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Chadwick: Hey Washington, Want Jobs? Here's How

Why is there no job growth in the U.S. Economy?

Susan Trigg | Getty Images

Depending upon whom you ask, you can get any number of different answers. Political demagoguery is the easy response, particularly when we are less than fourteen months away from the presidential election.

But I am confident that had John McCain won the election in 2008, the unemployment rate today would not be much lower than it currently is.

Contrary to what many Republicans say, the stimulus plan did indeed help the economy and certainly provided for jobs. And for the most part the money that was spent was used for long overdue infrastructure spending that the Government should have been doing all along. But there is no way the stimulus plan could be a long term solution for economic growth. That is the responsibility of the private sector.

The real problem underlying the dearth of new jobs today is two-fold.

On the one hand, it reflects the fact that the consumer is paying for the sins of the past. For two decades, consumers in this country went on a spending spree. With the aid of banks and other lending institutions, they used the equity in their homes to borrow money, over and above what they were earning, and then they spent that money. Such behavior acted as a stimulus to the economy, that is, until the music stopped.

The recession that started in 2007 brought an end to the profligate borrowing, as the decline in home values eviscerated many homeowners’ equity. Banks turned off the lending spigot and consumers were forced to alter their lifestyles. Instead of turning to a new line of credit in order to pay off the old one, they found themselves forced to repay their loans, often as their own income was diminished. Their response was quick and logical. They cut back on spending and started to save, and savings rates, which had plummeted over the past twenty years of excessive spending, began a sharp reversal, rising dramatically over the last four years. All of that sounds like good news, and in one way it is because it means that the consumer’s balance sheet is improving.

However, savings increases are coming at the expense of spending and therein lies one of the big problems for job growth and the economy in the short run. Savings by definition is money NOT spent. Savings in the long run will be very beneficial and will allow consumers to replenish their balance sheets but the process is painful. And because the consumer had so much debt at the time of the recession, it is likely that it will take a number of years still before consumer spending becomes robust again. And without robust demand, it is difficult to create new jobs.

On that score, it is not fair to blame the current administration for the lack of jobs. Consumers brought this state of affairs on themselves, and they are slowly rectifying it.

On the business side of the economic equation, which is the investment part of the economy, the issue of job creation is also a problem. In part, it is the result of slow final demand by consumers who are unable to spend as freely as they could when borrowing was at their beck and call. However, the problem is bigger and more dire than that.

Businesses spend their capital and/or expand their labor force based on the profits they expect to generate from those investments. Entrepreneurs make decisions about starting new businesses (and more than half of the job creation in this country comes from new and small companies) on the basis of the long term outlook for growth and profitability.

What has emerged over the last several years is an environment of Government regulation that is truly crushing the entrepreneurial spirit in this country. Companies large and small are facing an array of rules, restrictions, and profit-destroying constraints that have immobilized capital. The threat of higher taxes for corporations and small owner-operated business is a powerful deterrent to capital formation.

Until and unless there is a major reprieve from such stultifying over-regulation, our economy will not make forward progress and unemployment will remain unnecessarily high. The blame for this state of affairs can indeed be laid at the feet of the current administration. President Obama is either getting bad advice from his inner circle of advisors or not heeding them, but he ignores the problems facing business and employment at his own peril.

There is not much time between now and Election Day in 2012 to remedy the unemployment rate. However, massive elimination of regulation and an equalization of corporate tax rates that allows the U.S. to be competitive with other countries would be a major start. A bold move such as that would send the message that the President understands how the economy works and what it needs to get it turned around. But as of now, people don’t think he gets it and they will be looking for someone for President who does.

Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.

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