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Bill George

Harvard Business School Professor, former Medtronic CEO

Tag: main street business

Economic Crisis Moves to Main Street

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:

  1. 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.
  2. To incentivize investment in research, R&D tax credits should become permanent.
  3. Free trade agreements should be negotiated to open up export markets and reduce punitive tariffs.
  4. 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.
  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. 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.