[OPINION] Facing Economic Reality

By former Gov. James J. Florio, Florio Perrucci Steinhardt & Fader Founding Partner

The release of unemployment numbers for the month of May 2013, raises the possibility of a need to rethink some basic assumptions about our national economic policies. A respectable 175,000 jobs were created, but the unemployment rate rose from 7.5% to 7.6! The explanation offered is that more people entered or re-entered the job market. Reasonable enough, but people have always entered or re-entered the job market.

So how is it that since coming out of the Great Recession in June of 2009 we still have such a high unemployment rate and are so far from full employment, which is usually thought of as 5% or 6%? This is especially frustrating in light of the fact that the stock market is doing well, as is productivity, corporate profits, and corporate cash on hand ~ so much so as to induce stock buybacks and generous dividends. The question is, has business learned to prosper with dramatically fewer employees? Is the new normal for “Full Employment” to be 7% or 8%?

Rather than just wait for the traditional business cycle to bring jobs back, maybe there is a need to review basic structural changes occurring in the global economy to look for answers. The profit motive is an appropriate and necessary means to attract investments in the capital intensive economy we are in. Without access to capital, whether you are a business, an industry, or a Nation, you go under.

Traditionally, you need pricing freedom to adjust prices to make necessary profit margins. Might it be that with so much National and International competition in virtually every field the ability to raise prices is dramatically limited? The additional fact of extensive worldwide over-capacity in so many industries; steel, autos, shipbuilding also limits pricing freedom. If such is the case, the only way to maintain profit margins is to then go to the cost side of the ledger, and that means personnel. That means little incentive to hire! But, isn’t hiring and giving workers purchasing power essential for a domestic market for goods and services?

Henry Ford said he paid his employees good wages so they could buy his cars.

Could it be that domestic cost containment is so important to remain internationally competitive, as overseas markets look more and more attractive? After all, the Chinese have 300 million upwardly mobile middle class consumers, which is roughly equivalent to the population of the entire United States of America. And they have another billion people coming along. GE already generates 60% of its profits overseas. It would not be economically irrational to contain costs so as to be competitive in growing overseas markets; the result being disincentives to hiring and incentives for labor saving technology.

The point of all of this is that we have to think about things as they are ~ even when they are unpleasant ~ as we formulate public policy. Our Leaders must deal with reality rather than delude us with what we would like reality to be. You can’t fix a problem if you don’t understand the problem… There are no answers if you don’t know the questions…

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