Jobs Solutions for Our Jobless Recovery

This speech was delivered at The New School on May 19, 2009.

Views on the U.S. economy

Let me start by offering five views of the U.S. economy that in combination are much bleaker than the single "we're near the bottom" view being put forward by those who seemingly are more interested in resuscitating the banks and Wall Street and in resurrecting their discredited trading practices, than in fundamentally reforming these institutions and providing long-term systemic fixes to our very broken economy.  And I should warn you, this tension between the so-called "reformers", of which I am definitely one, and the laissez faire "resuscitators" is an issue I am going to come back to a couple of times.

As for those five views:   

First, and most concerning, when we more accurately add to the 13.7 million officially unemployed workers at the end of April, the 14.8 million workers who are either underemployed - which means part-time of necessity [8.9mm] or otherwise marginally attached [2.1mm] - or in the so-called "labor force reserve" because they have abandoned their job searches [3.8mm], then the current effective unemployment rate is a staggering 17.8%, rather than the half lower official rate of 8.9%.  In all, there are now 28.5 million effectively unemployed Americans, and yet only around 3 million job openings.

The U.S. economy lost 540,000 more jobs in April, despite the government adding 72,000 temporary jobs as part of its preparation for the 2010 Census - and it's a sad commentary indeed when such a huge job loss is perceived by some pundits as a "good sign" because we didn't lose even more jobs.  All in all, 6.2 million jobs have tragically been lost since the start of the recession in December 2007, when instead we should have been creating over the last 16 months up to 2.4 million new jobs just to keep up with population growth.

Second, right up until the U.S. economy went into its tailspin, the spending habits of Americans accounted for about 71% of our nation's Gross Domestic Product [source: Bureau of Economic Analysis, Table 1.5.5], which is at least 5 and up to 10 percentage points higher than the level in most other developed countries and a full 30 points higher than the current level in China [source: Anne Krueger, SAIS, 4-22-09]. 

Now, however, because of dramatic changes in their purchasing practices, American consumers' percentage of GDP has begun to drop toward a level more in line with that of the other major developed nations and one that we ourselves haven't seen in nearly thirty years.  And while about half of this trillion dollar-plus decline in our GDP is likely to be offset by the effects of reduced imports, other import-substitution initiatives, and government stimulus, it still represents a huge dislocation of the U.S. and global economies, which is going to require a substantial "rebalancing" of our economy.  [note: U.S. GDP in 2008 was $14.3 trillion]

Third, the United States has a persistent trade deficit that has aggregated an almost unbelievable $7.2 trillion since 1980.  Just the trade deficits accumulated during the Bush administration - $4.7 trillion worth - have made our economy today about $1.5 trillion smaller than it would have been otherwise [source: Peter Morici, Univ. of Maryland, 5-11-09], and such deficits were a major cause of the loss overseas, during this same period, of more than 5 million manufacturing and 2 million service jobs.  And of course, all of this completely contradicts the premise that a nation's trading would always be nearly in balance and that it would never lose large numbers of both types of jobs at the same time.

Fourth, past Administrations have let America's manufacturing sector - and the exports and import-substitute goods it produces - be swamped by our services economy, to such a degree that durable goods now represent less than 7% of U.S. GDP and the number of people working in manufacturing now account for only 8.7% of the jobs in the country [source: Manuf. & Tech. News, 4-17-09].  These are completely doomed-to-failure percentages for a nation as large and globally important as ours, but they also represent the height of economic irresponsibility, since service jobs in comparison pay below average wages, do very little to improve America's balance of trade, and mostly just move incomes around the country.

And fifth, the current estimate of the total credit losses to be incurred on U.S. assets now stands at an almost unbelievable $2.7 trillion, plus there is another $1.3 trillion of expected losses on European assets [source: NY Times, 4-22-09].  The U.S. Treasury has already doled out $300 billion of TARP funds to the top 18 commercial banks and non-bank miscreants like AIG and Bear Stearns, and of course just last week we learned that even using overly lenient premises, $75 billion of additional capital will be required in the next few months to buffer the banks against their projected 2009 and 2010 losses [source: FT, 5-08-09].  These are stupefying numbers. 

The first thing we have to ask ourselves today is, "What the heck happened?"

Well, the answers are actually pretty simple.

Even though history teaches us that no nation can simply borrow its way to sustained prosperity and that prosperity never comes either from disconnecting workers' wages from their productivity or from a government's refusal to protect the right of workers to organize and receive a fair share of their productivity gains, successive U.S. Administrations, for the past 25 to 30 years, have in fact:

• Gutted the progressive individual income tax in order to benefit high-income Americans, to such a degree that an infinitesimal two-tenths of one percent of U.S. taxpayers now earn about half of our nation's individual income;
• Let most productivity gains go to those at the highest income levels, again through preferential tax policies; and
• Ceased in any meaningful way to protect workers' rights. 

