With the jobless rate stubbornly stuck above 9 percent for the last 28 months, the United States is experiencing a “jobless recovery” that is much worse than those following the 1990-91 and 2001 recessions. What’s the main reason that job creation has stalled and prevented a full economic recovery? The ongoing economic weakness and lack of job creation can be traced directly to a lack of private business investment, and the critical “investment-employment-economic growth” connection has been getting some attention lately.
For example, Robert Higgs wrote recently that “The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed.” In a recent New York Times editorial, Greg Mankiw emphasized that “The subpar recovery has coincided with a historically weak investment recovery.”
The chart below helps to illustrate the current economic situation by showing the percent changes since the third quarter of 2007 for five key economic variables: real personal consumption spending, real disposable personal income, real GDP, private payroll employment, and real business investment. As can be seen in the chart, consumption, income, and production have all recovered from the effects of the Great Recession and are now back to their pre-recession levels. But private employment remains almost 6 percent and more than 6 million jobs below the pre-recession level, and that’s associated with private business investment that remains 10 percent below 2007 levels.
What can be done? Charles Schwab pointed out in the Wall Street Journal this week as he discussed the sluggish recovery:
We cannot spend our way out of this. We cannot tax our way out of this. We cannot artificially stimulate our way out of this. We cannot regulate our way out of this. Shaming the successful or redistributing income won’t get us out of this. What we can do—and absolutely must—is knock down all hurdles that create disincentives for investment in business.
Schwab’s solution? “Proposed laws and regulations should be put to a simple test: What will this do to encourage businesses and entrepreneurs to invest? What will it do for jobs?”
Bottom Line: Private job creation and private business investment are so closely linked that the current “jobless recovery” could also be described as an “investment-less recovery.” The chart above helps to show that it’s not a lack of consumer spending, weak gains in personal income, or sluggish real output growth that are holding back job creation. Rather, it’s weak business investment spending that is largely responsible for the sub-par recovery. The attempts to jump-start the economy with fiscal and monetary stimulus haven’t brought the jobs back because they haven’t created the right incentives to bring private business investment spending back to a level that would restore jobs to pre-recession levels. If we could focus instead on removing the many political and regulatory uncertainties that are holding back private business investment, risk-taking, and entrepreneurship as Schwab suggests, then the “investment-less recovery” will end and strong job creation will automatically follow.