In a typical month, millions of Americans switch jobs or find work, and millions quit their jobs or are let go. The net of these millions is the change in total employment, usually a few hundred thousand jobs, while the ratio of those who are involuntarily unemployed to the total workforce provides the unemployment rate, typically around 5 percent at full employment. This remarkably dynamic process of job creation and destruction, hiring and layoffs, reflects the great labor mobility that is one of the abiding strengths of the American economy and allows the unemployment rate to dip so low.
During the 2008–2009 recession, the unemployment rate nearly doubled from its norm of about 5 percent to 9.8 percent, and it remains around 9 percent heading into 2012. Layoffs increased during this recession as one would expect, but they were not the primary cause of the nearly 10 percent unemployment rate. In fact, layoffs have been surprisingly mild, especially given the depth of the recession. In the 2000–2001 recession, for example, employers shed 2.6 million more jobs six quarters after the recession began.
The main factor driving the unemployment rate so high during the past recession and slow recovery was and continues to be the sharp drop in hiring. First the credit crunch and the collapse of the housing bubble dampened job creation, and then a procession of harmful economic policies so dampened business confidence and elevated uncertainty that the economy became and remains far less hospitable to growth-inducing, job-creating entrepreneurial activity.
The basic strengths of the American economy remain undiminished and undamaged by recent events. What is lacking is not smarter nostrums from Washington, but a chance to breathe, a little clarity, a respite from the flurry of petty policies targeting the latest politicized shortcoming. The vital missing ingredient in our economy is confidence; the essential debilitation is an excess of uncertainty. Many of President Barack Obama’s policies sap confidence while heightening uncertainty.
The simplest examples of such misguided policies are President Obama’s failed fiscal stimulus and many other efforts to boost federal spending to “create demand” in the economy. More deficit spending cannot boost the economy or reduce unemployment, because deficit spending means more borrowing, which means less money in the private sector to spend. If that were all, at least fiscal stimulus would not weaken the economy, but as federal deficits have soared, uncertainty about the future of the economy has also grown.
This extra, government-spawned uncertainty discourages businesses from making the kinds of investments today that can produce a stronger economy tomorrow. The key to adopting true pro-growth federal policies that can lead to strong job growth is to reorient the government toward a policy of “do less harm.”
- End any suggestion of higher taxes. The U.S. government currently finds itself simultaneously plagued by sagging revenues and soaring spending. As the recession dissipates and the economy resumes growth, tax receipts are projected to return to their post-1960 average of roughly 18.5 percent of GDP, and that is in the absence of any tax increases. Unfortunately, the same cannot be said for spending, which is projected to climb to a level well in excess of 20 percent of GDP. Long-term deficits are thus being driven not by low revenues, but by government spending—a reality that can and should be addressed not through higher taxes, but through reduced spending.
- Cut the budget deficit. Our short-term and long-term fiscal situations have reached perilous depths. According to the Medicare and Social Security Trustees Reports, unfunded liabilities for these two programs are in excess of $30 trillion. For each year that we put off serious entitlement reform, the price tag of such reform grows by $1 trillion. Cutting the budget deficit—specifically by reforming entitlements, which are the key drivers of America’s growing deficits—is of paramount importance.
- Advance free trade. While it might be tempting to reach for protectionist policies during an economic slowdown when economic growth and employment prospects are weak, this would decidedly be the wrong approach. Trade has come to represent an increasing portion of U.S. economic activity, and that reality is ignored at great peril.
- Repeal laws that give rise to economically harmful regulations. Regulations have the triple effect of fattening the government budget and workforce, diverting business spending away from productive activities, and passing higher prices and limited choices on to consumers. While new regulations are by no means confined to recent years, they have increased sharply under President Obama, with 75 new major regulations totaling roughly $40 billion in estimated business costs passed during the first 26 months of his presidency alone. Excessive regulations that stifle investment and growth must be repealed.
- Repeal Obamacare. The Patient Protection and Affordable Care Act, popularly known as Obamacare, has frozen business hiring across America as businesses wait to see how the law’s new regulations will develop and what effects they will have. Obamacare encapsulates the kinds of harmful regulatory policies the Obama Administration has favored at the expense of economic growth. Nor will its economic consequences be transitory, passing with the publication of and reaction to its many regulations, because the legislation also imposes numerous tax hikes that transfer more than $500 billion over 10 years—and more in the future—from hardworking American families and businesses to Congress for spending on new entitlements and subsidies. In addition, higher tax rates on working and investing will discourage economic growth both now and in the future, harming the hiring potential of employers.
