January 15, 2010
Jobs, Jobs, JobsBy Howard Richman, Raymond Richman, and Jesse Richman
The economic news for January has been dominated by disappointing employment news released on January 8 by the U.S. Bureau of Labor Statistics. Total non-farm payroll employment edged down by 85,000 in December from November, led by a loss of 57,000 construction jobs and 27,000 manufacturing jobs. Public dissatisfaction with the Obama administration's handling of the economy has been following employment levels down.
A few days later, on January 12, the U.S. Department of Commerce reported that the trade deficit rose 9.7 percent in November. The media ignored the relationship of the trade deficits to the lost manufacturing jobs.
The loss of construction jobs reflects, in part, a natural consequence of the popped U.S. real estate bubble. As the graph below shows, construction employment has been on a roller coaster, generally rising until 2006 but falling precipitously ever since.
Although always cyclical at the local level, the nation's housing market has not always been so volatile. It grew fairly steadily from 1951 through 1997, following the passage of President Truman's rollover treatment of capital gains from home sales. Whenever a homeowner sold his or her primary residence to buy another residence, the capital gains tax was deferred (i.e., rolled over) until the new home was sold. Homeowners would typically build up their equity in one home, sell that home, and then use their savings to make a down payment on a larger home. During that period, families bought homes to live in, not to make money.
But in 1997, at the urging of President Clinton, Congress changed the tax code so that almost anyone who had lived in a house for two of the past five years could sell that house free from capital gains tax. The new policy encouraged homeowners to gamble. If they saw that houses were going up in price, they would buy second or even third homes in the hopes of getting a tax-free capital gain.
The resulting overbuilding spree caused construction employment to rise until 2006. Other factors also contributed. Mortgage rates were kept artificially low by an influx of foreign government money as a result of mercantilist government currency manipulations. At the same time, the Community Reinvestment Act of 1977, which is still on the books, forced banks to lend money for mortgages to unqualified borrowers lacking sufficient equity. Government pressure was brought through Fannie Mae and Freddie Mac to keep mortgage rates artificially low through a secondary market for subprime mortgages.
Once the housing bubble popped in 2006, there were a huge number of houses for sale. The Obama administration and the Federal Reserve tried to help get them sold by shoveling taxpayer money into the banking and housing sectors, including tax credits for first-time home-buyers and huge loans to Fannie Mae, Freddie Mac, and AIG.
On December 24, the U.S. Treasury officially raised the lower limit from $400 billion on the amount of money that it is willing to pour into Fannie and Freddie. And the Federal Reserve's January 7 balance sheet shows that it has another $908 billion already invested in Fannie Mae's, Freddie Mac's, and Ginnie Mae's mortgage-backed securities.
In a commentary aptly entitled "Will the U.S.A. Go Bankrupt?" Mike Coplits of HousingPredictor.com estimates that the bank/mortgage bailout could end up costing the U.S. government $1.9 trillion, which is more than the U.S. government collected in 2008 in personal and corporate income taxes combined. Despite these heroic efforts, the layoffs of construction workers continued.
There probably isn't anything that we can do to bring back construction jobs. The smartest thing would be simply to stop wasting taxpayer and Federal Reserve money. In a few years, construction employment will stabilize on its own, no matter what we do.
In the meantime, Congress can learn a valuable lesson from Clinton's mistakes. In general, we are much better off with tax reforms that encourage wealth accumulation than with tax reforms that encourage speculation. We recommend the rollover treatment for all capital gains, replacing our corporate income tax with a VAT, or replacing our entire tax system with the Fair Tax.
As the graph below shows, manufacturing employment fell off a cliff in 2000 and has been falling steadily ever since, with rapid job losses from 2000-2003 and from 2008 to the present.
President Clinton got these job losses rolling in 1999 when he opened the way for China to enter the WTO without first requiring it to open its markets and let its currency float freely against others. Then, from 2001-2009, Presidents Bush and Obama allowed China to continue its objectionable trade practices, including manipulating the dollar-yuan exchange rate in order to produce huge trade deficits for the U.S. vis-à-vis China.
If trade were in balance, China would have produced only those goods in which it enjoyed a comparative advantage and traded them with the U.S. for the goods in which we enjoyed a comparative advantage. Those jobs lost in our labor-intensive industries would have been replaced by higher-paying jobs in our capital-intensive industries.
But the Chinese government used, and continues to use, a wide variety of techniques to keep its people from buying U.S. products. In 2008, the Chinese government let its people purchase only 25¢ of our goods and services for every $1 we bought from them, even as its subsidies and currency manipulations gave Chinese exporters an artificial advantage in areas where they would otherwise be less effective competitors.
President Obama has been nibbling around the edges of China's mercantilist policy. He has imposed tariffs on Chinese tires, secured an agreement from China to end some of its export subsidies, and got China to reduce its tariffs on American-made auto parts. But he has done nothing that would actually require the Chinese government to give up its overall mercantilist policy of maximizing exports while minimizing imports.
Instead, President Obama has tried to revive American manufacturing by subsidizing investments in windmills and solar panel production. On the same day that the disappointing jobs report came out, he announced that his administration was awarding $2.3 billion in Advanced Energy Manufacturing Tax Credits for retooling, establishing, or expanding green-energy manufacturing facilities in the United States. Up to this point, his funding of windmill projects has subsidized purchases of many foreign-produced windmills.
Even if Obama's subsidies increase American green-energy manufacturing jobs, they will probably result in a net job-loss for our manufacturing sector. A study by Gabriel Calzada, economics professor at Madrid's King Juan Carlos University, calculated that Spain lost 2.2 jobs in other industries for every government-subsidized green job that was created. The problem is that renewable energy, being more expensive, raises the overall cost of energy for local manufacturers.
Meanwhile, his administration is discouraging investment in profitable energy sources that would actually reduce manufacturers' business costs. Not only are they letting Senator Harry Reid veto the construction of a nuclear waste storage facility in Nevada, but they are also threatening EPA regulation of carbon. And he is doing nothing to switch our transportation system from expensive imported oil to America's abundant and relatively inexpensive natural gas.
Although there is little that the Obama administration could do to bring back construction jobs, manufacturing is another story. All he would have to do is insist on balanced trade with countries with whom we are experiencing chronic trade deficits.
There is a specific remedy within WTO rules for trade deficit countries: country-targeted tariffs or import restrictions. If the United States were to tie the value of American imports from China to the value of Chinese imports from the United States, as we recommended in our 2008 book Trading Away Our Future, the Chinese government would have to give up its mercantilist strategy. The result would be a boom in the building of modern capital-intensive factories in the United States. This particular remedy in the WTO rules states:
Just the threat of such action would likely get China to take down their many, many barriers to American goods. Once American and international corporations realized that the United States was serious about balancing trade, they would build highly efficient new factories in the United States.
How many jobs would this create? Since each manufacturing worker produces about $100,000 worth of product, balancing trade would produce somewhere between 4 million and 7 million new manufacturing jobs. And each of these new manufacturing workers would have money to spend on locally-produced goods and services. The resulting boom would probably be enough to set the U.S. on a growth path.
Instead, President Obama's foolish economic policies are likely to worsen the recession, leading to Democratic Party defeats in upcoming elections. By 2012, construction jobs will probably have stabilized, but it may be up to Republicans to put forward the obvious solution to America's manufacturing problems: balanced trade.