New York Review of Books:

Our Crisis of Bad Jobs 

Jeff Madrick

Bruce Gilden/Magnum Photos

Mercedes-Benz car show, Washington DC, 2005

With domestic policy as the theme of Wednesday’s presidential debate, the Obama campaign is facing a weakening economy. The Commerce Department just reported that GDP grew at an annual rate of only 1.3 percent in the second quarter. Job growth has been tepid, with continued high unemployment and underemployment. When one counts all those looking for full-time jobs and unable to get them, the true unemployment rate is close to 17 percent. Meanwhile, the US faces looming threats of a new European recession and a slowdown in China and other parts of the developing world.

But the starkest evidence that something is seriously amiss in the American economy is the dramatic deterioration of the middle class. Median household income—the midpoint income of all American households—was reported by the Census Bureau (whose data is a year or so behind) to be down in 2011 compared to 2010, despite an economic recovery that began in mid-2009. More disturbing, that figure is now down to around $50,000, which is 7 percent or so below what it was in 2000 and its lowest level since 1996, adjusted for inflation. Incomes are falling still more sharply for black households.

The Census Bureau also reports on poverty levels, and these too are reason for serious concern. At 15.1 percent—some 46 million people—the proportion of Americans in poverty is now at its highest level since 1993. Moreover, according to a recent Rutgers University report, more than half of those who have received a college degree since 2006 cannot find full-time jobs.

The reason that the economic recovery is coinciding with middle class decline is increasingly clear. America is creating jobs, but they are bad jobs: retailing, food preparation, and table waiting, for example—in other words, jobs that don’t pay much. Economists like David Autor of MIT and Larry Mishel of the Economic Policy Institute have been talking for years about the hollowing out of middle-level jobs in offices and manufacturing.

Annette Bernhardt of the National Employment Law Project did the hard empirical work recently and found that most of the job losses from 2008 to early 2010 were in the middle-income category, jobs that pay from roughly $14 to $21 an hour. What is disturbing is that in the job turnaround since then, only one in five such jobs came back. Instead, very low-end jobs, paying $7.70 to $13.80 an hour, accounted for most new employment. This is a stark continuation of the hollowing out.

The mystery, then, is not what is going on in the economy but what to do about it. And neither candidate has a satisfactory plan. Romney is offering a repeat of the George W. Bush approach, which involves mostly large tax cuts for upper income “job creators.” Even before the devastation of 2008, job growth was slower under Bush than under any other postwar president.

In his recent stump speeches, Obama has begun to talk about “economic patriotism” and the need to create more opportunities for the middle class. But he has not sharpened his job proposals much since issuing his 2013 budget last winter, which called for some tax breaks for hiring and a reversal of the Bush tax cuts for those earning more than $250,000, as well as spending programs based on the American Jobs Act of 2011. One of his more recent actions has been to levy tariffs on Chinese solar panels and wind turbines, and he recently lodged a complaint about Chinese violations of trade rules for auto tires with the World Trade Organization. But this seems to be more a political response to Romney’s criticism of China’s currency manipulation than a plan to restore job growth in America.

Obama has every reason not to emphasize bad news about the economy now, in the final weeks of a reelection campaign, so in truth we do not fully know what is in store for us if he wins. With deficit monomania hanging over DC like the blackest of clouds, he realizes that strong public spending, even including on measures like transportation infrastructure, which would help create middle-income jobs, will be derided not merely by the right but by the center.

Despite deficit concerns, robust action in the jobs market will be urgently needed to counter the growing problem of bad jobs over the next presidential term. Only by encouraging much faster growth through new stimulus and public investment will the government have a strong prospect of reversing the middle-class income crisis. The next steps should also include more direct intervention, such as higher minimum wages; aggressive wage subsidies; outright job creation through public programs in fields like construction and teaching; constraints on financial incentives to suppress wages by CEOs and Wall Street privatizers; and a significantly lower dollar, by keeping interest rates low, to improve exports and limit imports.

We are unlikely to see any of this even mentioned with the election only weeks away, and it is unclear how much political clout the president will have after November if he is reelected. It will depend not only on whether he wins but whether more Democrats are elected to Congress with him. Nevertheless, it should at least be clear to voters that President Obama’s proposals as they now stand will still add far more jobs in 2013 and 2014 than would Mitt Romney’s. Moreover, while falling short of what is needed, Obama’s general approach could be enhanced if the political environment changes.

Moderate tax increases for the wealthy are an effective way to raise revenue to reduce the deficit: they do not reduce GDP very much because the well-off don’t tend to cut much of their spending and have enough money to keep going. But direct spending by the government can have a big impact on GDP due to what’s known as the multiplier effect. Money is spent, winds up in the hands of consumers, who save some and spend more, and so on in a virtuous circle. With more sales, business hires more workers. If growth speeds up, a higher proportion should be for better-paying jobs, though this is not altogether clear any longer.

Mark Zandi, chief economist of Moody’s Analytics, has computed such multipliers for various kinds of spending, and the Economic Policy Institute (EPI) has determined that, based on these figures, Obama’s budget proposals would increase jobs by 1.1 million in 2013 and 280,000 jobs in 2014. In contrast, because Romney’s plan seems largely to consist almost entirely of tax cuts, the EPI estimates it will not have much impact on growth, adding fewer than 100,000 jobs in 2013. The size of these multipliers is also in dispute but EPI’s estimates, even if a bit high, are probably in the ballpark.

And if Romney cuts spending to pay for the tax cuts, as he has promised to do (but without revealing the details), it will devastate the economy, leading to 2 million more lost jobs over the next two years, according to EPI.

There has been much talk about the so-called fiscal cliff, the program of sharp spending cuts, including at the Pentagon, and a complete reversal of the Bush tax cuts for all, as well as the end of the moderate payroll tax cuts of 2012. The Budget Control Act in late 2011 mandated these changes, and if enacted they would sharply contract government stimulus and almost surely produce a recession.

The EPI basically assumes a postponement of major cuts and the end of payroll tax cuts, and a rise in taxes for upper-income earners, among some other changes. These would have a moderately contractionary effect, but it would be more than offset by the Obama spending proposals in the American Jobs Act. Given the near-obsession with deficit cutting in Washington, any compromise may involve greater cuts later this year, resulting in more economic contraction. If Obama brings more Democrats into office with him, however, odds rise for a more moderate compromise. Still, there is a good chance even Social Security will be on the chopping block.

But a larger question remains. If the current Obama proposals are passed, the American jobs crisis will not have been solved. If austerity economics is still the rule of the day, attempts at spending and investing adequately by government will be stanched and promises to rebuild the workforce will not be kept. The outcome of the election is still more momentous than many may believe. While we fail to address the long decline of the middle class, a key foundation of American prosperity is eroding in full view.

October 2, 2012, 1:44 p.m.