A Flight Plan for the American Economy

Growth is back, but jobs still aren't. Here are five ways to bring unemployment down

By Fareed Zakaria Sunday, June 05, 2011
    • Photograph by Stefan Ruiz for TIME

    U.S. manufacturing could surge on the back of products like Pratt & Whitney's new lean, green jet engines

    The good news is that the American economy is back to its precrisis size. The U.S. GDP is now about $13.5 trillion, a bit above what it was in 2007, before the financial crisis. The bad news is that we are producing the same amount of goods and services as in 2007 with 7 million fewer workers. The number of Americans who are unemployed has roughly doubled, and though that number is declining, it is doing so very slowly. Most new jobs are for part-time work at wages that average $19,000, less than half the median income. The official unemployment number does not include the millions who have stopped looking for work or are working part time. Add these categories and the actual number of Americans without a real full-time job would be closer to 24 million.

    This disconnect between economic recovery and employment growth is new. Since World War II, recoveries from recessions have followed a fairly stable path. After the crunch, the economy bounced back vigorously, often growing at a rate of around 6%, and employment started picking up steam. We are banking on that pattern recurring. Except that it isn't. Two years into the recovery, growth is about 2% and job creation has reached around 250,000 a month, which might sound high but is actually barely enough to keep pace with all the new workers entering the job market for the first time.

    President Obama's budget assumes that the economy will create 20 million jobs over the next 10 years. That would be an almost magical acceleration. Over the past 10 years, it has produced only 1.7 million. If unemployment doesn't drop a great deal fast — as it shows no signs of doing — problems proliferate in all directions. The "new normal" of slower growth and job creation means lower tax revenues and more unemployment and health benefits to be paid out, hence a much larger deficit. But the most significant impact is on the lives of the unemployed. Studies show that after a few years of not working, people lose the talents, skills and work habits that make it possible for them to work productively. They risk becoming a lost generation, lost to their country, their communities and their families.

    Ironically, it's the astonishing productivity of the U.S. that has brought us to this place. Usually, productivity gains translate into higher economic output, higher incomes and thus rising employment. That was the experience in the 1990s. This time, we've achieved productivity gains almost entirely by cutting jobs, finding ways of making the same products with fewer people. At many major companies, profits have returned to 2007 levels but with thousands fewer workers. "We've found ways to do more with fewer people," says Klaus Kleinfeld, the chairman and CEO of Alcoa.

    Two powerful drivers have allowed for this new productivity. The first is technology, which is producing massive efficiencies across industries. It has already transformed manufacturing and is now beginning to transform white-collar professions, with computer programs able to do, for example, the basic discovery work performed by expensive lawyers.

    The second force is, of course, globalization. There is now a single world market for many goods and services, and over the past 10 to 15 years, about 400 million people — from China, India, South Africa, Indonesia and elsewhere — have entered the global labor force, offering to make the same things Americans make for a tenth the price. That's why growth by itself won't create enough jobs. The economy increasingly has the capacity to grow nicely without adding many workers. America's largest companies have over $1 trillion in cash on their balance sheets. But the average American, who has seen his or her wages decline over the past decade, simply cannot find a good job. In a working paper for the Council on Foreign Relations, the Nobel Prize–winning economist Michael Spence and his co-author, Sandile Hlatshwayo, argue that "growth and employment are set to diverge" for decades in the U.S. They point out that over the past decade, most job growth was in two sectors — government and health care — and that neither is likely to grow dramatically over the next decade.

    The bottom line: forget about the debt ceiling, Pakistan and Afghanistan. The crisis of our times is the employment crisis. And there are solutions to it. We need to focus on five areas that will create jobs.

    Manufacturing. The image we all have in our heads when we think of bringing back good jobs is manufacturing. And such jobs fill a crucial space in the economy, allowing people with good skills but limited college education to earn a decent living. The trouble is, many of those people are now in places like China and Vietnam. But there is a way to keep manufacturing jobs in wealthy countries. Germany has managed to do so, bringing unemployment down sharply to an astonishing 20-year low in the midst of a global recession.

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