As a result,

• Income inequality is now at its highest level since 1928;
• Median wages have stagnated for more than a decade; and
• Trade unions now represent only 7.6% of private-sector employees, down from more than 20% as recently as the early '80s.

And most damaging to long-term prosperity, our economy has simply bounced from one bubble to another, fueled in each case by the combination of manufacturing and energy-related trade deficits, cheap credit generated through financial engineering, and hyper-consumerism.

And greatly compounding our current predicament is the fact that the Economic Stimulus Plan that was enacted is woefully short of what is needed and does not come close to sufficiently rebalancing our economy.  It is:

• Too small by half;
• Not nearly timely enough in some of its spend-out rates;
• Too focused on small one-time individual tax cuts [$233b]; and, most important,
• Too underperforming against the only measure that really counts, which is job creation.

Nearly three months after passage of the current $787 billion Stimulus Plan, less than 6% of the money [$45.6b] has been paid out, and even this paltry amount was just "social service payments" and small individual tax cuts and not for jobs creation [Michael Cooper, NY Times, 5-13-09].  And the 3.6 million jobs which the Plan is forecasted to create and save - but mostly just save - over the next two years barely exceed the 3 million additional jobs likely to be lost over the next 12 to 18 months [source: Sara Murray, WSJ, 5-09-09].  And of course 3.6 million jobs pales when compared to those 28.5 million workers who are already unemployed and need to find productive work.

America's Human Capital

In his first inaugural address, when there were but 13 million unemployed Americans and not 28 million, President Franklin Roosevelt said that the nation's greatest task was (quote) "to put people to work" (unquote). 

This "greatest task" now falls on the shoulders of President Obama and this Congress, and the only way they are going to be able to help us earn our way back to long-term, sustained prosperity is with an all-encompassing strategy - on the same massive scale that America had at Normandy and behind the Marshall Plan - that creates those millions of jobs which are missing in order for American workers to again be nearly fully employed.

I believe nine specific initiatives are needed right now, and while this sounds like a lot, frankly we need them all.  They are:

1.      A genuine national industrial & manufacturing policy plus trade policies that put American workers first and are as mercantilist as the policies that exist in the major emerging markets - especially in China, India and Brazil - and in some of the other major developed countries such as Germany.

2.      A ten-year (not a two-year) program of significant public investment to upgrade and rebuild our nation's infrastructure, which will immediately create 18,000 new jobs for each $1 billion we spend [source: Univ. of Mass.-Amherst PERI] and help American companies succeed in the global marketplace.

3.      Policies that encourage private investments in wind and solar PV energy, together with targeted [i.e., $50b] federal government spending related to:

• Improving energy efficiency in manufacturing facilities,
• Smart grids and smart meters,
• Ready-to-go transportation projects and clean-energy public transit vehicles, and
• Building retrofits.

These initiatives alone would very quickly create 3 million new jobs, including nearly 1 million construction jobs and 800,000 manufacturing jobs. 

4.      A very strong "Buy American" requirement related to all federal procurement, which now comprises about 19% of our economy, along with policies which encourage the domestic manufacturing of green energy component parts.

5.      Major tax incentives for businesses of all size to invest in state-of-the-art laboratories, domestic jobs-focused R&D, and follow-on manufacturing plants and equipment.

6.      Programs similar to Roosevelt's Civilian Conservation Corps and later programs like VISTA and CETA, in order to provide employment opportunities for this year's 6.4 million high school and college graduates and the graduates who will follow.  To appreciate the magnitude of just this one challenge, the unemployment rate of workers with only high-school diplomas is already 19.6%, not even including the high school classes of 2009.

7.      Significant expansion of job training and apprenticeship programs.

8.      Public-sector employment initiatives that target urban renewal and, especially, enhanced inner-city K-12 education.

9.      Passage of the Employee Free Choice Act so that the 60 million or so workers who would like to join unions can do so without obstacles, since expanding union membership is one of the clearest signposts on the road to growing the middle class from the bottom up and less income inequality. 

We need all nine of these initiatives - in fact, we should have had them already - and what will never work is for us to simply pour borrowed money into our economy on the flawed and unfair premise that it will "trickle down" to where it is needed.  "Trickle down" is a completely discredited theory, whether the money is given to high-income individuals, as Presidents Reagan and George W. Bush did, or, as is happening now, it is distributed in the form of massive bailouts to big banks and Wall Street firms with only the hope (but not at all the requirement) that the bailouts result in economy-enriching and jobs-creating loans.

