Where did all the jobs go? 9 recommendations for Mr. Obama!

by | Sep 7, 2011 | Employment, Innovation, Leadership, Politics, Transparency, Web/Tech


Friday we learned, as the New York Daily News headlined, “August 2011 Jobs Report: NO Net Jobs Created.”  U.S. unemployment, and underemployment, remain stubbornly stuck at very high levels.  This situation is unlikely to improve, as reported at 24×7 Wall Street in “August Lay-off Plans Up 47%” with the latest Challenger Gray report telling us 51,144 people are soon getting the axe.  No wonder we saw a dramatic decline of nearly 15 points, to 44.5, in the Conference Board’s Consumer Confidence Index – near record-low levels. 

This has all the Presidential candidates talking about jobs, and President Obama signed up to deliver a jobs speech to Congress. 

The problem actually goes beyond just jobs.  Buried within consumer concerns lies the fact that for most people, their incomes are going nowhere.  Adjusted for inflation, almost everyone is making less now than they did when the millenium turned.  Generally speaking, about 15% less than 11 years ago!  Most family incomes are about where they were in 1998.  For the wealthiest, income since the mid-1960s has grown only about 1.5%/year on average. For everyone else the improvement has only been about .5%/year. And universally almost all of that increase occurred between 1992 and 2000 (for anyone who wonders about Bill Clinton’s resurgent popularity, just look at incomes during his Presidency compared to every other administration on this chart!)

Real income growth 1967-2010 from BI
Source: “U.S. Household Incomes: A 42 Year Perspective” Doug Short, BusinessInsider.com

But will anything the President, or the candidates, recommend make a difference?

So far, the politicos keep fighting the last war, and seem surprised that nothing is improving.  The recommendations for putting people back to work in factories, such as autos and heavy equipment, or  building roads simply defies the reality of work today.  America has not been a manufacturing-dominated jobs country for over 60 years!  All job creation has been in services!

Service v Mfg jobs 1939 to 2010 from SAI
Source:”Charting the Incredible Shift From Manufacturing to Services” Doug Short, BusinessInsider.com

For this entire period, productivity has been climbing.  Just 50 years ago most people spent 1/3 to 1/2 their income on food.  No longer.  Today, few spend more than 5 to 10%, and everyone can enjoy an automobile, telephone, television and computer – regardless of their income!  We have all the stuff anyone could want, and in many cases a lot more of some stuff than we need – or want! 

The old notion of “what’s good for G.M. (General Motors) is good for America” is simply no longer true!  As we recently witnessed, a multi-billion dollar bail-out of the largest American auto maker may have saved some unemployment – but it did not create an economic turn-around, or create a slew of jobs! 

Today’s jobs are all in information – the accumulation, assimilation, analysis and use of information.  Few “managers” actually manage people any more – most manage a data set, or a computer program, or some sort of analysis.  The vast majority of “managers” have no direct reports at all!  The jobs – and incomes – are all in information.  Job growth is in places like Facebook, Google, Linked-in, Groupon, Amazon and Apple (the latter of which outsources all its manufacturing.)

No President or economist can manufacture jobs today.  As we’ve seen, interest rates are at unprecedent low levels – yet nobody wants to take a loan to hire a new employee!  In fact, business productivity is at record high levels as business keeps accomplishing more and more with fewer and fewer workers!

Profits per worker 2001-2011
Source: “Corporate Efficiency is Getting Absurd” BusinessInsider.com

Public companies aren’t going broke, by and large.  Most have cash balances at record levels.   Only they keep using the money to buy back their own stock!  Every month sees a wave of new stock buy back commitments, as 24×7 Wall Street reported “August’s New Massive Stock Buybacks… Over $30 Billion!”  Business leaders find it less risky to buy back their own stock (supporting their own bonuses, by the way) than invest in any sort of growth program – something that might create jobs.

So what’s the President to do?

