What will it take to bring back 7 million jobs?

A growing political debate over how to revive the job market has its roots in a very basic predicament: Jobs disappeared during the recession on a scale not seen since the 1930s.

Worry about a “jobless recovery” needs to be understood in this context. If employment recovers slowly this time – as it did after the past two US recessions – it would be a much bigger problem than it was following slumps in 1991 or 2001. That’s because there’s a much bigger hole to fill.

More than 5 percent of US jobs have disappeared since the recession began in 2007, some 7 million in all. That compares with job losses in the neighborhood of 1.5 to 2 percent during the previous two recessions.

No wonder there’s a lively discussion in Washington about whether the $787 billion stimulus plan is working and whether new tax credits or other policies could create jobs.

“It’s probably going to be at least as difficult as the prior two jobless recoveries,” says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C. “It is very, very challenging.”

Not every forecaster believes job growth will be tepid over the next year or two. But the big risk is a worst-of-two-worlds outcome: That massive job losses – the kind last seen decades ago – will be coupled with the kind of lackluster rebound seen in more recent times.

How long to get back to normal?
The goal is not just to get those 7 million jobs back. First, the economy needs to stop losing jobs – a corner that may be turned early next year. By some estimates, the economy must then add about 125,000 jobs a month, or 1.5 million a year, to keep up with the natural rate of growth in the labor force.

What does that mean for getting back near a 5 percent unemployment rate?

Here’s a back-of-the-envelope calculation: If jobs could grow at a mid-1990s pace of 3 million a year, it would take about five years. If jobs grow at a mid-2000s pace of 2 million a year, it would take a lot longer.

In the past, steep job losses have often been followed by strong rebounds in jobs. What’s different today is a historic erosion of household wealth: households amassed record levels of debt in the past decade, and then saw the value of homes and stock portfolios tank.

Against this backdrop, economists say the number of jobs needed is more than the government can afford to engineer.

Consider that in May, the Obama administration gauged the likely impact of its record stimulus package as creating 6.8 million “job years” (one job existing for one year) during the 2009-2012 period. Put differently, the stimulus is expected to generate jobs temporarily, peaking in 2010 at about 3 million jobs for that year.

Lawmakers weigh more fixes
The nation won’t know for a while whether the stimulus will deliver on that estimate. But with the unemployment rate pushing near 10 percent, lawmakers are considering a range of additional policies.

These include:

  • Extending the first-time homebuyer tax credit, worth up to $8,000.
  • Extending unemployment benefits and health benefits for laid-off workers.
  • Tax breaks for businesses that hire new employees or spend on new equipment and facilities.
  • Additional federal spending on infrastructure, or aid to state governments.

“Under any plausible scenario, the effects of [additional] fiscal stimulus are still likely to fade in the second half of 2010,” Alec Phillips, an economist at Goldman Sachs, wrote in a report Friday assessing these proposals. He said the proposals, depending on their sizes, might increase gross domestic product in 2010 by anywhere from 0.2 to 1.6 percent.

A central concern is whether fiscal stimulus will be effective at a time of high federal deficits, say some experts, since many businesses and consumers will factor in the likelihood of higher taxes down the road.

Republicans in Congress wrote letters this week to Mr. Obama and House Speaker Nancy Pelosi (D) of California, arguing that Democratic policies are hindering instead of helping in the quest for jobs. “Nearly 3 million private sector jobs have been lost in America since the ’stimulus’ was signed into law,” House Republican Leader John Boehner and colleagues said.

What’s unknown, of course, is what the job market would look like without the stimulus. Republicans have proposed their own stimulus measures, centered around tax cuts for businesses and households, and reforms to bring down the cost of health insurance.

Some economists say that it’s possible employment will pick up faster than expected.

Michael Darda of MKM Partners in Greenwich, Conn., argues that fears of a persistently weak “new normal” in the labor market are overblown.

“Large declines in both output and employment tend to give way to more rapid recoveries,” he writes in a recent report. But even a recovery that surprises people for its strength, he said, doesn’t mean a quick return to low unemployment rates of 5 percent.

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Comments (3)

  1. Submitted by Richard Schulze on 10/12/2009 - 11:08 am.

    Simple, another housing bubble.[snark alert]

    How much of the current unemployment and under employment rate is tied to the housing boom?

    A key problem for housing and the economy is that there are too many housing units compared to the number of households. However it is important to note that the two key categories of housing inventory are owner occupied units and rental units.

    The so-called “first-time” home-buyer tax credit just moves people from renting to owning, and doesn’t reduce the overall number of excess housing units. The tax credit policy will push the rental vacancy rate above 11% soon.

    By just shuffling households from renting to owning, the tax credit will force some of these accidental landlords into foreclosure.

    And although a higher vacancy rate and lower rents is good news for renters, this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

    Since the tax credit is poorly targeted and inefficient, it might be hurting the economy more than helping. And it does nothing to reduce the excess inventory problem.

  2. Submitted by Richard Schulze on 10/12/2009 - 03:16 pm.

    When I hear the call for “Tax breaks for businesses that hire new employees or spend on new equipment and facilities.” I have to wonder who is going to supply the demand to purchase the widgets that will be manufactured buy the newly hired employees.
    Tax breaks do not equal demand.

    Here is another reality check: The expansion of our economy was really fueled by housing. A huge amount of job creation was tied to housing. As well as a huge amount of consumption. Housing peaked in 2006.

    snip//Between 2000 and 2007, US households led a national borrowing binge, nearly doubling their outstanding debt to $13.8 trillion. The pace was faster than the growth of their incomes, their spending, or the nation’s GDP. The amount of US household debt amassed by 2007 was unprecedented whether measured in nominal terms, as a share of GDP (98 percent), or as a ratio of liabilities to disposable income (138 percent). But as the global financial and economic crisis worsened at the end of last year, a shift occurred: US households for the first time since World War II reduced their debt outstanding.

    Over the past decade, rising US household spending has served as the main engine of US economic growth. From 2000 to 2007, US annual personal consumption grew by 44 percent, from $6.9 trillion to $9.9 trillion – faster than either GDP or household income. Consumption accounted for 77 percent of real US GDP growth during this period – high by comparison with both US and international experience.//snip
    http://www.zerohedge.com/sites/default/files/McKindsey%20On%20Consumer%20Debt.pdf

    Most borrowers have maxed out the ATM that most folks would call their home. Credit card spending is all but over. The as long as I can make the monthly payment attitude will no longer apply. So where does one begin to supply both the consumer demand and spending that until recently, had furiously fueled our economy. More tax breaks?

    The question we should be asking now, is not how can we revive our old economy, the one that was one built on credit and borrowing and thus unsustainable. But what will the new economy look like and how can we develop it without massive consumer debt and the endless leveraging that industry had come to embrace.

  3. Submitted by Joshua Abell on 10/15/2009 - 09:03 am.

    Unfortunately “Extending unemployment benefits and health benefits for laid-off workers.” will not bring back jobs. It will make not having a job suck less, but it will actually increase unemployment. People not getting unemployment benefits are more likely to go out and get another job. The problem is that they are more likely to get a crappier job.

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