On this latter point, as I commented earlier, of great concern right now to many of us is our perception that certain important people in the Obama Administration would actually like to forestall any significant reform and regulation of the proprietary financial trading system that led us into the worst financial collapse since the Depression.  

The basis of this concern is twofold: first, of course, is that absence of any requirement at all that the banks receiving bailout funds actually start lending; and second, is the use in the recently completed stress tests calculations of the very same high debt-to-net-capital ratio of 25 to 1 that the banks were using when they got us into this mess in the first place - 25:1 is twice the 12:1 ratio that the SEC required up until 2004, and it is obviously a ratio designed mostly just to get the banks back trading securities using ridiculous and dangerous amounts of leverage.

In 1999, the American political establishment, led by then Treasury Secretary Robert Rubin, dismantled the 66-year old Glass-Steagall Act, which almost immediately caused banks and investment banks alike to trade mortgage-backed securities, make unwise loans, do deals purely for deals' sake, and use credit default swaps to lower regulatory capital requirements to absurd levels [source: Joe Nocera, NY Times, 5-09-09]. 

It would be the height of irresponsibility if the U.S. resurrected its failed financial institutions rather than reform them, and the proof will be found in whether or not we materially rein in the credit default swaps and other derivatives - and the too-big-to-fail firms that traded them - which ten years ago we unleashed on the world.  We can't afford any more "crony capitalism", in financial services or anywhere else for that matter, and the answer is not simply improved transparency, which was proposed last week by the Administration [source: FT, 5-14-09], as important as that is.  The fundamental problem is that these securities, which grew to be in the aggregate tens of trillions of dollars, most often have no underlying economic rationale beyond pure speculation - and of course it is this unbridled speculation which has ill-served the U.S. and world's economies like never before and brought them to their knees.

Our nation's Founders often spoke of a "city upon the hill", a place where people are judged on their individual abilities and where all of us have a fair chance to make a good life and leave our children and grandchildren a better world.  How well President Obama, Congress, and business and labor leaders respond to the jobs and financial regulatory challenges now confronting the American economy will substantially determine whether our nation continues to be the preeminent economic power in the world and whether we ever again get the chance to live in that "city".

Health and Retirement Security

I am going to close my prepared remarks in a minute or so by talking about an issue near and dear to my and Professor Madrick's hearts, which is CEO and corporate responsibility, but before I do, let me talk about a "city upon the hill" issue that I know is near and dear to Professor Ghilarducci's, which is the on-going theft of many Americans' health and retirement security. 

Eighty years ago, retirement security was stolen from two generations of Americans by the Wall Street greed which brought on the Great Depression - and now, with the complicity of big business, it is being stolen from this generation and maybe the next by the kind of greed that would, on the one hand, privatize Social Security at the drop of a hat and, on the other hand, bring back the very same proprietary trading and compensation practices that just brought the world's economies to their knees.

If this nation is ever going to get back to being that "city upon the hill", there needs to be immediate health care reform, as there is no greater ethical failure and no greater impetus to offshoring jobs than our nation's wheezing health care system.  And there also need to be pension and Social Security reforms that fix the current systems while preserving safety-net obligations as well as the pensions already owing to workers as fairly-earned deferred compensation. 

How twisted is it that the CEOs of our nation's most important companies, the S&P 500, are, even in this crisis, retiring with an average of $10.1 million in their retirement plans while only 36% of American households have any type of retirement account?

President Obama and Congress need to put forward a new "corporate responsibility contract" between American business and the American middle class, which, among other things, requires corporations to keep their pension promises to workers, prohibits the raiding of employees' pension funds, and restricts any unfair dissolving of collective bargaining agreements and their pension plans. 

Importantly, Congress also needs to encourage tax-benefitted government-managed accounts that function like defined-benefit plans of old, which means getting rid of the tax breaks for 401(k)s.  An adverse unintended consequence of the advent of 401(k) plans is that so many workers have been driven out of their defined-benefit plans that now 82% of them now have either no private plan or are perilously at risk of market vagaries in high-fee commercial 401(k) accounts. 

Corporate Irresponsibility and Excessive Compensation

Now, let me close by talking about the two items that I believe are at the very root of the financial crisis of 2008, which are corporate irresponsibility and excessive executive and management compensation. 

In 1972, Reginald Jones, Jack Welch's predecessor at General Electric, which was then as well America's preeminent company, said in his maiden speech as CEO that while his job was to keep GE successful into the long term on behalf of the shareholders, he nonetheless had, at all times, equal and concurrent responsibility to employees, customers, communities and the nation.  He then went on to say that a large fully-employed middle class growing from the bottom up would be the very best thing for his company, its shareholders, and the United States. 

