State of the Union—Why So Few New Jobs?

Popular Economics Weekly

President Obama’s State of the Union address was all about jobs. So why have so few been created since the Great Recession?

Federal Reserve Vice Chair Janet Yellen gave a recent speech entitled: A Painfully Slow Recovery for America’s Workers: Causes, Implications, and the Federal Reserve’s Response. It is a warning about future job formation. She attributes most of the weak recovery to ‘fiscal headwinds’ (a shrinking of government spending to support growth and jobs), as well as the busted housing market that reduced consumers wealth some 40 percent. And because housing will take years to recover, more government stimulus is needed to bring down unemployment to an acceptable level.

Why do we need the government to continue spending? The reduction in household incomes since the 1970s reached its climax in the Great Recession. Income inequality had risen to the levels of 1929, just before the Great Depression. And Economist Emmanuel Saez has just updated income growth since the Great Recession. From 2009 to 2011 the top 1 percent incomes grew by 11.2 percent while bottom 99 percent incomes shrank by 0.4 percent. Hence, the top 1 percent captured 121 percent of the income gains in the first two years of the recovery.

And expectations of future income growth haven’t improved, as shown in this graph from 1978 presented by Dr. Yellen. Just 25 percent now expect higher incomes since the Great Recession, vs. a historical average of 50 percent since 1978.


Graph: Federal Reserve

So we are in a very tough spot. The fiscal headwinds Dr. Yellen speaks of have to do with the shrinking budget deficit, believe it or not. The Congressional Budget Office expects the deficit to shrink from 8.7 percent of GDP in fiscal 2011 to 5.3 percent in fiscal 2013 if the sequester takes effect and to 5.5 percent if it doesn’t. Either way, the two-year deficit reduction — equal to 3.4 percent of the economy if automatic budget cuts are triggered and 3.2 percent if not—would stand far above any other fiscal tightening since World War II, and could lead to another recession. For without rising household incomes, and private sector businesses that aren’t reinvesting, only the government can boost the demand for goods and services.


Graph: Calculated Risk

There is no simpler explanation for the employment picture. There cannot be more private sector growth if the government continues to shrink spending, since household incomes aren’t growing that control most of the aggregate demand (70 percent) for goods and services. Businesses account for approximately 20 percent of total demand, and government spending accounts for the other 10 percent.

Lower taxes can help if they go to the right households, but most tax cuts enacted since 1980 have benefited the wealthiest, or corporations’ record profits, rather than economic growth overall. In fact, corporations have been hoarding their profits—some $2 trillion in cash—rather than reinvest it in the economy. Overall buying power has been significantly reduced, in other words. And the 2 percent payroll tax increase just enacted with further cut consumer spending.

So the problem is how to create enough new jobs to generate more demand for goods and services. And only government is in a position to do that at present. Nothing else will generate the growth we need.

Harlan Green © 2013

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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