We need to radically jack up the investment in innovation! Think about that last period of very low unemployment and growing incomes – in the 1990s.  We had the explosion in technology as people began using PCs, the internet, mobile phones, etc.  New technology introduced new business ideas (mostly services) and created a rash of growth!  And that created new jobs – and higher incomes.  Innovation is the jobs engine – not trying to save another tired manufacturing company, or pave another highway or extend another bridge!  Today those projects simply do not employ very many people, and the “trickle down” affect of a highway project creating more jobs has disappeared!

Bloomberg/BusinessWeek reported in “Failing at Innovation? Bank On It“

  • Government spending on higher education has been declining since the 1970s reducing the number of graduate students and innovation projects
  • Federal share of R&D has been less than 1% since 1992 – all while corporate R&D spending has declined dramatically!  The days of spending “to put a man on the moon” has disappeared, as we fairly quietly mothballed the space program and commence to dismantle NASA
  • The number of entrepreneurs is actually declining!  There were fewer startups with 1 or more employees in 2007 (before the financial collapse and ensuing economic mayhem) than in 1990
  • New companies are not employing people.  In the 1990s the average startup employed 7.5 people, but now the number is 4.9
  • Meanwhile “infrastructure” spending today is the same as it was in 1968! 

We’ve done a great job of cutting taxes, but we’ve simultaneoously gutted our investment in R&D, innovation and doing anything new!  If you wonder where the jobs went it wasn’t oversees, it was into higher corporate cash levels, more stock buybacks, increased bank reserves and dramatically higher executive compensation! 

We don’t need more tax cuts – because nobody is investing in any new projects!  We don’t need more unemployment insurance, because that – at best – delays the day of reconning without a solution.

Here’s what we do need today:

  1. Implement a tax on corporate stock buybacks.  At least as great as the tax on corporate dividends.  Buybacks simply drain the economy of investment funds, with no benefit.  At least dividends give returns back to shareholders – who might invest in a new company!  And if buybacks are taxed, executives might start investing in projects again!
  2. Quit giving such large depreciation allowances for physical assets.  We don’t need more buildings – we’re overbuilt as we are right now!  Again, it’s not “things” that make up our economy, it’s services!
  3. Re-introduce R&D credits!  Give businesses a $3 tax break for every dollar spent in R&D and new product development!  Prior to President Reagan this was considered normal.  It’s not a new idea, just one that’s been forgotten.  If we can give credits for oil and gas drilling, which creates almost no jobs, why not innovation?
  4. Cut payroll taxes on the self-employed and small business.  Today self-employed pay 2x the payroll taxes, so it’s a big dis-incentive to entrepreneurship.  Give start-ups a break by lowering employment taxes on small employers – say less than 50 employees.
  5. Allow investors in start-ups to write off up to 2x their losses.  It takes away a lot of the risk if you can get most of your money back from a tax break should your investment fail.  And for all those corporations that abhore taxes this would incent them to invest in small enterprises that have new ideas they’d like to see developed.
  6. Remember the Small Business Administration (SBA)?  Re-activate it by giving it $100B (maybe $200B) to guarantee bank loans of small businesses.  Bank lending has ground to a halt as banks eliminate risk – so let’s get them back into their primary business again.  In WWII the government guaranteed every loan for the construction of the Liberty Ships – and behold business built 2,751 of the things in 4 years!  
  7. Increase funding for higher education.  Increase the grants for science, engineering and new product research at America’s universities.  Increase grants for students in science and engineering, and allow students to deduct out-of-pocket educational expenses from their taxes.  Allow corporations to deduct all the expense of employee education – uncapped!  Allow corporations to deduct the university grants they make!
  8. Invest in today’s digital infrastructure.  Once we paid to send men to the moon – and a flood of innovation (from microwave ovens to powdered drinks and frozen food) followed.  Today we should invest in a nationwide WiFi network that’s everywhere from rural forests to city buildings – and make it all FREE.  Digital networks are the highways we need today – not concrete ribbons.  Create tax deductions for people to buy smartphones, tablets and other products that drive innovation, and make it easy for innovators to network for solutions to emerging needs.
  9. Streamline the process for small companies to test and sell new bio-engineered products.  The existing complicated process is a legacy of big companies and traditional pharmaceutical research.  Make it easy for entrepreneurs to test and launch the next wave of medical technology based on the new bio-sciences.  Offer federal-backed safety insurance to protect small businesses that show efficacy in new solutions.

These are just 9 ideas.  I’m sure readers can think up 90 more (in fact, I challenge you to offer them as comments to this blog.) If we invest in innovation, we can create a lot of jobs.  But we need to start NOW!

America’s Wrong-Headed Jobs and Innovation Policies – why we don’t create enough Amazon.com’s

by | Mar 25, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in


It is unlikely anyone in business or government thinks productivity is a bad thing.  Productive students get their homework done faster, and learn more in the available time.  Productive musicians make more recordings, and tend to learn more over their careers.  And productive companies produce more goods and services with less inputs – like labor – thus offering more to customers at lower cost while making more money for investors.  At a national level, the more productive we are at everything from growing wheat to making cabinets to writing smartphone apps improves the quantity of goods available to our population – growing the gross domestic product (GDP.)  Improving productivity is one of the most critical activities to creating and maintaining a healthy economy, improving incomes and generating wealth.

Then why is American policy so anti-productivity?

American manufacturers today are about the most productive in the world.  In the Wall Street Journal's "The Truth About U.S. Manufacturing" we learn that American factory workers are producing triple the output of 1972.  The use of ever more sophisticated equipment, often with digital controls, and a higher trained workforce has made it possible to make more and more stuff with less and less labor.  While considerable manufacturing has gone offshore, it is not because our workers are competitively unproductive.  To the contrary, productivity is amongst the highest in the world! 

Unfortunately, most of America's business/economic policy at the government level has been trying to preserve jobs that are, well, not that productive.  Take for example agriculture subsidies.  They pay farmers to produce less and otherwise make less productive use of land, feedstocks, grains, etc.  By giving farmers (most of which are now huge corporations, not the "family farm" circa 1970 and before) subsidies it actually lowers agricultural productivity.

Similarly, bank and auto bailouts (and all subsidies to any manufacturer) in effect lowers productivity.  It gives money to a bank, which makes nothing.  Or to an unproductive manufacturer to keep its plant operating when the value of the output is insufficient to cover costs.    These spending programs serve only to defend and extend the least productive jobs in society – jobs that are economically unviable.  By spending money in these areas the government attempts to preserve the old (companies such as GM and Chrysler) at the expense of productivity.

America can create highly productive jobs

"Amazon.com On Hiring Spree" is the Seattle Times headline. Amazon has revolutionized book retailing, publishing and is changing a number of other markets as well.  The result is a far more productive workforce in these industries than previous competitors.  Borders, to cite a recent example, could not be nearly as efficient selling or publishing books with its out of date model, so it recently followed 90% of other book sellers into bankruptcy. The more productive company, Amazon, is hiring people as fast as it can to grow its business.  Its productivity allows Amazon to sell more and create jobs. 

Had the government chosen to bail out Borders there would have been a public outcry. Why should we protect the jobs of those store shelf stockers?  Likewise, as the number of printed books drops, replaced by digital books, should it be government policy to subsidize book (or magazine, or newspaper) publishers/printers?  Whenever a business is no longer competitively productive – whether it be agricultural, manufacturing or anything else – bailouts serve only to keep the unproductive competitor alive.  Which actually harms the more competitive company that subsequently must fight the subsidized competitor.

The right policy would be to subsidize Amazon.  Amazon is growing.  Theoretically, the more money Amazon has the faster it could grow and the more jobs it could create.  But, of course, nobody feels good about subsidizing a growing, profitable concern.  And Amazon isn't asking for subsidies, anyway.

Our public investments are shifting in the wrong direction.

