Courtesy of BusinessWeek.com
Wall Street may have stabilized, but the crisis on Main Street is deepening. The jobs crisis is going to get worse before it gets better.
The stock market is booming again after months of sharp decline. Leading economic indicators are turning positive. Prominent economists, the Federal Reserve Bank, and the White House are proclaiming the U.S. is on its way to recovery.
If you’re one of 7.5 million Americans who lost your job in the recession, don’t buy into this optimism for a minute. Wall Street may have stabilized, but the crisis on Main Street is deepening. Get ready for the long haul: The jobs crisis is going to get worse before it gets better.
This recession is the deepest and longest of the past 60 years. By the end of 2009, 9 million to 10 million people will have lost their jobs, triple the number of any period since the Depression. Those jobs aren’t coming back soon. The true unemployment rate, counting former full-time employees doing low-paying, part-time jobs and those who have given up looking, is running 16% and looks like it is heading to 20%.
STIMULUS WON’T SOLVE THE PROBLEM
The situation is dramatically worse among racial minorities and the young. The only sectors gaining employment are government, education, and health care, all of which are largely funded by taxpayers, not private investment. The U.S. cannot look indefinitely to deficit financing to offset private-sector losses.
Last winter’s $787 billion stimulus package isn’t going to solve these problems. These funds are going for tax cuts, extended unemployment compensation, fiscal relief for states, and federal spending. The stimulus package is providing temporary relief that it helping to stabilize the economy but it won’t get the economy growing steadily again, nor will it provide steady new jobs for the unemployed.
The government’s claim that the stimulus will “create or retain 3.5 million jobs” by the end of 2010 is misleading. Saved jobs are generally not sustainable. For example, look at General Motors, which emerged quickly from bankruptcy, thanks to prompt action by the Obama Administration. Its employment trend is clear: non-competitive U.S. factories will be shuttered and thousands of people laid off as GM shifts to more competitive plants overseas. Other traditional manufacturing industries are experiencing similar shifts.
HEADING FOR A JOBLESS RECOVERY
We have structural problems in the economy that can only be resolved with a new growth strategy. The post-recession economy of 2010-2012 won’t resemble the boom economy of 2007-08. The latter was driven by overheated consumer spending and depleted savings, which created nonsustainable jobs that were quickly shed when the financial crisis hit. Consumers who are out of work—or fear that they might be—aren’t going deeper in debt to buy new cars or houses, no matter how attractive the incentives.
It is highly unlikely that traditional companies will be the ones to add employees. No CEOs I know are hiring these days, other than replacement workers, nor do they have plans to ramp up hiring. At many companies, workers who leave aren’t being replaced at all. Companies continue to look to technology for efficiency instead of their employees. When large numbers of employees are needed, jobs are often moved outside the U.S., usually to Asia.
Unless immediate action is taken, we’re headed for a jobless recovery, which will be a drag on the economy for years to come. There is only one way out of the jobs crisis that will create sustainable new jobs: Revive the entrepreneurial economy based on innovation and creativity.
SEVEN WAYS TO CREATE JOBS
From 1982-2000, the U.S. went 18 years without a recession, but not because old-line companies were adding employees. Rather, new companies like Intel (INTC), Microsoft (MSFT), Apple (AAPL), Wal-Mart (WMT), Starbucks (SBUX), Target (TGT), and Google (GOOG) emerged as dynamic growth engines, driven by creativity. Thousands of new companies were jump-started by ingenuity and entrepreneurship. They stimulated U.S. demand and became leading global competitors.
What can the U.S. government do to stimulate another boom in innovation and entrepreneurship? It shouldn’t be by subsidizing preferred industries or funding startups. Instead, the government needs to facilitate innovation and new company formation. Here are seven things that would release the U.S. from a jobless recovery and create sustainable jobs:
1. Base capital gains taxes on the time an asset is held, with assets held for seven years or more taxed at only 10%. Investment tax credits should be dramatically increased and made permanent. These moves will stimulate company formation and capital spending.
2. Incentivize investment in research by increasing R&D tax credits and making them permanent.
3. Actively negotiate free trade agreements to open up export markets for U.S. companies to compete aggressively.
4. Accelerate federal investments in science and technology. To stimulate basic research in renewable energy sources, create a National Institute of Energy, like the National Institutes of Health.
