Wanted: A new economy

By Judith Stein

In his speech on jobs Thursday, President Obama will offer tax credits for new hiring, extension of the payroll tax cut, and other small items, his aides hinted. These measure may be helpful at the margins, but the only way they, and much needed larger ones, will get people's attention is if they are attached to a narrative that makes jobs the centerpiece of a new economy that produces more of the goods that Americans consume.

In 2009, the president seemed to agree when he told CNN, "We can't go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them."

Nobel prize-winning economist Michael Spence calculated the employment numbers that such an economy produced. Spence found that between 1990 and 2008, the economy added 27.3 million jobs to the base of 121.9 million. But 26.7 million of those jobs were in the nontradable sector - government, health care, real estate, and retail - where goods and services are both produced and consumed in one country, immune from international competition. In the tradable sector, manufacturing employment fell, as many jobs were off-shored. (This decline was offset by some additions in high-end management and consulting services.)

Most of the new nontradable jobs paid less than those lost, so inequality rose. Americans kept up their consumption by increasing their household debt - sustained by low interest rates, which nations like China and Japan kept down by using dollars accumulated from their trade surpluses to purchase U.S. debt. Because the United States was making fewer products than they used, the trade deficit rose to 6 percent of GDP in 2006.

Then came the Great Recession. In previous downturns, government spending and/or tax cuts and low interest rates brought people back to work. But past economic growth based on housing, debt-financed consumption, and finance cannot be restored.