Globalization Initiative

How to Create New Jobs in a Troubled Economy

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.

New JobsAnd 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. 

Syndicate content