5. Enforce patent and intellectual property rights around the world to enable American companies to realize global benefits from their research investments.
6. Expand educational grants for math and science, to encourage more young people to enter these fields.
7. Liberalize H1B visas to keep talented and entrepreneurial foreign nationals with U.S. graduate degrees in the U.S.
These actions will take time, but now is not the time to look for quick fixes. These steps will provide for sustainable gains in employment and healthy growth for the U.S economy.It’s time to get started.
The stock market is booming. Leading economic indicators are turning positive. Prominent economists, the Federal Reserve Bank, and the White House are proclaiming the U.S. is on its way to recovery.
If you´re one of 7.5 million Americans who lost your job in the recession, don´t believe this optimism for a minute. Wall Street may have stabilized, but the crisis on Main Street is deepening. Get ready for the long haul: the jobs crisis is going to get worse before it gets better.
This recession is the deepest and longest of the past sixty years. By the end of 2009, 9-10 million people will have lost their jobs, triple the number of any period since the Depression. Those jobs aren´t coming back soon.
The true unemployment rate, counting former full-time employees doing low-paying, part-time jobs and those who have given up looking, is running 16 percent and headed to 20 percent. The situation is dramatically worse among racial minorities and the young. The only sectors gaining employment are government, education and health care - all largely funded by taxpayers, not private investment. The U.S. cannot look to deficit financing indefinitely to offset private sector losses.
Last winter´s $787 billion stimulus package isn´t going to solve these problems. Its funds are directed at tax cuts, extended unemployment compensation, fiscal relief for states, and federal spending. This provides temporary relief to stabilize the economy, but won´t get it growing steadily again, nor provide steady new jobs for the unemployed.
The government´s claim that the stimulus will "create or retain 3.5 million jobs" by the end of 2010 is misleading. Saved jobs are generally not sustainable. For example, look at General Motors, which emerged quickly from bankruptcy, thanks to prompt action by the Obama administration. Its employment trend is clear: non-competitive U.S. factories will be shuttered and thousands of people laid off as GM shifts to more competitive plants overseas. Other traditional manufacturing industries are experiencing similar shifts.
We have structural problems in the economy that can only be resolved with a new growth strategy. The post-recession economy of 2010-2012 won´t resemble the boom economy of 2007-08. The latter was driven by overheating consumer spending and depleting savings, creating non-sustainable jobs that were quickly shed when the financial crisis hit. Consumers who are out of work - or fear that they might be - aren´t going deeper in debt to buy new cars or houses, no matter how attractive the incentives.
No CEOs I know are hiring these days, other than replacement workers, nor do they have plans to ramp up hiring. Instead, they are replacing people with technology. Where they need large numbers, the jobs are being moved outside the U.S., usually to Asia.
Unless immediate action is taken, we´re headed for a jobless recovery, which will be a drag on the economy for years to come. There is only one way to create sustainable new jobs: revive the entrepreneurial economy based on innovation and creativity.
In the 1980 and 1990s the U.S. went 18 years without a recession. Why? Not because old-line companies were adding employees. Rather, new companies like Intel, Microsoft, Apple, Wal-Mart, Target, and Google emerged as dynamic growth engines, driven by creativity. Thousands of new companies were jump-started by ingenuity and entrepreneurship. They stimulated U.S. demand and became leading global competitors.
What can the U.S. government do to stimulate another boom in innovation and entrepreneurship? Here´s a list of seven things that are required to create sustainable jobs:
- To stimulate company formation and capital spending, base capital gains taxes on the time an asset is held, with assets held for seven years taxed at only 10 percent. Investment tax credits should be dramatically increased and made permanent.
- To incentivize investment in research, R&D tax credits should become permanent.
- Free trade agreements should be negotiated to open up export markets and reduce punitive tariffs.
- Federal investments in science and technology should be accelerated. To accelerate basic research in renewable energy, create a National Institute of Energy, like the National Institutes of Health.
- Enforce patent and intellectual property rights around the world to enable American companies to realize global benefits from their research investments.
- Expand educational grants for math and science, to encourage more young people to enter these fields.
