Mort Zuckerman: U.S. No Longer the Great Job Creation Machine

There's a little candle in the dark in the trend of unemployment just reported. But to give it perspective, General Electric recently posted job openings for 90 $13-an-hour positions assembling washing machines at a plant in Louisville, Ky., and received 10,000 online applications. Clearly, 9,910 had to be rejected.

The volume of eager workers is a tsunami. Employers have shed 8.2 million jobs since December of 2007; 5.9 million Americans have been out of work for more than half a year. On top of that, the unemployment rate has risen by 5.1 percent of the workforce in the past 18 months, the largest increase since the Great Depression. The proportion of the workforce out of work for more than 15 weeks is the highest in 60 years. We have lost 6.6 million manufacturing jobs since 2000. We can take a little consolation, but not much, in the fact that the average workweek has increased from 33 to 33.2 hours.

Today, 21 percent of all families have an immediate family member who is unemployed, and 33 percent have an immediate family member or close friend who has lost a job. This affects not only the unemployed but also the family members who depend on them.

Naturally, millions of people fear they are next. Families are already living with a decline in their net worth because home values have dropped by an average of 30 percent and financial assets are worth nothing near what they were. The Wall Street Journal reports that 23 percent of households have mortgages that exceed the value of their homes. That's almost 11 million homes. About half the mortgages are 20 percent higher than the value of the house, and 520,000 homes are already in default. This is an overhang that is bound to put a damper on residential construction, which in the past has been an important source of employment, and that is unlikely to improve anytime soon. In the most recent survey, only 9 percent of families said their income increased this year, the lowest recorded in the 60-year-old survey. And for the first time in the survey's history, the majority of families said they thought their incomes would stay the same or fall.

The nervousness of millions of Americans is entirely justifiable. They see economic head winds all about them. The biggest economy in the world is held hostage by shoppers and consumers who are scared and pessimistic.

What are our job prospects? The problem in the job market going forward is not so much layoffs in the private sector, which are abating, but a lack of hiring. The federal stimulus program is offset by the estimate that there will be a 2010 budget shortfall for states, cities, counties, and school districts in the range of an astonishing $250 billion. Since virtually all states and cities have to run balanced budgets, the result will be reduced services, layoffs, and tax hikes. As Harold Meyerson points out in the Washington Post, this will reduce net government spending to boost the economy to approximately 1 percent of gross domestic product, thus diminishing the effectiveness of the government's efforts to combat the recession.And there is a major credit crunch constraining consumer spending and squeezing small businesses. There is virtually a total freeze in credit for small businesses. This is particularly ominous because small start-ups provide most of the economy's new jobs. If these businesses can't keep credit lines open, those jobs simply disappear. All this is reflected in cutbacks in the number of credit cards, credit lines, and loans from small banks. Meanwhile, the number of personal credit cards for consumers is down by 150 million, and personal credit lines have been reduced by $500 billion, from $1.3 trillion to $800 billion. This trend is expected to continue. Consumer spending is off 12 percent per shopping trip. Consumers are simply not buying expensive goods; they hunt for bargains. This in turn is punishing for many small businesses with small margins.

Medium-size businesses are constrained by the risk-analysis lending of the financial world, which prefers to lend to large businesses that are deemed more creditworthy. But while these big businesses have access to financing, they are holding back in hiring because of anxiety over the Obama administration's policies on such matters as increased healthcare costs, higher taxes, more corporate regulations, and disaffecting labor policies.

The result is a new business attitude and a business model that focus less on revenue growth and more on that part of the businesses that executives know they can control: their costs. This means cutting personnel (and also advertising) to improve operating margins and reflects their lack of confidence in the growth of the economy.

The consequence is that the U.S. economy, which was for decades the greatest job creation machine in the world, is taking longer and longer to replace the jobs lost in the recession.

In the 1970s and 1980s, it took as little as one year from the end of a recession to add back the lost jobs. After an eight-month downturn that ended in March of 1991, jobs came back in 23 months. After the downturn from the dot-com bust in 2001, it took 38 months. This time, it could take five years or more to recover all of the 8 million-plus jobs lost since the "Great Recession" began.

Employment will continue to fall into 2010, and perhaps through it. If the jobless rate peaks at around 11 percent, we will be lucky to begin a proper jobs recovery before the end of 2010.

What accounts for the growing lag times? Fundamentally, it is that households and businesses are stepping back from spending levels that were artificially pumped up by debt. American consumers realize they had been on a binge. The ratio of consumer debt to the nation's GDP rose to 97 percent in the first quarter of this year, up from 45 percent in 1975. Every dollar that scared consumers save is one less for consumption and output.

Then there are all those young people just entering the labor market. To keep the jobless rate from rising, the United States needs to add a net 150,000 jobs a month. No one expects we will generate anywhere near that growth.

Furthermore, in the past decade, globalization and deregulation have forced companies to focus far more on productivity and on controlling costs. This means they seek to produce far more with the workers they have. Simultaneously, factory automation is wiping out assembly-line work, and information technology is making many white- and pink-collar jobs extraneous. Finally, companies are moving operations abroad to take advantage of cheaper labor in places like China and India. American workers are working harder, given their concern over job losses that have averaged 135,000 a month for the past three months. That's better than the 740,000 jobs lost in January, but it is still relatively high at this point in a recession.

We must face the hard fact that many of the lost jobs are gone forever. In this cycle, 56 percent of the currently unemployed have permanently lost their jobs, according to Ned Davis Research. These people have lost their jobs because plants have closed, work has moved overseas, or companies have gone out of business. This compares with an earlier peak in 1982 and 1991 of 43 percent.

As Fed Chairman Ben Bernanke confirmed, this recovery is shaping up to be a jobless one, just like the last two. The conventional unemployment rates look as if they will remain very high for years to come. Should there be an increase in demand, businesses will raise the number of employee hours worked, rather than adding new workers. This is reinforced by a recent Federal Reserve Board report stating that most of the participants in its survey anticipate it will be five to six years before the economy can convert fully to a normal job market.

Why is the long-term outlook for umemployment so dismal? One critical reason is the U.S. housing shock. The 30 percent average decline in home prices is far greater than the normal threshold of a 15 percent or greater fall in past sluggish recoveries. Add to this the drop in value of financial assets, and you have a colossal shock to household balance sheets, much greater than in previous recessions, adding up to $7 trillion. The result is a much bigger drop in nondurable consumer spending, on top of the much higher rise in the unemployment rate than in typical recessions.All of this reflects the fact that this downturn has been caused by a financial crisis. It therefore plays out differently from recessions that come about after businesses overinvest or when the Federal Reserve aggressively raises interest rates. When the machinery of finance grinds down, people cannot get enough credit to purchase consumer durables and businesses cannot borrow to invest and grow. In a study of recessions caused by financial crises, the unemployment rates rose dramatically higher—by an average of 7 percentage points, compared with the 5 percentage points we have experienced to date. Such crises last much longer—an average of 4.8 years. This one is at its two-year point.

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.

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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.