Its the Jobs, Stupid!!

In plain Clinton Speak - "It's the Jobs, stupid!" One in five families in the US is struggling to make ends meet and mood is increasingly getting despondent as the job market continues to show weakness.

The crying need of the hour is "Confidence" and that is fragile at the moment. The last thing we need is knee jerk actions from politicians that can threaten the fragile confidence that is so essential for the business to resume hiring.

The combination fiscal stimulus, quantitative easing and low interest rates have managed to hold the economy from sliding deeply into a pit but it has had its run and has even helped in recording a strong growth of 5.7% in Q4. The United States economy grew at its fastest pace in more than six years at the end of 2009, even as businesses resisted hiring and continued to do more with less.

However, the growth is a lot more feeble than the headline number suggests if we strip the effect of inventory build up. The biggest factor in the strong growth rate during the last quarter was not driven by consumers spending, but by businesses building up inventories. The change in inventories added 3.4 percentage points to the growth rate.

Obviously inventory changes alone cannot sustain growth over an extended period of time, unless of course these are consumed. Interestingly the economy has been able to grow even without adding workers because of productivity gains.

There isn't much more ammunition left to pursue this steroid infused growth any further without threatening to fall into a debt trap, risking ratings downgrades and fuelling future asset bubbles.

The biggest challenge in the near term is the job market. On a net basis, the economy lost 208,000 nonfarm payroll jobs last quarter, and the unemployment rate rose to 10 percent, from 9.7 percent. As long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money. That means businesses will need to look for other sources of demand, like exports (read weak US Dollar policy).

Larry Summers commented at Davos that US "appears to be out of statistical recession, but remains in a human recession". Across the world, unemployment looks set to remain high despite GDP growth. This will have a huge impact on politics, and thus on policy. The risk is that concerns about "protecting jobs" lead to protectionism. That may well endanger trade and retaliatory actions all around.

The West has been profligate for far too long and it is time now to tighten the belt. And tighten the belt it must by several slots! President Obama unveiled a budget that projects a deficit of US$ 1.6 trillion for Fiscal year 2011 and the cumulative deficit to reach US$ 5 trillion over the next 5 years. US is postponing the problem in the hope that they can rein in deficits in the future. It is a ticking time bomb!

Alternatives are tough and its time for some radical action. Actions to eliminate waste, productivity gains in administration to fund investments, innovation through research (tax breaks for research spend), creating business climate that encourages capital investment (stable tax policies), investment in green energy and private sector job creation (reduce corporate tax and support self employment programmes).

I think the administration is turning its focus on the critical issue i.e. job creation. The Obama administration seized on news of the latest upturn as an opportunity to push its proposal to encourage hiring. Companies would receive a tax credit of up to $5,000 for each new hire, and an additional credit on Social Security payroll taxes for raising wages — by increasing hourly pay or work hours, for example — in excess of inflation. Some of the new initiatives are being funded by taxing earners with income > US$250,000.

A lot more needs to be done and some additional measures such as the following would help:

- lowering corporate taxes thereby encourage foreign capital investment

- supporting investment in new technologies through tax breaks;

- investment in education to improve skills linked to business needs

- support research for innovation mainly in green energy,

- focus on improving productivity, eliminating waste in public sector and stricter conditions for doles and

- lastly, sensible regulation that does not limit credit growth from banks; bashing bankers, however, appealing it is must stop and focus should be on developing a framework that makes the system safer;

There is a great need for public-private partnership with focus on equipping the youth with appropriate skills through sustained training and development programmes. If only part of the fiscal stimulus or the QE was spent to set up a Venture Capital fund to support entrepreneurship and self employment programmes, it might have had potentially much more lasting and positive impact.

Time for some concerted, coordinated and well thought out measures. Can we expect it from our Leaders ?