- Instead of sending foreign nationals with U.S. graduate degrees back to their home countries, liberalize H1b visas to keep these talented and entrepreneurial people in the U.S.
These actions will take time, but will provide for sustainable gains in employment and healthy growth for the U.S economy.
It´s time to get started.
Robert McNamara´s death this week has reignited the controversy over the Vietnam War. Many Americans blame McNamara for everything from America´s first lost war to the death of 58,000 American troops. Even in death, McNamara´s life remains a contradiction - a brilliant but flawed leader. Yet much can be learned from McNamara, both good and bad.
I had the privilege of working for him in 1966-1967 as assistant to the Pentagon´s CFO. I saw McNamara as a hard driving but compassionate leader, committed to addressing major issues in the world. He was passionate about nuclear proliferation and reducing the risks of nuclear attack. From the Cuban missile crisis, he knew first-hand just how close we and the Soviets came to mutual self-destruction.
On Vietnam, he was a tortured human being who knew intuitively the war was not going well, but couldn´t admit it in public. Yet privately he was desperately seeking an honorable way out. His last forty years he ruminated about what went wrong. His agony was painfully displayed in Errol Morris´ 2004 documentary interview, "The Fog of War." McNamara tried to explain his mistakes, but never could admit his initial error in getting the U.S. into the war.
As a 23-year-old Harvard Business School graduate, I opted to defer my business career to learn leadership from McNamara and the extraordinary people around him. Along with three classmates, I was responsible for a wide range of analyses that McNamara demanded, from the cost of the war and F-111 aircraft studies, to analytical justifications for getting out of the war.
That brought me in regular engagement with McNamara, as well as great leaders like Cyrus Vance, Paul Nitze and, Harold Brown. McNamara surrounded himself with young people known as "whiz kids" for their brilliance but also their arrogance. Driven by McNamara´s quest for analytical data, they believed numbers could solve all problems.
Ironically, McNamara´s greatest strengths were his greatest weaknesses and led to his downfall. He used his analytical intellect to dominate Kennedy´s and Johnson´s cabinets. But his machine-gun questioning style was so intimidating that he cut off honest "truth tellers" trying to help him understand the reality in Vietnam.
McNamara had intense loyalty to powerful bosses like Ford´s Henry Ford and Presidents Kennedy and Johnson, which also led to his undoing. In late 1967, word got to President Johnson that McNamara opposed the war, causing Johnson to replace him with Clark Clifford. Instead of telling him directly, Johnson leaked the news that McNamara was being sent to the World Bank.
McNamara´s greatest flaw was his inability to admit his mistakes. Even when he knew he was wrong, he searched for a rationale to prove he was right. At times all 40,000 people in the Pentagon were trying to cover his mistakes - and our own. His initial strategy was to match North Vietnamese and Vietcong troop buildup with incremental additions to U.S. troops, but this led to a stalemate.
McNamara then bought into the rationale that we could win a war of attrition through superior "kill ratios" (the ratio of enemy troops killed to our own) to decimate the enemy. This resulted in systemic overstating of the number of North Vietnamese and Vietcong killed. My college ROTC buddies told me that dead bodies of enemy troops were counted 3-4 times, just to improve kill ratios. Unfortunately, McNamara never recognized the numbers were falsified, because he trusted numbers as "truth."
To verify the data, my boss forced military intelligence to remove the estimated enemies killed from their force strength. In the eleven months prior to the devastating Tet offensive in January 1968, official reports indicated the Vietcong force dropped 80 per cent. After inflated estimates of 40,000 enemy deaths during Tet, the report´s fallacies were exposed.
The following year McNamara gave the keynote address at the commissioning of Naval carrier John F. Kennedy. He broke down several times and had to stop midway through his talk. I recognized then he couldn´t cope with the reality that Vietnam had destroyed the promise of the Kennedy years. To the end, McNamara was like a tragic Shakespeare figure, torn apart by internal agony but still searching for the answers to what really happened.
The tragedy of Robert McNamara´s leadership is this: an outstanding public servant was brought down by his unwillingness to face reality and unwillingness to admit his mistakes.
Portions of this are drawn from Bill George´s forthcoming book, "7 Lessons for Leading in Crisis."
