A funny thing happened on the way to the bailouts: Nobody really worried about jobs.
In early 2009, when the Federal Reserve was preparing its "stress tests" of 19 big banks, economists expected the 2010 unemployment rate to average about 8.8 percent. Whoops. So far this year, it's ranged from 9.5 to 9.9 percent, and it could crest 10 percent later this year as discouraged workers who gave up looking for work rejoin the labor force and start looking again. Every percentage point in the unemployment rate represents about 1.4 million jobs. So the forecasters missed badly when they low-balled the unemployment rate last year.
[See why a rising unemployment rate is good news.]
The thinking back then was that saving the banks would save the economy. It's an old economic aphorism that credit is the lifeblood of capitalism, so the emergency responders in Washington injected capital into the banks and pulled other levers to stabilize the financial system. That, in turn, was supposed to reopen the spigot of capital that businesses and other borrowers need to buy stuff and remain economically active. The $787 billion stimulus package was a kind of insurance policy meant to preserve some jobs and replace a bit of lost consumer spending with federal dough.
Some of it worked. The banks are back on their feet, and most economists feel that the recession would have been much worse—perhaps even crossing into a depression—if Washington had dragged its feet. But one big thing hasn't turned out as hoped: All those bailouts and stimulations haven't created many jobs. The private sector has added 593,000 jobs so far this year, but nearly 8 million jobs have been lost since the recession began in December 2007. And overall, the job numbers have been lower than expected for the past few months. The barely-there pace of job creation could keep unemployment high for years, and it's even stoking concerns about a second wave of recession. Here are four things that need to happen for hiring to really pick up:
More lending to small businesses. Bank-lending to big companies is more or less back to normal, but small businesses have been relegated to a lending ghetto. Many small businesses—think dry cleaners, delis, independent contractors, even some dentists and lawyers—rely on local bank loans or credit cards to help keep their businesses afloat. And those are precisely the kinds of loans that banks have clamped down on as they raise lending standards and try to filter out risky borrowers. This comes at the same time that business have to figure out new regulations and bear new expenses involving healthcare and financial reform, and perhaps energy and immigration, if those reform bills get through Congress.
These strains matter a lot, because small businesses—not Fortune 500 firms—create most of the new jobs in the economy, even if it's just one or two at a time. Without credit, they can't expand or hire, and small business have created virtually no new jobs at all since the recession supposedly ended last summer. Banks need to raise lending standards, since defaults by subprime borrowers who never should have gotten loans in the first place helped trigger the recession. But banks are snaring legitimate business owners in the same net, with no mechanism to help distinguish entrepreneurs who could create jobs from people who might merely waste money. If there's any stimulus left in the government, more secured loans to small-business owners might be a good way to spend it. It wouldn't hurt to offer small-businesses tax breaks, relief from new regulations or other incentives, at least until the economy is firmly growing again.
More confident CEOs. Many big companies are in a good position to hire, with lean staffs and a stockpile of cash. Some of them even need to hire, because they cut their payrolls by too much during the recession. But they're not hiring yet, largely because CEOs aren't sure that the recession is really over. Part of this is a circular conundrum that economists refer to as a "negative feedback loop:" Companies are waiting for the economy to pick up before they start hiring; for the economy to pick up, consumers need to spend more money; for consumers to spend more money, they need to feel more confident that hiring will pick up. Rinse. Repeat.
But there are some things that would make CEOs feel more confident that don't involve a game of chicken with consumers. The biggest involves politics. CEOs are worried about the ballooning national debt because if Washington doesn't rein it in, interest rates and inflation could spiral out of control at some point. As big as it is, the debt could be tamed with a reasonable program of budget cuts and tax increases. But there's no serious effort to do this, with politicians spreading blame and fear rather than trying to solve the problem. The dysfunction in Washington creates the impression that America's leaders can't solve serious problems. Who would want to invest in a climate like that?
More stable state and local governments. We all know about the federal debt, but state and local governments are feeling the heat, too. This has been masked somewhat by $250 billion in federal stimulus spending that went to states, helping limit layoffs and preserve civic services. During the recession, for example, employment levels in state and local government remained stable while the rest of the economy lost about 8 million jobs.
Those stabilizers are now wearing off, and regional governments are poised to start slashing jobs if tax revenues don't pick up soon. That could produce a fresh spate of mass layoffs that undermine the recovery. And tax increases in some states are cutting into consumers' disposable income, yet another reason that business leaders are skeptical of a recovery. Governors and mayors are lobbying for more money from Washington, but this time they've run into tough opposition from members of Congress who say the well has run dry.
Aggressive action in Europe. Athens and Lisbon are a lot closer than you think. Debt problems in Greece, Spain, Portugal, and several other European nations could still trigger a financial panic that leads banks all over the world to hoard cash and curtail lending, which is yet another worry nagging American business leaders. There's also a good chance that Europe will slip back into a recession, with reverberations felt here. The American economy won't necessarily move in lockstep with Europe's, since we consume many of our own goods and services. But weaker spending in Europe will depress American exports, which have been looking brighter lately.
[See what Washington needs to learn from Greece.]
Some American leaders want to see more aggressive action in Europe, similar to last year's stimulus spending and to the Federal Reserve's all-in interventions. But European governments tend to worry a lot more about inflation and debt, and they seem inclined to muddle through a second wave of recession, should it arrive. So business leaders, consumers, and government policymakers keep looking to each other for hopeful signs that the worst is over. And nobody's sure that it is.