The balloons and confetti showers at the recent Republican and Democratic Party conventions have not helped brighten America’s dour economic outlook. For all the chest thumping about the US being the “greatest nation”, vague programmes and poisonous divisions cannot inspire confidence. As the world’s major economies continue to lose steam, the odds of a recovery led by a rejuvenated US look increasingly remote.
Unemployment in the US is not just a concern for American voters in the presidential election, but also a wider world relying on a resilient US market. With 12.3 million unable to find jobs and many more having stopped looking for work, US demand for goods has shrunk, dragging down with it the jobs of people the world over.
At a recent central bankers’ meeting, Fed chairman Ben Bernanke put it bluntly: “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.” But there are few good and practical ideas on how to create jobs. Increasing aggregate demand to stimulate job creation brings with it the classic chicken-and-egg dilemma as US corporations are sitting on huge piles of cash, waiting for the market to generate demand for the goods and services they would produce.
Obsessed with reducing the deficit, the Republican recipe is to shrink government and extend tax breaks to the rich. Candidate Mitt Romney says cutting taxes for ‘job creators’ and entrepreneurs will allow those individuals to invest and create jobs. But Romney does not explain how he will fill the hole created by this loss of tax revenue; and not further widen the yawning budget deficit that he blames on President Barack Obama. Republicans have criticised as ‘socialism’ Obama’s $787-billion stimulus plan that stemmed the economy’s free fall and saved millions of jobs. Romney would instead count on the private sector to revive the economy.
Democratic plans for revitalising the economy are more detailed but have little chance of succeeding given the bitter political divisions. The Obama plan calls for increasing aggregate demand and meeting great social needs by creating and protecting tens of thousands of jobs with government spending. In a $447-billion jobs plan he presented to the Congress a year ago, he proposed to cut the payroll tax for workers to stimulate buying power, aid state and local governments to avoid planned layoffs of teachers, police officers and firefighters.
He also proposed to reduce taxes for small businesses while creating jobs through spending on roads, bridges and refurbishing of schools. With the exception of a minor tax cut for workers, the rest of the plan was blocked by Congressional Republicans.
Had the bill been passed, it would have created over a million jobs by this year. The fact that no jobs were created perversely provides his Republican challenger the very argument he is employing to castigate Obama for his failure.
Politicking aside, the Republicans haven’t addressed a deeper, long-term problem faced by the US: structural changes in the economy leading to what economist Joseph Schumpeter called ‘creative destruction’. Manufacturing that is emerging from the ashes of the smokestack and massive labour-intensive factories are capital and technology intensive industries with ever decreasing need for low-skilled workers. But the highly trained engineers and college-educated operators and technicians needed for the new economy are in short supply. Even if assured of low taxes, entrepreneurs were to invest in new industries, as Romney wants, it won’t help reduce unemployment. As is already the case, millions of jobs will remain unfilled, lacking skill. Conscious of the challenge, the Obama administration tried to launch education and training programmes like the “Right Skills Now” in conjunction with the manufacturers’ association to meet the need. But again, their attempts have been largely defeated by the steep spending cuts demanded by Republicans in Congress.
Even if Obama wins re-election in November, with the Republicans still strong enough to gridlock Congress, slow growth and joblessness are likely to dog the US economy in the foreseeable future. Speaking at the Democratic convention former president Bill Clinton said, “The old economy is not coming back, we’ve got to build a new one.” The problem for America today is that it takes two parties to build one.