"Jobs - Education and Innovation Help, Unions Hurt"

Sydney M. Williams

Thought of the Day

“Jobs – Education and Innovation Help, Unions Hurt”

August 10, 2010

The painfully slow process of job creation has been making a difficult recession more so. The folks at PIMCO have taken to calling this period a “new normal”, an economy in which the growth rate is too slow to rapidly bring down the unemployment rate, thus an economy more dependent on government intervention.

Employment has been resistant, but that was also true for the mild recession of 2001-2002 – a “jobless recovery” is the way that recovery was depicted by the press. The numbers are dismaying – 14.6 million of the unemployed have been out of work for more than six months. Laura Tyson, as quoted in the New York Times, says we will have “an elevated unemployment rate for several years.” In the same paper, Robert Gordon, a professor of economics at Northwestern, says “The situation is devastating.” In Monday’s Wall Street Journal, Mark Whitehouse noted that 4.3% of the workforce has been unemployed for “more than six months – a level much higher than any other recession since 1948.” Yet, in the same Journal report, the Labor Department suggests that the number of job openings has risen twice as fast as actual hires – a disparity most notable in manufacturing. “If”, Mr. Whitehouse wrote, “openings were getting filled as they usually do – the U.S. should have about five million more gainfully employed people than it does.”

Ninety-nine weeks of unemployment benefits, at a rate substantially above the minimum wage, has dissuaded some workers from seeking employment. Regardless, the situation reflects significant changes that have taken place in the American workplace over the past few decades.

In my opinion, the problem stems from the transition that began in the early 1960s, as we evolved from a unionized manufacturing economy to a non-unionized service economy. At the same time, Europe and Asia were emerging from the effects of World War II and their lower costs for labor attracted manufacturing offshore. Currency markets became increasingly sophisticated; trade was easier and freer. The world was becoming flatter and, importantly, less unionized. Domestic job growth occurred in services, finance, healthcare and technology, hardly something a steel or auto worker knew much about. And, of course, many of the service jobs did not pay as well as the old union jobs. While medical technicians, programmers and financial analysts benefitted from these changes, those without such skills discovered that flipping burgers did not pay as well as their old auto assembly job.

As we entered the 1980s, creative debt instruments (particularly in mortgages, but also in credit cards), easier credit conditions and lower interest rates served to mask the underlying problem. A relatively strong Dollar allowed for cheap imported goods such as clothing and electronics and had the effect of delaying a fundamental change in our economy that was beginning to take place – that we were losing our competitive presence, dragged down, in large part, by unions mired in the past and blind to the changes taking place.

In 1978, China, realizing that Mao’s Communism was not working, began its path toward modernization, while our manufacturing sector remained riveted to the past. As a country, we remained in denial as to the changes going on around us.

Much has been written about the widening income gap in the U.S. and the fact that wages for many have remained stagnant for several decades. That is a fact, and an answer needs to be found. But there is no returning to the old days. The world is global and so is the competition.

Where America did remain competitive it has done well – healthcare, technology and finance. It is both sad and ironic that the administration has chosen to place two of those areas under increased regulation, while continuing to play politics with the unions that failed to adapt to a changing economy. Creative talent poured into investment banks innovating technologies, producing derivative and debt instruments, allowing offshore businesses to more quickly and less expensively finance their growth. It was a case of American creative and competitive talent rising to meet a new challenge. It is true that some on Wall Street took advantage of the system and they deserve punishment. Healthcare would be more efficient and effective if the consumer played a bigger role, but penalizing success at a time of increased global competition does not seem to me to be a winning strategy.

There is plenty of anecdotal evidence that manufacturing can continue to be a success in this country. The best and most recent example is not GM; it is Volkswagen’s decision to open a $1 billion, energy saving, non-union plant in Chattanooga, capable of producing 150,000 cars a year and scheduled to go into production in 2011 bringing two thousand jobs to the area. That tells you that America, as a manufacturing hub, is not dead – at least not in the eyes of Germans.

The answer to succeeding in today’s global world is first, education. We must ensure our students understand the nature of today’s competition, where it is and what it takes to succeed. We cannot emulate everything our competitors do, nor should we, but we can learn from them. We must play to our strengths, the most important of which is that this is a nation to which people from around the world still want to come. As a friend of mine recently put it, years ago immigrants added to the collective intelligence of the nation. Today that assertion is questionable. We will not grant citizenship to newly created college graduates, yet we do very little to deter illegal immigration. It doesn’t make much sense.

The answer is not in shoring up public unions at the expense of the private sector. As the Wall Street Journal noted this morning only three metropolitan areas reported higher personal incomes last year – Washington, D.C., and two areas with a strong military presence, San Antonio and Virginia Beach. We need the public sector. Society cannot function without it, but we must keep in mind that the sole source of revenue with which to pay government employees are the taxes paid by America’s workers and corporations.

We must encourage business start-ups and innovation. We must understand that unions, no matter the nobility of their past, must learn to adapt to a changed world, or risk dragging down a generation of young men. In passing massive healthcare legislation, the administration sacrificed private sector confidence. Growth depends upon its restoration. Having the second highest corporate tax rate in today’s world seems absurd if we expect to be able to compete with China, Brazil or even Canada. As I wrote last week, the American dream does not have to be dead; we must awake to the reality of today.