Chart 1: Employment by Sector as a % of total Non-Farm Employment
Source: Economy.com, author's calculations
Construction employment (the maroon line) has consistently run at around 5% of the total workforce since World War II. The 5% number makes sense, and is in line with the long term trend in real estate investment, which has run at about 5% of GDP as well.
Chart 2: Private Investment to Nominal GDP
Source: Economy.com, author's calculations
Chart 2 shows the annual numbers through 2008, and 2009 will show a further plunge in private investment in both business equipment and real estate. In addition, given slower demographic growth and the large overhang of unsold homes, potential foreclosures and homeowners in negative equity situations, there is no reason to expect a strong rebound in real estate investment anytime in the next five years.
Where will new jobs come from?
On Chart 1 we can see that there has been a secular increase in the share of jobs going toward "white collar" occupations like health & education (orange line), business & professional services (office & tech jobs, pink line) and leisure & hospitality (light purple line). Of these careers, health, education and non-administrative office jobs tend to require time-consuming and expensive training, and it's hard to envision the government laying out a vision of promoting employment in leisure & hospitality jobs as the route to a strong America.
Having a large pool of angry, unemployed men does not for pleasant politics make. The traditional US government approach of using tax cuts and interest rate cuts to stimulate private spending and investment will not work in the near term (for reasons I outline here). For reasons I won't get into in this article, it also appears that the world economic system is not quite ready to be geared toward stimulating US export growth and trade surpluses. That leaves the US government directly stimulating demand.
Invest in infrastructure
In normal circumstances, I am not one to argue for more government intervention in the economy. However, these are certainly not normal circumstances. I am advocating the government committing to a sustained, multi-year program of increased investment in the nation's infrastructure as a way of both directly creating demand and stimulating private investment. I am not advocating a boondoggle like the stimulus bill from early this year. The US needs to target infrastructure investments that directly improve the long-term productivity of the US workforce by laying out a long-term plan and set of priorities. The investment should have the following goals:
- Reduce the amount of time and energy Americans spend commuting (investment in commuter rail, highways and bridges)
- Increase the efficiency of moving people and goods around the country (investment in rail, a new air traffic control system, highways, bridges)
- Reduce our reliance on imported energy (investment in wind, solar, nuclear, transmission grid, battery technology)
- Increase broadband capacity and penetration (invest in rural and wireless broadband)
If carried out in a thoughtful way (i.e. not driven by parochial real estate interests), such a program would make America stronger in the long term while creating near term construction jobs and stimulating domestic manufacturing.
Read this excellent article by Martin Wolf in the Financial Times, and be sure to click on the chart, which I have also pasted below:
The private financial balance (net borrowing or net saving by households and businesses) plus the government financial balance must equal the net capital inflow from abroad. In the 2000s, the US was running a deficit in both the private and government accounts, which had to be offset by a positive net capital inflow from abroad. A net capital inflow for abroad must be offset by an equal current account deficit, which for the most part means a trade deficit.
Of the high-income countries, notice that in 2006 nearly all were running trade deficits, except Japan and Germany who were running trade surpluses. Also notice that Japan and Germany have been running a high positive private balance (i.e. businesses and households are high net savers). Japan and Germany have essentially been deflationary countries since the early 1990s, when the Japanese debt bubble burst and when Germany reunified. Both have been borrowing demand from abroad to partially offset their shortage of private demand.
The US, Spain, Ireland and the UK have been running private deficits. The US and the UK have been running private and government deficits. The twin deficits were therefore offset by large trade deficits.
Since the Great Recession, all of the countries listed have become high net private savers and all are running large government deficits. The large government deficits are necessary to offset the collapse in private demand. With all countries turning down at once, there would be no one to make up for domestic demand shortfalls. While international imbalances have become smaller, Japan and Germany remain net exporters and and the rest remain net importers.
As I have been saying over and over, for the US (and Spain, and Ireland and the UK) to dig out of the financial hole, we need to start running a trade surplus. Ideally that would come from an increase in foreign demand for US goods and services, and not by a deflationary bust in the US. For this to occur, a structural change will need to occur in the global economy that promotes balanced international capital flows. For a period we need countries like China, Japan and Germany to run trade deficits. Such a structural change does not seem at hand. Until that time, the US's only escape valve is for a weak dollar to support exports and to drive dollar investment abroad. The investment abroad will flow into emerging market financial bubbles, which will increase foreign demand and reduce the trade deficits in developed markets.
Without structural change, the likely outcome is continued high government deficits, low US interest rates, a weak dollar and financial bubbles in emerging markets. This is the trend to ride for this business cycle…just be sure to get off before it blows up.
Floyd Norris from the New York Times hits the nail on the head with this article. Bankers get paid so much because the system lets financial firms make so much money.