High unemployment – the new normal

George Rebane

[This is the submitted form of my monthly column published in this morning’s (11 December 2010) print edition of The Union.  The online version of it can be found here.]

This week another batch of economists got surprised.  What they didn’t understand again, let alone predict, was the nation’s unemployment rate – it jumped to 9.8% from 9.6%.  With all the stimulating that’s been going on, wasn’t it supposed to go the other way?  Fortunately, readers of this column were not surprised by the news, and some may even have prepared.

Let me be specific.  We have an ensconced government that has been and continues to be hostile to the creation of any jobs that do not involve government growth or subsidies.  If that is not enough, our government monopoly schools have produced a workforce that is rapidly going downhill in the global competition department.

Illustrating these points we begin with last month’s Survey of Current Business put out by the U.S. Bureau of Economic Analysis.  The report described “a dynamic group of companies that create high-paying American jobs based on significant capital investment and export prowess - precisely the kinds of jobs America desperately needs to build a sustainable recovery.”  This group of international firms has doubled its US workforce through a process called ‘insourcing’.

Insourcing is nothing but effectively cannibalizing America’s talent by using capital investment, increasing R&D, and expanding exports to attract from other companies the smartest and most experienced workers the country has to offer.  Such private-sector firms only hire from the top, and then spend enough empowering their workers to grow revenues and profits.  As a result, on the average these workers earn over 30% more than the average American worker.

Insourcing companies see prospects for increasing their US employment and operations through similar tactics.  But they are frustrated by our government which has constructed an extremely anti-business tax environment – at 35% it is one of the highest in the world.  The government also has been slow on trade liberalization which impedes the amount of goods that the US can export.  And finally, our feds have let the world know that these policies are not going to change any time soon.

Specifically, over 70% of the insourcing CFOs report to the Organization for International Investment that “the environment for doing business in America has deteriorated over the last year.”  The big culprit in all this has been the ‘buy American’ dictates of the $787B 2009 American Recovery and Reinvestment Act.

On the workforce development end we received another jolt this week.  Results of the latest Program for International Student Assessment tests were made public, and US teenagers were nowhere near the top.  Worse than that, we wound up below average in PISA’s reading, science, and math categories.  In reading, one out of five US students didn’t even achieve Proficiency Level 2 where "students can complete low-level reading tasks."

The top ranking students all came from Asian countries led by …, yes, China.  Well not exactly, Finland managed to score up there also (google ‘PISA test scores’).

Even though American students are “inching in the right direction”, what do these results tell us?  First we should realize that no one around the world cares about the talents of American lawyers and MBAs.  They can handle their own legal affairs and manage their own companies, thank you very much.  So what do we have left to sell that the world needs?

The obvious answer is technology development, and corporate processes involving high tech components.  Unfortunately, our primary and secondary schools are not geared to motivate or produce many workers for these areas.  Here’s a test I have been conducting for the last twenty years or so.  When meeting young people I always ask them about their career plans.  The overwhelming fraction (>70%) of responses name a career in government, or one that requires government subsidies.  Try it yourself.

Combine all this with the fact that today most people don’t have the raw talent to educate themselves for jobs paying more than overseas wages, and you see the inescapable conclusion that very few of our young are prepared to compete.  Instead they are taught to expect a lifetime of redistribution from someone else’s wealth – and to feel that this is their just due.

Meanwhile, we are being fed soothing pap that this federal stimulus or that one will fix things and return unemployment to the 5% ‘normal levels’.  This is not even close.  With no massive school upgrades, simplification of tax codes, and a sane regulatory environment, the new normal will be at the 10-15% level and rising.

George Rebane is a retired systems scientist and entrepreneur in Nevada County who regularly expands these and other themes on KVMR, NCTV, and Rebane’s Ruminations (www.georgerebane.com).

Comments

[Russ Steele]

George,

You comment about ARRA's Buy American policy reminded me that on the ARRA Broadband Funding, the governement agencies running the program ran into a brick wall and had to get a congressional exemption. Many of the telcoms, especially the wireless broadband providers, could not build a system with out using key components manufacture outside of the US. The program was delayed almost a year, while the NTIS and Department of Agriculture obtained an exemption from the Buy American policy. We currently lack the manufacturing resources in American to bring broadband to every citizen that wants or needs it.

I also found it interesting the Asian nations and Finland, which have the higher PISA scores, have much higher broadband downlload speeds than in the US. The median download speed in the U.S. is a mortifying 2.35 megabits per second (mbps). In Japan the median download speed is 63.60 mbps. In South Korea it’s 49 mbps, and in tiny Finland it’s 21.7 mbps. These countries are pushing for high speeds in excess of 100 mbps because they see them as necessary for new health, education, energy, and civic engagement applications, according to a Brookings Institute Report.

[George Rebane]

Good perspective Russ. Our regulations tie our undies in a bundle, and we don't even have the high tech manufacturing to supply our high tech needs. What in the world will we compete with now?

[Mikey McD]

George, once the "employer of last resort" the government (or tax funded NGO's, non-profits...) are now the low hanging fruit with pay, security and benefits which the private marketplace cannot compete. It is tough for private enterprise to compete with the vacation time, sick pay, pension plans, health care, salary, low stress work place which exists at all levels of government (or tax payer funded NGO's, non-profits, schools,...). It was 3 years into this recession when Obama announced he was freezing (not cutting or laying off) federal pay for selected employees, 3 YEARS! Talk about security! The question is why would someone want to work anywhere else?!!

http://www.heritage.org/research/reports/2010/07/comparing-pay-in-the-federal-government-and-the-private-sector

[Bruce Hunt]

The USA is in dire straights these days with very little positives to sing about. After reading this article in the Saturday, December 11 Union, it made me realize one of the serious reasons the US is falling behind in so many categories lies in our education system. It seems to me that it has become too easy to go from one grade to another these days. The students aren't challenged nearly enough. I think this is due to failure of public education. Kids cannot be taught with the idea that one size fits all. We need more charter-type schools that can better address the diversity in cultures and in with what comparative ease or difficulty different students learn different educational disciplines. In 1998 about 71% of students that entered high school graduated; more recently this figure has shrunk to about 68%. One third of public high scholl students fail to graduate. Of the high school graduates, only 27% obtain college degrees within the next six years. Of the college graduates there only 12% or so that graduate with science or engineering degrees. None of these statistics compare favorably with many Asian or European countries. I think over the longer term, in order for the USA to ever regain its number one standing in general education, technology,and quality of life, our educational process must be retooled to ensure much higher graduation rates.

College must be more accessible for more high school graduates. In 2008 the average cost of tuition, fees, and room and board for a college student was approaching $17,000. This figure is comprised of costs for both public and private institutions. I would venture a guess that a family earning less than $100k per year could not afford to send a child to college without grat financial difficulty or some form of subsidy. Only 15.73% of American families earn over $100k per year and this number is shrinking. To me, this is a glaring problem that nobody seems to want to solve. Another related remark... why would a highly motivated science, math or engineering graduate choose teaching in h.s. or college over the private sector where he/she could earn a much greater salary? What's teh incentive to teach?

[Bruce Hunt]

Regarding attaining "full employment" I agree with your comments in the last paragraph of your article. Yet, there are differeing thoughts of what "full or normal employment" means. I would imagine full employment would be 0%, i.e. anyone who wanted to and all who were able to work, could get employment. When I was in college and graduate school (Keynesian economics was popular then), full employment was considered to be 4%. Nowadays, I hear many folks calling it 5% or 6%, one of which is Ben Bernanke. But no matter how anyone defines full or normal employment the way we are headed is not dissimilar to the Japanese decade of no or miniscule growth. If something were to trigger even higher national unemployment, say 12% to 16%, we will head toward disinflation and depression economics. We have to make American products more valuable around the globe; create policies that make it easier for US businesses to compete. Our tax code is ludicrously complex. Bernanke has publicly stated we need a much simplified tax code. And finally, our schooling system needs a huge overhaul. I have been writing both democratic and republican politicians for a few years that "change" in these areas has to come about, however it appears I am the minority of this type of thinking because the more we want change, nothing has changed. Sometimes I feel our political leaders are either real stupid or just to worried about their jobs to think creativley.

[Steve Frisch]

Great comments Bruce.