Our Jobless Recovery Had Its Origins in the 1980's

This post by Mark Thoma suggests that the rate of job creation in the US began to slow down well before our current downturn. Changes in executive compensation, and its connection to what Wall Street rewards with higher stock prices, is a big part of the problem. Higher stock prices are associated with lean and mean management. The 90's were an exception because of the dot.com boom. High tech start-ups were creating lots of jobs and mature companies invested heavily in new applications that took advantage of the Internet.

The end of the dot.com boom led to the jobless recovery in the Bush administration. It was fueled by the real estate bubble and debt instead of job related income. The implication of this analysis is that we are in for an extended period of high unemployment as long as corporate executive compensation is linked to the single goal of increasing shareholder value. Multinational corporations will continue to operate "lean and mean", and they will continue to find customers and opportunities in locations where the middle class is expanding rather than shrinking as it is in the US. From the viewpoint of standard economic theory, this is a good thing. It leads to efficiency and the free flow of capital to its most productive use. Perhaps we need an economics in which efficiency is not the primary objective of economic activity. The financial crisis should cause us to rethink the relationship between our incentive system and socially valuable economic results. Bank executives did just what they should have done to increase shareholder value and their compensation. It turned out that the increase in shareholder value was short lived for many investors. Bank stocks have performed poorly, and we are still suffering from the consequences on Main Street.

Another implication from this analysis is that short term stimulus of the economy, which I have been advocating, may not be the answer to our economic malaise. We have structural problems in the economy that need to be corrected by political action. Unfortunately, the most politically active elements in our society would only aggravate a bad problem. We have a new "silent majority" in America. Richard Nixon activated his silent majority during his presidency. We need to activate our passive middle class which has learned to suffer in silence.