Invest in infrastructure to stimulate jobs

Clearly, today most Americans would identify the weak job market as the biggest problem facing the country today. While the job market will recover on its own eventually, there is a desire in many quarters to roll out a second stimulus package to promote job growth. As Paul Krugman noted in a recent NYT opinion piece, the standard American approach to stimulus is to focus on expanding the economy as a whole with the assumption that jobs will follow. The traditional approach makes a great deal of sense during a run-of-the-mill recession. The problem today is that some of the dislocations in the economy and job market are so large, it could take many years to retrain and relocate the unemployed, particularly among the large pool of unemployed manufacturing and construction workers. In addition, the downturn in employment in construction and manufacturing are the result of long term or secular trends, not purely cyclical unemployment. To stimulate jobs among this large pool of unemployed workers, we should increase our investment in infrastructure on a sustained, multi-year basis.

"Blue collar" job losses

Of the 6.7 million jobs lost in the United States since 2007, nearly 58% were lost in construction and manufacturing. These largely male, "blue collar" occupations have seen such large losses that women now make up more than 50% of the workforce for the first time in history. Over 2.2 million jobs have been lost in manufacturing, but as can be seen in the chart below, the decline of manufacturing (dark green line) as a share of employment is in line with the historical trend. Manufacturing employment as a percent of total non-farm employment has fallen pretty much in a straight line from about a third at the end of World War II to under 10% today. As I have written previously (see here), this decline is due primarily to the consistent increase in manufacturing productivity. Manufacturing production has continued to grow and has largely maintained its share of GDP, even while employment has plunged. In other words, even if there was a large rebound in manufacturing, the vast majority of manufacturing jobs that have been lost in the last decade are never coming back.

Chart 1: Employment by Sector as a % of total Non-Farm Employment

                    Source: Economy.com, author's calculations

Construction employment (the maroon line) has consistently run at around 5% of the total workforce since World War II. The 5% number makes sense, and is in line with the long term trend in real estate investment, which has run at about 5% of GDP as well.

Chart 2: Private Investment to Nominal GDP

 

                   Source: Economy.com, author's calculations

Chart 2 shows the annual numbers through 2008, and 2009 will show a further plunge in private investment in both business equipment and real estate. In addition, given slower demographic growth and the large overhang of unsold homes, potential foreclosures and homeowners in negative equity situations, there is no reason to expect a strong rebound in real estate investment anytime in the next five years.

Where will new jobs come from?

On Chart 1 we can see that there has been a secular increase in the share of jobs going toward "white collar" occupations like health & education (orange line), business & professional services (office & tech jobs, pink line) and leisure & hospitality (light purple line). Of these careers, health, education and non-administrative office jobs tend to require time-consuming and expensive training, and it's hard to envision the government laying out a vision of promoting employment in leisure & hospitality jobs as the route to a strong America.

Having a large pool of angry, unemployed men does not for pleasant politics make. The traditional US government approach of using tax cuts and interest rate cuts to stimulate private spending and investment will not work in the near term (for reasons I outline here). For reasons I won't get into in this article, it also appears that the world economic system is not quite ready to be geared toward stimulating US export growth and trade surpluses. That leaves the US government directly stimulating demand.

Invest in infrastructure

In normal circumstances, I am not one to argue for more government intervention in the economy. However, these are certainly not normal circumstances. I am advocating the government committing to a sustained, multi-year program of increased investment in the nation's infrastructure as a way of both directly creating demand and stimulating private investment. I am not advocating a boondoggle like the stimulus bill from early this year. The US needs to target infrastructure investments that directly improve the long-term productivity of the US workforce by laying out a long-term plan and set of priorities. The investment should have the following goals:

1. Reduce the amount of time and energy Americans spend commuting (investment in commuter rail, highways and bridges)
2. Increase the efficiency of moving people and goods around the country (investment in rail, a new air traffic control system, highways, bridges)
3. Reduce our reliance on imported energy (investment in wind, solar, nuclear, transmission grid, battery technology)
4. Increase broadband capacity and penetration (invest in rural and wireless broadband)

If carried out in a thoughtful way (i.e. not driven by parochial real estate interests), such a program would make America stronger in the long term while creating near term construction jobs and stimulating domestic manufacturing.

Comments

[Tim]

is there any way you could send me a copy of chart 1 where the words in the key are clear? I have been searching forever for a chart like this and this is perfect, I just cant read the key.

[smartbrains]

Stimulus I don't think so! I agree with those who believe this to be wasteful spending on our governments part. I am concerned that idiots we elect to congress actually believe that throwing money, I should say borrowed money, is going to help! All I see is waste!

Plus - I don't understand how our Congress can call, Unemployment, Medicaid and other social welfare programs funded in this bill stimulus. Please can someone enlighten me!
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[Richard Wicks]

Your charts are unreadable. Why post them?