The U.S. economy is facing a sustained adjustment process that will deepen this recession. It is not simply a shortfall in demand but reflects deeper shifts relating to the unraveling of financial imbalances.
The result is an economic framework in which labor markets are still deteriorating; pay rate deflation is increasingly common; small businesses remain under stress without precedent in more than 60 years; business bankruptcies have been rising exponentially; and credit remains extraordinarily tight for most households and moderate-size businesses and is continuing to worsen. Large corporations are downsizing, but the worst job losses are in the small-business sector. Small- and medium-size enterprises—and especially start-ups—have been engines of job growth. Firms with fewer than 20 workers employ a quarter of the workforce. But in the last economic expansion, they accounted for 4 out of 10 new jobs. These are the businesses that are getting crushed.
Some estimates predict the unemployment rate will be as high as 8 percent for as long as five to 10 years, worse than in any previous 10-year period since the 1930s. Such high unemployment will shrink the number of households, undermine housing demand, devastate discretionary spending, intensify defaults on debt, reduce export growth and hence capacity needs, strengthen forces for protectionism, and demoralize millions of people.
Under these conditions, only the government has the capacity to launch the necessary compensatory programs to increase job creation.
One suggestion is to undertake an all-out infrastructure program reminiscent of President Franklin Roosevelt's Works Progress Administration during the Great Depression, which immediately generated jobs. We could find a way to substitute paying people unemployment insurance and use this money to pay workers something on the order of minimum wage to produce something. There could be a requirement that 50 percent of the jobless be taken off unemployment rolls and paid the minimum wage until they find a better job, thus reducing the overall cost. The pay would be low enough to create an incentive to find better-compensated private-sector jobs, but the government would be the employer of last resort and dedicate these workers to improving the quality of our worn-out infrastructure, training our unemployed, and working as assistants in schools, courts, hospitals, child-care centers, and the like. The Economic Policy Institute argues that spending $40 billion a year for three years on public-service employment would create at least a million jobs.
Another critical measure must be to help out fiscally strapped state and local governments that have seen their tax receipts plunge and face huge layoffs. A third step would be to dramatically expand Small Business Administration financing for small businesses, which have generated 64 percent of all the new jobs created in the past 15 years and employ half of all U.S. workers, according to the SBA. There is no time to lose.
Corrected on : Corrected on 12/07/09: An earlier version of this commentary misstated the year for which a budget shortfall is expected for states, cities, counties, and school districts. That shortfall is expected for 2010.