Because of Jones's sense of concurrent obligations and his overriding sensitivity to the American middle class, he was a "CEO statesman" in the best meaning of the phrase.

However, only a few years later, beginning in the early 1980s, corporate responsibility started to materially break down because of irresponsible changes in executive compensation and shareholder governance.  At the same time, Congress, at the urging of big business, began to alter the progressive nature of the income tax for the substantial benefit of high-income Americans, and the federal government largely stopped protecting workers' right to organize and collectively bargain. 

And by the end of the ‘80s, many U.S.-based global corporations went another step further and began to see their non-U.S. operations not just as sources of raw materials but as cheap production and service sites, which triggered the most massive decline in trade numbers in the history of any nation and the most instant and substantial offshoring of jobs ever. 

For the 35 years following the end of the Second World War, the critical component of making the pursuit of the American Dream fair for all Americans was how honorably government and business behaved and interacted, and for the most part they did pretty well.  Now, however, Corporate America often uses the excuse of needing to "stay competitive" in the global economy to justify breaking its social contract with workers. 

But the global economy doesn't have to mean more job insecurity, stagnant wages, and little or no health care or pension benefits.  And it also doesn't have to mean threatening workers with moving their jobs overseas and slashing their benefits, just because multinational corporations have almost complete mobility of capital and technology and American workers have almost no mobility.

Every day in America, we tolerate the needless offshoring of millions of jobs, when CEOs could instead be demanding immediate tax cuts for manufacturers, tax credits for U.S.-based R&D expenditures, and trade agreements that incorporate anti-subsidy and anti-currency manipulation provisions and strong labor and environmental standards.

Every day in America, we are foreclosed from the benefits that would come from a meaningful carbon cap-and-trade system, because just one member of the 160-member Business Roundtable - Exxon Mobil - opposes this system, despite the fact that nearly every other developed nation in the world is in the process of implementing one.

Every day in America, a handful of insurance companies keep universal health care from the 100 million or so citizens who are either uninsured or chronically underinsured.

In my opinion the reason these things are happening is because also every day in America, the average public company CEO earns about 400 times what his average employee makes, while thousands of other managers in both business and financial services drink heartily from the same frothy trough. 

For most of the last century, CEOs in the U.S. earned roughly 20 times as much as the average employee [source: EPI per NY Times, 12-18-05 and 1-01-06], and even today the ratio of CEO pay to that of the average employee has remained around 22-times in Britain, 20-times in Canada, and 11-times in Japan.  But in just ten years time or so, we in America abandoned this fair and equitable relationship, both in business and in financial services.

And in the process, we not only shot our own economic foot off, but that of nearly every other economy in the world.  For not only is our current extreme disparity in compensation an ethical embarrassment and an affront to workers and shareholders, but it also sadly underpins, in my opinion, almost every major corporate misbehavior of the last decade, especially including this great "financial crisis of 2008".  As the infamous bank robber Willie Sutton said when asked why he robbed banks, "It's where the money is."

President Obama and Congress need to take a very proactive role in fixing our capitalist system and reestablishing its fairness:

First, Congress should immediately grant public shareholders the rights, on their own, to call shareholders' meetings, to vote out the current board, and to render advisory votes on executive compensation. Much better than any other measures contemplated or previously adopted, these three rights, which are already in place and working well in Britain, would align shareholder and management interests as to both governance and executive compensation.

Second, Congress should establish a ceiling for individual executive compensation as a reasonable multiple of average employee compensation, and penalize through the corporate income tax code those companies that elect to pay in excess of this multiple.

Third, Congress should close the loopholes that currently allow the wealthiest Americans to use offshore tax schemes that cost our Treasury $70 billion in taxes each year, and it should aggressively step up tax enforcement to capture the 30% or so of earnings from selling investments that currently goes unreported each year.

And fourth, Congress should empower the Department of Treasury to oversee the compensation practices of any entity that has or relies on federal government guarantees.

If Congress enacts these four measures, then we will have mitigated many of the current breakdowns in our economy.  And the fairer and more balanced sense of corporate responsibility which so honorably distinguished our country for most of the 20th century will have been restored.

Thank you for allowing me to join you today. 

Leo Hindery Jr. chairs the Smart Globalization Initiative at the New America Foundation and is formerly CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI) and Liberty Media. He is now an investor in media companies as Managing Partner of InterMedia Partners, LP in New York City. He is the author of "It Takes a CEO: It's Time to Lead With Integrity" (Free Press, 2005).  During 2007-2008, he was Senior Economic Policy Advisor for U.S. Presidential candidate John Edwards, and later unofficial economic advisor to now President Barack Obama.