- Repeal unwarranted provisions in the Dodd–Frank Act. The Dodd–Frank financial regulation law was enacted in 2010 under the pretense that it was necessary to avoid a repeat of the 2008 financial crisis. Now, over a year into the implementation process, it is clear that little in the legislation will help avoid future crises, and some provisions may even make future crises more likely. Among the most problematic sections are those that create a new Consumer Financial Protection Bureau, which is granted virtually unconstrained authority yet is not accountable to any other entity; sections providing for the seizure and “orderly liquidation” of firms, which grants regulators broad power to close private businesses without meaningful review by the courts or other protections; and price controls on debit cards, which has forced banks to impose new debit card fees on consumers. Congress should repeal or radically restructure these and other provisions of this flawed legislation.
- Prevent the Environmental Protection Agency from regulating carbon dioxide. Whether carbon dioxide is restricted by levying a tax, by imposing caps, or by new regulations and mandates, the associated economic dislocations and energy cost increases will cut into economic growth. The resulting losses in national income will be similar for different approaches of comparable magnitude even though regulation may not generate government revenues. Under a regime that taxes CO2 directly, the transfer of revenue is not the immediate source of economic damage. The damage is a result of the behavioral changes brought about by the tax, including the disincentive for employers to hire.
- Repeal the job-killing Davis–Bacon Act. The Davis–Bacon Act (DBA) requires federal construction contractors to pay at least the wage rates prevailing on non-federal construction projects in the same locality. The act was intended to prevent the purchasing power of the federal government from driving down construction wages during the Great Depression. Today, the DBA instead artificially props up construction worker wages at the expense of all other taxpayers and increases the cost of federally funded construction projects by 9.9 percent. Repealing the DBA restrictions would allow the government to build more infrastructure and create 155,000 more construction-related jobs at the same cost to taxpayers. Alternatively, repealing the act would save the federal government $10.9 billion on construction costs in 2011.
Facts & Figures
- In September of 2009, a panel of economists from the Brookings Institution, the Environmental Protection Agency, the Congressional Budget Office, the Energy Information Administration, and The Heritage Foundation presented their different findings on the economic impact of cap-and-trade policies. None of the economists argued that cap-and-trade would stimulate the economy. None denied that it would be harmful. Instead, the debate was over how much the economy would be harmed.
- The housing bubble of the 2000s consumed huge quantities of capital in housing investments that proved to be worth much less than investors anticipated. Banks and wealthy investors lost hundreds of billions of dollars in bad investments. These funds no longer exist to loan to entrepreneurs. Lenders have become less risk-tolerant, in some cases excessively so, and many business investments go unfunded.
- In the current weak economy, business owners have become extra cautious about risking their capital in new enterprises, and policy choices in Washington have contributed to that caution. One in 10 small-business owners surveyed by the National Federation of Independent Business said that because of the current political climate, it is a bad time to expand.
- During the 2001 recession, net employment by small businesses fell by 371,000 jobs. That figure constituted relatively little (11.8 percent) of the total job losses in that downturn. In this recession, small-business employment has fallen by a staggering 2.9 million jobs. Small businesses now account for 35.8 percent of job losses in this downturn—triple the 2001 amount.
- Failed or contracting small businesses have shed 163,000 more jobs than in 2001. New or expanding small businesses have added 2.4 million fewer employees. Small-business hiring has plunged much more than during previous downturns, making this recession significantly more painful.
- Many congressional “jobs bills” attempt to solve the problem of low private hiring by increasing government hiring. Historically, this approach has failed because (1) government spending does not encourage private entrepreneurship or investment and (2) the resources that the government spends do not materialize out of thin air—they are taken from the private sector.
- Countries in which the government spends heavily to create jobs—such as France and Germany—do not enjoy higher employment rates. In fact, they have higher unemployment.
Selected Additional Resources
- J. D. Foster, “Doubling Down on the Payroll Tax Holiday Still Won’t Create Jobs,” Heritage Foundation WebMemo No. 3358, September 8, 2011.
- James Gattuso, “Jobs, Regulations, and Broken Windows,” Heritage Foundation Commentary, March 2, 2011.
- David Kreutzer, “Green Jobs and Unemployment: Assessing Federal Efforts to Encourage Employment,” Heritage Foundation Testimony, April 20, 2011.
- James Sherk, “Opportunity, Parity, Choice: A Labor Agenda for the 112th Congress,” Heritage Foundation Special Report No. 96, July 14, 2011.
- James Sherk, “Years of High Unemployment Ahead at Recovery’s Pace,” Heritage Foundation WebMemo No. 3307, July 5, 2011.
- James Sherk, “The Cause of High Unemployment: Still Due to Dwindling Job Creation,” Heritage Foundation Backgrounder No. 2392, March 24, 2010.
Heritage Experts on Economy and Jobs