A Turning Point For The Economy
Suddenly, things are looking up. Corporate profits are surging, the stock market is levitating, confidence is returning -- and even tax revenues are beginning to rise. With the economy going gangbusters, the unprecedented past two years of massive job losses in the face of rising economic growth is probably at an end. But a quick rebound in jobs should not be taken for granted, especially by those in the 2004 Presidential campaign. This time around, the U.S. is having not just cyclical joblessness but permanent job destruction.
People thrown out of work are taking substantially longer to find new work. Most of their old jobs are gone forever, and they will need to jump to different industries, perhaps entirely unrelated ones, to replace them. As demand picks up and companies lose their strong reluctance to hire, the economy will eventually generate many jobs. But millions who suffer from job destruction will require extra training and schooling to retrofit them into new careers.
The biggest job losses, of course, have been in manufacturing. Employment in factories peaked at 19 million in 1979. In every business cycle since then -- except the current one -- sharp declines in jobs during recessions were followed by stability during expansions. Manufacturing fell gradually, until the decline went into free fall with the recession of 2001. Even in the third quarter, with growth in gross domestic product running at 6% to 7%, factory jobs disappeared.
What's different this time around? Sharply rising productivity and "offshoring" of factories to China. Past business cycles saw productivity fall as the recovery picked up and companies hired more people. This time, productivity growth actually accelerated, allowing corporations to accomplish more with fewer people, and boosting profits. Companies sent production offshore even as growth returned. With its network of suppliers, reliable energy, and able workforce, China makes it easy for manufacturers to move.
America is clearly moving into unknown economic territory. The tradeoff between productivity and job growth that has characterized this business cycle may soon end in the heat of strong economic growth. In the months ahead, we could see a replay of the '60s and '90s when high productivity was matched by major job creation to spread prosperity throughout society. Sustained growth of 4% or more could generate enough demand for labor that it draws in all able-bodied workers, including those laid off from dying industries. That's what happened in the '90s.
But there is a chance that job destruction overwhelms job creation. Rising productivity combined with outsourcing could spread from manufacturing to services, impairing jobs. Goldman Sachs predicts that up to six million service jobs could move offshore over the next decade.
It would be prudent for policymakers to start thinking about helping people find the education and training to start new careers. The tide is clearly rising. We should make sure that everyone gets into the boat.