What U.S. Economic Recovery? Five Destructive Myths

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Half of Americans say they couldn't come up with $2,000 in 30 days without selling some of their possessions. Meanwhile, companies are flush: American firms generated $1.68 trillion in profit in the last quarter of 2010 alone. But many firms would think twice before putting their next factory or R&D center in the U.S. when they could put it in Brazil, China or India. These emerging-market nations are churning out 70 million new middle-class workers and consumers every year. That's one reason unemployment is high and wages are constrained here at home. This was true well before the recession and even before Obama arrived in office. From 2000 to 2007, the U.S. saw its weakest period of job creation since the Great Depression.

Nobel laureate Michael Spence, author of The Next Convergence, has looked at which American companies created jobs at home from 1990 to 2008, a period of extreme globalization. The results are startling. The companies that did business in global markets, including manufacturers, banks, exporters, energy firms and financial services, contributed almost nothing to overall American job growth. The firms that did contribute were those operating mostly in the U.S. market, immune to global competition — health care companies, government agencies, retailers and hotels. Sadly, jobs in these sectors are lower paid and lower skilled than those that were outsourced. "When I first looked at the data, I was kind of stunned," says Spence, who now advocates a German-style industrial policy to keep jobs in some high-value sectors at home. Clearly, it's a myth that businesses are simply waiting for more economic and regulatory "certainty" to invest back home.

Myth No. 4: We'll pack up and move for new jobs
The myth of mobility — that if you build jobs, people will come — is no longer the case. In fact, many people can't move, in part because they are underwater on their homes but also because the much heralded American labor mobility was declining even before this whole mess began. In the 1980s, about 1 out of 5 workers moved every year; now only 1 of 10 does. That's due in part to the rise of the two-career family — it's no longer an easy and obvious decision to move for Dad's job. This is a trend that will only grow stronger now that women are earning more advanced degrees and grabbing jobs in the fastest-growing fields.

A bigger issue is that the available skills in the labor pool don't line up well with the available jobs. Case in point: there are 3 million job openings today. "There's a tremendous mismatch in the jobs market right now," says McKinsey partner James Manyika, co-author of a new study titled An Economy That Works: Job Creation and America's Future. "It runs across skill set, gender, class and geography." A labor market bifurcated by gender, skill set and geography means that unemployed autoworkers in Michigan can't sell their underwater homes and retool as machinists in North Dakota, where homes are cheaper and the unemployment rate is under 5%.

Myth No. 5: Entrepreneurs are the foundation of the economy
Entrepreneurship is still one of America's great strengths, right? Wrong. Rates of new-business creation have been contracting since the 1980s. Funny enough, that's just when the financial sector began to get a lot bigger. The two trends are not disconnected. A study by the Kauffman Foundation found an inverse correlation between the two. The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs. The credit crunch has exacerbated the problem. Lending is still constrained, and the old methods of self-funding a business — maxing out credit cards or taking a home-equity loan — are no longer as viable.

So where does it all leave us? With an economy that still needs a major shake-up. There are short-term and long-term solutions. Job No. 1 is to fix the housing market. While the government is understandably reluctant to get deeper into the loan business, it's clear that private markets aren't able to work through the pile of foreclosures quickly enough for house prices to stabilize. If the numbers don't improve in the next month or so, it might be time for the government to step in and either take on more failing loans (a TARP for homeowners as opposed to investment banks?) or pass rules that would allow more homeowners to negotiate better terms with lenders.

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