Clear the Fog, Bring on the Jobs

While the U.S. economy added 244,000 net new jobs last month, the unemployment rate increased from 8.8 percent to 9 percent as discouraged workers started looking for jobs again, and the total number of unemployed remains at an all-time high of 13.7 million, according to the Bureau of Labor Statistics. The bright spot, of course, is manufacturing. U.S. factories, especially in the low-cost Sunbelt, are starting to hum again. As wages in China increase, U.S. factories should continue to gain. Still, we have a long way to go. Millions of U.S. jobs have disappeared in recent years, and Washington's best efforts to put Americans back to work seem to have had little impact.

The reason? Perhaps many, in Washington and elsewhere, don't really understand why companies hire. Do businesses hire because Washington will spend taxpayer dollars to underwrite basic research, green energy, high-speed rail, and other politically popular programs? Certainly, some do: those that directly benefit from such spending. The vast majority of U.S. companies base the decision to hire new employees on the need to fill shortages of critical skills, gain a talent advantage over competitors, or ramp up production to meet customer demand.

For most businesses, the cost of new employees is a concrete line item. Companies don't hire for altruistic or patriotic reasons. They hire for economic reasons: The cost of each new employee, according to the company's calculations, must be exceeded by the additional revenue the employee will help generate. We call this profit.

Most major U.S. corporations have been reporting strong profits, but their hiring has lagged. So what's the problem?

A Fog of New Laws

Economic historian Robert Higgs, a fellow with the Independent Institute in California, attributes America's anemic job performance to uncertainty: not knowing what steps the government will take to get its fiscal house in order and what form the hundreds of still-to-be-written rules and regulations implementing various new laws will take. If it survives legal challenges, the new health-care law, for example, will affect virtually every employer in the country. The regulations implementing the law are still a work in progress. Then, of course, there will be a battle over how the regulations are interpreted. It all adds up to great uncertainty.

And this, as much as anything else, is holding the economy back.

The government's main challenge, then, isn't creating jobs, but clearing the fog, restoring confidence, and inspiring us to meet head-on the challenges of a changing global marketplace. Until this happens, many executives will continue to delay expansion and hiring decisions. And investors will sit on the sidelines, too.

Companies alone are sitting on an estimated $2 trillion in idle capital. They're making record profits, in some cases, but they're not spending or hiring at record levels; they're just waiting for the fog to lift.

Opportunities Abroad

Many of those that are hiring are doing so overseas. A major fast-food chain, for example, announced early this year that in 2011, it expects to add 500 to 600 new stores in China and another 700-plus in other developing markets. In the U.S. and Europe, the company is planning to open fewer than 200 new stores. Granted, these stores will not produce the kind of highly desirable, high-paying, innovative jobs U.S. government leaders would like to see, but that's not how the global economy works. In the world of globality, politicians don't get to choose who hires how many of what kinds of employees in which locations: Executives make these decisions based on information derived from the marketplace. Besides, if you're an unemployed teenager, wouldn't a job at a new fast-food franchise be attractive?

This fast-food chain is not the only company hiring in rapidly developing economies. The Associated Press reported in January that U.S. companies hired an estimated 1.4 million new employees overseas in 2010. The trend will continue. Ford (F), according to recent news reports, is anticipating significant growth in India and plans to build engines there, both for the Indian domestic market and for export to Thailand and elsewhere in Southeast Asia. Coca-Cola (KO) is building new factories in Inner Mongolia and the Philippines. General Motors (GM) last year sold more vehicles in China than in the U.S. The pattern is clear.

So how can America get its great job machine running at full tilt again?

First, Washington needs to change its focus—from orchestrating the economy to restoring confidence in it. When business executives feel uncertain about the future, they play it safe by sitting pat and waiting for the storm to blow over. That's where we've been stuck, and it doesn't generate vigorous jobs growth. The politicians can restore confidence in the economy by showing they are serious about long-term fiscal discipline, laying out a clear plan of action so taxpayers, investors, and executives all know what to expect and when. Washington also needs to lower corporate tax rates, as President Barack Obama and others have proposed, and recognize that the manner in which government officials promulgate regulations and issue "rule-makings" can increase business uncertainty and choke hiring. By laying out a course of action and sticking to it, rather than zigzagging whenever the political winds change, the government can encourage more companies and investors to get back in the game.

No Special Favors

Washington also needs to show the business community that it intends to maintain a level playing field, so all companies and industries, not just a select few, have incentives to innovate and expand. Green energy, though we should all embrace it, is not the only game in town. Nor is there anything special about high-speed rail. Washington should not shower any industries with special favors or incentives; it should make the same incentives available to all: agriculture, autos, chemicals, electric power, health care, mining, pharmaceuticals, telecommunications, and others. We need to innovate across the board. All innovation is valuable to our economy. For example, while Washington has been focusing on such technologies as solar and wind power, the oil and gas industry in recent years has found cost-effective ways to extract natural gas from rock. This is nitty-gritty, dirty business. But as a result of this new technology, the U.S. will become less dependent on foreign energy and could make itself a significant exporter of natural gas. It will also produce jobs.

Third, we need to create the conditions in which the American entrepreneurial spirit can thrive, by rewarding venture capitalists willing to risk their money on somebody else's dreams and establishing policies that encourage banks to expand their business lending. Small entrepreneurial companies for many years have created the bulk of the net new jobs in America. Microsoft (MSFT), Google (GOOG), Facebook, Ebay (EBAY), Amazon (AMZN)—none of these companies existed before 1975. Google, started in 1998, today has more than 24,000 employees. EBay has more than 15,000; Amazon, some 31,000; Facebook is up to about 1,700; Microsoft, 89,000.

I don't know what the next big thing will be. Washington doesn't know either. Let's let the marketplace decide. If we give it some encouragement and breathing room, it will generate more jobs than any of us can imagine. But it will take place only if banks, which are benefiting from record low costs, have the incentive to lend to entrepreneurs and other companies needing financial support to bring their ideas to life.

America is still the "big dog" and has a very flexible economy. As wages in China and other low-cost countries rise, and exchange rates move, the U.S. becomes more than capable of taking on the world. To remain on top, Washington needs to clear the fog, end the uncertainty, and create conditions where businesses will want to invest in the U.S. That's when we'll see a serious jobs boom.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE