What’s Killing Jobs and Stalling the Economy

A toxic regulatory brew, from Dodd-Frank to state licensing laws, has poisoned the formation of new firms that drive growth.

By Marie-Joseé Kravis 

An economy that has struggled for growth for seven years showed fresh signs of trouble Friday with a sobering jobs report. Nonfarm payrolls climbed by a mere 38,000 in May—the fewest since September 2010. The Bureau of Labor Statistics also reported that a record 94,708,000 Americans were not in the labor force last month, as the labor-force participation rate fell to 62.6%, from 63% two months earlier.

When thinking about what has stymied the U.S. economy, I sometimes recall a biology lesson about the role that cell death plays in explaining embryonic development and normal growth of adult tissue.

In economics, as far back as Joseph Schumpeter, or even Karl Marx, we have known that the flow of business deaths and births affects the dynamism and growth of a country’s economy.

Business deaths unlock resources that can be allocated to more productive use and business formation can boost innovation and economic and social mobility.

For much of the nation’s history, this process of what Schumpeter called “creative destruction” has spread prosperity throughout the U.S. and the world. Over the past 30 years, however, with the exception of the mid-1980s and the 2002-05 period, this dynamism has been waning. There has been a steady decline in business formation while the rate of business deaths has been more or less constant. Business deaths outnumber births for the first time since measurement of these indicators began.

Equally troubling, the latest analysis of Census Bureau data by the Economic Innovation Group points to the increasing concentration of new business formation in a smaller number of U.S. counties. The findings show that 20 counties account for half of new businesses and that most counties had fewer business establishments in 2014 than in 2010. Even accounting for so-called dynamic counties, the total number of firms in the U.S. remains lower than it was in 2004.

As the Economic Innovation Group shows, the 1990 recovery registered a net increase of over 420,000 business establishments, or a 6.7% increase. The numbers for the 2000 recovery were 400,000 and 5.6%. Since 2010, the number of new business establishments has grown by only 166,000 or 2.3%.

One explanation for this subpar new business formation is the overall pallid U.S. recovery.

Today’s new-normal 2%-growth economy doesn’t inspire vigor or confidence. Likewise the collapse, until very recently, of real-estate values, and the imposition of tougher standards on personal credit cards, have constrained traditional sources of credit for startups. Banks have tightened lending criteria and many regional and community banks have disappeared.

Many studies have also attributed the slow rate of business formation to the regulatory fervor of the past decade. Some point to the deadening effect of the Dodd-Frank law, which is 23 times longer than the Glass-Steagall Act passed in response to the 1929 Depression. One part of Dodd-Frank, the so-called Volcker rule pertaining to bank investments, has 1,420 subsections.

Then there is the Affordable Care Act.

It is not clear to what degree these laws affect business formation, but in a 2010 report for the Office of Advocacy of the U.S. Small Business Administration, researchers at Lafayette University found that the per employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees, compared with $7,755 for companies of 500 employees or more. Large and established businesses navigate through rules and compliance requirements. Small and new businesses often find them prohibitive.

Don’t just blame the feds. State and local regulators have also hampered new business initiatives, notably through the growth of occupational licensing. In 1950, 5% of workers required a license or certificate. Today that number is close to 30%. Fortunetellers, party planners, florists, shampoo assistants, cosmetologists, manicurists, beekeepers, librarians and many others have joined the ranks of licensed workers. As the rate of private-sector unionization has fallen, occupational licensing has become a new barrier to entry into the workplace and a tool to protect incumbents from competition.

Consumer protection from shoddy services, dangerous products, health and safety hazards is essential. But as the Texas Supreme Court showed in a recent ruling that licensing of eyebrow-threading is “useless,” licensing often has less to do with public safety and more with handicapping competitors. Fear of the gig and sharing economy, and growth in teleworking across state or local boundaries will undoubtedly stir existing businesses to step up their self-protective lobbying.

A July 2015 White House study found that licensing requirements vary substantially by states, irrespective of political leadership. Ohio imposes licenses on 33.3% of workers; in Florida it’s 28.7%; in California, 20.7%; and in Nevada, 30.7%. Sixty occupations are regulated in some way in all 50 states, with 1,110 occupations regulated in at least one state.

Certain demographic groups, such as immigrants and military spouses, are more heavily penalized by these licensing measures. For immigrants, the tedious and costly process of obtaining a license often delays their integration into the workforce. Thirty-five percent of military spouses work in professions that require state licenses, but they are also more likely to move across state lines than civilian counterparts, requiring multiple and lengthy relicensing reviews.

This is clearly an area for bipartisan action to harmonize regulatory requirements among states, increase multistate compacts to promote greater mobility and impose sunset reviews of licensing requirements.

Another troubling economic undercurrent is the decline of churn in the labor force. The flow of unemployed to employed has declined from close to 30% in 2007 to 16% at the trough of the recession to roughly 20% over the past two years. There has been a shift from full-time to part-time work, and the flow of workers to and from jobs has been dropping since the early 2000s, despite the drop in the unemployment rate.

In every quarter during the 1990s, six of every 100 workers moved to new jobs, while 5.5 out of 100 workers left their jobs. When they are not fired, many employees move from firm to firm, or different jobs within their firm in search of broader experience, better pay, better prospects for career-building and advancement or greater compatibility with personal needs. Historically, young firms have been dynamic job creators, but they now account for a smaller share of new hires, down from about 38% in the late 1990s to roughly 33% today, according to the Kauffman Foundation.

March data from the Labor Department’s Job Openings and Labor Turnover Survey showed that 5.3 million workers moved to a new job, down from 5.5 million in February. Close to five million left their jobs compared with 5.2 million in February. The good news was that there are now 1.4 unemployed workers for every available job, down significantly from 6.7 workers for every available job at the worst of the recession, and that 60% of workers are changing jobs willingly.

The ominous news is that these improvements haven’t been accompanied by sustained productivity growth. Measuring productivity is the subject of much debate, and there is considerable dispute about the impact of technology. Nevertheless, almost three decades of slower churn in the flow of business formation and business deaths, of less-dynamic labor markets, and of flat income growth point urgently to the need for better policy.

Washington and state governments need to wake up and remove obstacles to investment, new business formation and labor mobility. Encouraging investment in human capital and productive infrastructure is essential, and so is moving to financial and interest-rate conditions that promote investment and growth. That might give American investors and workers the bounce they deserve. What we’ve been doing so far hasn’t worked. Time for something new?

Ms. Kravis is a senior fellow at the Hudson Institute.

Populists and Productivity

Nouriel Roubini
. Google logo in Berlin Germany

NEW YORK – Since the global financial crisis erupted in 2008, productivity growth in the advanced economies – the United States, Europe, and Japan – has been very slow both in absolute terms and relative to previous decades. But this is at odds with the view, prevailing in Silicon Valley and other global technology hubs, that we are entering a new golden era of innovation, which will radically increase productivity growth and improve the way we live and work. So why haven’t those gains appeared, and what might happen if they don’t?
Breakthrough innovations are evident in at least six areas:
  • ET (energy technologies, including new forms of fossil fuels such as shale gas and oil and alternative energy sources such as solar and wind, storage technologies, clean tech, and smart electric grids).
  • BT (biotechnologies, including genetic therapy, stem cell research, and the use of big data to reduce health-care costs radically and allow individuals to live much longer and healthier lives).
  • IT (information technologies, such as Web 2.0/3.0, social media, new apps, the Internet of Things, big data, cloud computing, artificial intelligence, and virtual reality devices).
  • MT (manufacturing technologies, such as robotics, automation, 3D printing, and personalized manufacturing).
  • FT (financial technologies that promise to revolutionize everything from payment systems to lending, insurance services and asset allocation).
  • DT (defense technologies, including the development of drones and other advanced weapon systems).
At the macro level, the puzzle is why these innovations, many of which are already in play in our economies, have not yet led to a measured increase in productivity growth. There are several potential explanations for what economists call the “productivity puzzle.”
First, some technological pessimists – such as Northwestern University’s Robert Gordon – argue that the economic impact of recent innovations pales in comparison to that of the great innovations of the First and Second Industrial Revolutions (the steam engine, electricity, piped water and sanitation, antimicrobial drugs, and so on). But, as economic historian Joel Mokyr (also at Northwestern) has argued, it is hard to be a technological pessimist, given the breadth of innovations that are occurring and that are likely to occur in the next few decades.
A second explanation is that we are overlooking actual output – and thus productivity growth – because the new information-intensive goods and services are hard to measure, and their costs may be falling faster than standard methods allow us to gauge. But if this were true, one would need to argue that the mis-measure of productivity growth is more severe today than in past decades of technological innovation.
So far, there is no hard empirical evidence that that is the case. Yet some economists suggest that we are not correctly measuring the output of cheaper software – as opposed to hardware – and the many benefits of the free goods associated with the Internet. Indeed, between search engines and ubiquitous apps, knowledge is at our fingertips nearly always, making our lives easier and more productive.
A third explanation is that there is always a lag between innovation and productivity growth. In the first Internet revolution, the acceleration in productivity growth that started in the technology sector spread to the overall economy only many years later, as business- and consumer-facing applications of the new digital tools were applied in the production of goods and services far removed from the tech sector. This time, too, it may take a while for the new technologies to become widespread and lead to measured increases in productivity growth.
There is a fourth possibility: Potential growth and productivity growth have actually fallen since the financial crisis, as aging populations in most advanced economies and some key emerging markets (such as China and Russia), combined with lower investment in physical capital (which increases labor productivity), have led to lower trend growth. Indeed, the hypothesis of “secular stagnation” proposed by Larry Summers is consistent with this fall.
A related explanation emphasizes the phenomenon that economists call hysteresis: A persistent cyclical downturn or weak recovery (like the one we have experienced since 2008) can reduce potential growth for at least two reasons. First, if workers remain unemployed for too long, they lose their skills and human capital; second, because technological innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth.
The reality is that we don’t know for sure what is driving the productivity puzzle or whether it is a temporary phenomenon. There is most likely some merit to all of the explanations on offer.
But if weak productivity growth persists – and with it subpar growth in wages and living standards – the recent populist backlash against free trade, globalization, migration, and market-oriented policies is likely to strengthen. Thus, advanced economies have a large stake in addressing the causes of the productivity slowdown before it jeopardizes social and political stability.

Commodities: Too Fast, Too Furious?

Commodities just had their best three month period since 2009

By Spencer Jakab 

Stocks may have had a rocky start to 2016, but commodities were practically a four-letter word. How quickly things have changed.

In the three months ended May, the S&P GSCI index rose by 18.1%. That marks its best such period since July 2009. The recent period reflected a bounce from the epic washout of the deepest post-war recession, so the recovery is really remarkable. Energy was the leader of the pack, rising by over 30%. That was its best three-month gain since the summer of 2008 when oil hit its all-time high.

It sounds bullish, but is it really? Commodities are outperforming stocks for the first year since – gulp – 2007. That marked the end of a five-year bull market and economic expansion. In fact, spiking energy prices preceded three of the last six recessions. We may curse this rebound yet.   

The Tipping Point Is Quickly Approaching

Editor's note: "The U.S. is going into a time of troubles at least as bad as any experienced in any advanced country in the last century."

Casey Research founder Doug Casey knows it sounds outrageous—and he'll probably get a lot of backlash—but he believes every American needs to be concerned right now…

Today and tomorrow, Doug will share his thoughts on this coming crisis…and why it will be much worse—and last much longer—than most people expect…

“Making the chicken run” is what Rhodesians used to say about neighbors who packed up and got out during the ’60s and ’70s, before the place became Zimbabwe. It was considered “unpatriotic” to leave Rhodesia. But it was genuinely idiotic not to.

I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as they might a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter, but basically academic and of little immediate personal relevance.

I’m directing these comments toward the U.S. mainly because that’s where the problem is most acute, but they’re applicable to most countries.

Now, in 2016, the U.S. is in real trouble. Not as bad as Rhodesia 40 years ago—and definitely a different kind of trouble—but plenty serious. For many years, it’s been obvious that the country was eventually going to hit the wall, and now the inevitable is rapidly becoming imminent.

What do I mean by that? There’s plenty of reason to be concerned about things financial and economic. But I personally believe we haven't been bearish enough on the eventual social and political fallout from the Greater Depression. Nothing is certain, but the odds are high that the U.S. is going into a time of troubles at least as bad as any experienced in any advanced country in the last century.

I hate saying things like that, if only because it sounds outrageous and inflammatory and can create a credibility gap. It invites arguments with people, and although I enjoy discussion, I dislike arguing.
It strikes most people as outrageous because the long-running post-WWII boom has been punctuated only by brief recessions. After 70 years, why should it ever end? The thought of a nasty end certainly runs counter to the experience of almost everyone now alive—including myself—and our personal experience is what we tend to trust most. But it seems to me we're very close to a tipping point. Ice stays ice even while it’s being warmed—until the temperature goes over 32° F, where it changes very quickly into something very different.

That point—economic bankruptcy accompanied by financial chaos—is quickly approaching for the U.S. government. With deficits over a trillion dollars per year for as far as the eye can see, the U.S. Treasury will very soon be unable to roll over its maturing debt at anything near current interest rates. The only reliable buyer will be the Federal Reserve, which can buy only by creating new dollars.

Within the next 24 months, the dollar is likely to start losing value rapidly and noticeably. Foreigners, who own over 7.3 trillion of them (including T-bills and other IOUs), will start panicking to dump them. So will Americans. The dollar bond market, today worth $40 trillion, will be devastated by much higher interest rates, a rapidly depreciating dollar, and an epidemic of defaults.

And that will be just the start of the trouble. Since the U.S. property market floats on a sea of debt (and is easy to tax), it’s also going to be hit very hard, again, this time by stifling mortgage rates. The next step is up for interest rates. Forget about property owners paying their existing mortgages; many won’t be able to pay their taxes and utilities, and maintenance will be out of the question.

The pain will spread. Insurance companies are invested mostly in bonds and real estate; many will go bankrupt. The same is true of most pension funds. If the stock market doesn’t collapse, it will only be because money is looking for a place to hide from inflation. The payout for Social Security will drop significantly in real terms, if not in dollars. The standard of living of most Americans will fall.

This rough sequence of events has happened in many countries in recent decades, and they’ve survived the tough times. But it has the potential, at least in relative terms, to be more serious in the U.S. than it was in Argentina, Brazil, Serbia, Russia, Mozambique, or Zimbabwe for two main reasons.

First, many people in those countries knew they couldn’t trust their government and acted accordingly, even in contravention of the law, by accumulating assets elsewhere. So, there was a significant pool of capital available for rebuilding. Americans, on the other hand, tend to be much more insular, law-abiding, and trusting in their government. When they lose their U.S. assets, they'll have lost everything.

Second, those societies were significantly more rural than the U.S. is today. As in the America of 100 years ago, much of the population lived quite close to the land and had practical skills and habits that helped them get through the tough times. For 21st-century Americans, it's a different story. Shortages and disorder are going to hit commuters who live in suburbs, and urban dwellers who think milk appears in cartons magically, like a ton of bricks.

One thing you can absolutely count on is that everyone will look to the government to “do something.” Americans really do think governments control the way the world works. Another certainty is that the U.S. government will “step in” massively, because everyone will want them to, and the politicians themselves believe they should. This will greatly aggravate the crisis and make it last much longer than necessary.