The right public policy is to invest in creating new Amazons.  New businesses that create products and services which are desirable to customers, productively using resources and creating jobs.  By helping these new businesses get going the government spending creates new markets.  Government money "primes the pump" for investors.  Early stage funding allows the business to get started, create a product or service, generate initial revenues, demonstrate a P&L and entice others to invest.  The payback to society is a growing enterprise that creates jobs, both of which creates future tax revenues which repay the early investment funding.

The current administration touts investing in the tools for creating growth.  In early February the MercuryNews.com reported on a Presidential speech in Michigan, "Obama Promotes Plan for Near Universal High-Speed Wireless."  But, like previous Presidential administrations, this is just a lot of talk.  While Mr. Obama may think national wireless technology to promote economic growth is good, there is no money for it.  In the same article it is noted that Michigan congressional representatives, who resoundingly backed putting billions into the auto bailouts, question the efficacy of investing in emerging infrastructure tools.  Protecting the past, while questioning (or opposing) investments in the future.

Unfortunately, for the last 50 years American policy has been headed in the wrong direction!  Innovation investment projects peaked around the Kennedy administration (early 1960s) with several American efforts to dominate new technologies through programs such as the famous "space race."  Since then, less and less has gone into America's future, and more and more has been spent preserving the past – through entitlements, military spending and tax cuts which provide less and less incentive to invest in unproven projects.

Us spending on R and D1953-2008

Source: Silicon Alley Insider Chart of the Day from BusinessInsider.com

Since 1953 government "pump priming" by spending on R&D for innovations has declined by 50%!!!  No longer is even 1% of Gross Domestic Product spent on R&D.  Businesses, which require an immediate return on investment and are generally loath to spend money on things which are uncertain, have been left to fill the vacuum.  As a result, total spending has been stagnant.  Worse, most spending by business is on sustaining innovations – improvements which defend and extend an existing business – rather than on breakthroughs which create new markets, and a lot more jobs (for more on sustaining innovation investments by business read Clayton Christenson's books including "The Innovator's Dilemma.")  Investment in innovation has been woefully underfunded, allowing America's economic leadership position to shrink.

America is driving innovation offshore

The Wall Street Journal has reported "More Companies Plan to Put R&D Offshore."  When things are equal, business will invest where the costs are lowest.  With little incentive to undertake innovation in America, increasingly U.S. companies are moving their R&D — along with manufacturing, customer service, telesales, etc. — to emerging markets.  And their plans are to increase this movement offshore by 50-100% by 2015!

[EMERGING]

What will happen if innovation investments move from America into emerging markets?  Will intellectual property remain an American advantage?  Will new product development be done in America, or elsewhere?  If the manufacturing is already in these markets, is it hard to predict that new products will increasingly be made offshore as well?  Asked another way, if we outsource the innovation jobs – what jobs will America have left?

A dramatic change in American policy is needed

Last week America started bombing Libya.  Part of protecting the national interest.  But, this is not free – reportedly costing Americans $100M/day.  Two weeks is $1.4B (probably a lot more, to be honest.). Let's not debate whether this is necessary, but rather recognize (as Roseanne Rosannadanna used to say on Saturday Night Live) "it's always something."  There are programs, policies, military bases, agricultural lands, national parks and jobs to protect in every district of America – and its interests around the globe.  And that's increasingly where America's money goes.  Not into innovation.

So why are Americans surprised that job growth struggles?  When the head of GE, a company that has moved manufacturing, information technology, engineering and R&D to offshore centers across the last decade, is made head of the U.S. jobs initiative is there much doubt?  When the spending and incentives, as well as the selected leaders, have as their #1 interest preserving the past – largely in areas where American productivity lags – why would anyone expect new job creation?

America's protectionist mentality is causing its lead in innovation to slip away.  The President, administration officials, Senators and Congresspeople needs to quit thinking that talking about innovation is going to make any difference in investments, or job creation.  If America wants to remain globally economically vibrant it requires a change in investments – starting with more money for R&D via grants, subsidies and tax breaks.

If America wants jobs, and healthy economic growth, it needs innovation.  Innovation that will create new, highly productive jobs  And that requires investing in the future, rather than spending all the money protecting the past.