For most of 2009, pundits on both the left and right have insisted that the programs enacted to bring the financial system back from the brink wouldn’t—and couldn’t—work. And they have been wrong. They said the TARP would throw good money after bad, but now Bank of America, recently a basket case, is paying back $45 billion in TARP funds—with interest. They said the stimulus passed in February was way too small to halt the economic decline. Actually, it has short-circuited the recession. The economy shifted from shrinking at a 6.4 percent annual rate in the first quarter to expanding at a 2.8 percent rate in the third quarter. “This growth has been better and stronger than we expected, than anyone expected,” says Treasury Secretary Timothy Geithner.
Skeptics are now focused on the next big economic problem we face: unemployment. The numbers have been dismal. America has lost 7.2 million jobs, and the unemployment rate in November was 10 percent. For African-Americans, the rate was 15.6 percent, and more than one in four teens are out of work. Economists believe the unemployment rate will persist at 10 percent through 2010.
But jobs are on the way, and sooner than you think. Not enough to make everybody happy, of course, or to reach anything approaching full employment. But the data suggest that the economy, now growing at a rate above its historical trend, may be creating more jobs than are being lost. Companies shed only 11,000 payroll jobs in November—the smallest drop since late 2007. For the past three months, the government’s first estimate of job loss figures has been high; when the November numbers are revised, there may be a job gain. Labor market recoveries are always a lengthy four-step process. First, as businesses stabilize, they fire fewer people. First-time unemployment claims are still elevated, but the four-week moving average is 474,000, the lowest in more than a year. Second, when demand begins to pick up, businesses prod existing workers to work harder, which is why we’ve just witnessed the fastest two-quarter productivity surge since 1961. Third, when growth persists, bosses give part-time workers more hours or bring on temporary workers. In November, the economy added 52,000 temporary jobs, the largest addition since 2004, and seasonal retail hiring for the Christmas season is up 37 percent this year.
The final step—adding full-time positions—is happening now. Services account for about 86 percent of jobs. And it’s here, not in the shrunken housing and finance sectors, where the employment recovery is taking hold. The Bureau of Labor Statistics said that the service sector added 58,000 jobs in November, the second straight month of growth. Among the new services workers are the 240 employees of the Elysian, a 188-room luxury hotel that opened Dec. 9 on Chicago’s Gold Coast.
So why hasn’t this preponderance of evidence led to more optimism about jobs? Well, jobs are still very hard to come by. The Elysian fielded some 3,000 applications for those 240 positions. Nationwide, in July, there were more than six job-seekers for every opening. And the duration of the slump—we’ve just endured the longest economic contraction since the Great Depression—has darkened the national mood. But several other factors are to blame. In the last few years, economic prognosticators have been spectacularly behind the curve. In 2007, forecasters told us housing prices wouldn’t fall and the economy wouldn’t lapse into recession. Oops! Since the unforeseen debacles of 2008, existential angst has led forecasters to err on the side of bearishness. Combine ennui with a tendency to extrapolate existing trend lines into the future, and gloom begets gloom. The result has been a systematic understatement of the strength of the recovery. In May, forecasters surveyed by the Philadelphia Federal Reserve said the economy would grow at about a 1 percent clip in the second half of 2009. That’s likely to be off by a factor of three. After being too optimistic at the top, business leaders are also frequently too pessimistic at the bottom.
This tendency has been amplified by another force: politics. For the right, it has become an article of faith that so long as Obama sits in the White House, the economy must remain weak. Having voted en masse against the stimulus package on the grounds that it can’t work, the line from Republicans is that Obama is a socialist, job-killing, market-wrecking disaster. It follows, naturally, that his policies can spell only doom. On March 6, Michael Boskin, the Stanford professor and economic adviser to Bush the elder, wrote a Wall Street Journal op-ed entitled: “Obama’s Radicalism is Killing the Dow.” Since then, the Dow has rallied 57 percent. The party of Reagan is, in effect, rooting for economic rain. For the left, the pessimism stems from two sources. First, the bailouts were conceived in sin, because they provided unjust rewards to highly paid idiots who nearly destroyed the economy. More broadly, Obama has been too concerned with catering to discredited economic forces: Wall Street banks and Republicans. To get three Republican Senate votes for the stimulus bill, backers reduced its size by about $300 billion. And that, argued Nobel Laureate and columnist Paul Krugman, made it too small to be effective.
There’s also a more abstract reason for pessimism: a collective failure of imagination. The forces that drove job creation in the past—the housing boom, easy money, reckless lenders—are no longer with us. And it’s hard to identify that one giant engine—the next internet or housing boom—that will ignite growth.
Instead of one big thing, it’s likely that job growth will be fueled by several smaller things. Government spending will be one of them. The Census Bureau is hiring 1.2 million people in preparation for the 2010 census. The big rap on the stimulus—it wouldn’t happen fast enough—may turn out to be one of its virtues. Since it was passed in February 2009, only $237.6 billion (30 percent) of the $787 billion package has entered the economy. The tax cuts and infrastructure spending in the pipeline for 2010 and 2011 will support job creation. On Dec. 9, New Jersey Transit approved a $583 million contract for two construction firms to get cracking on a new commuter rail tunnel connecting New York and New Jersey under the Hudson River. It will create at least 1,000 jobs starting next year.
A growing global economy and the weak dollar point to a second source of support for job growth: exports. Exports fell from $164 billion in July 2008 to $122 billion in April 2009, but they’ve risen in every month since then, to $137 billion in October. On Dec. 4, Korean Air announced an order for five Boeing 747-8 Intercontinental jetliners for a total of $1.5 billion. *
And there’s more help to come from the government. On Dec. 9, Obama unveiled a set of proposals for a second stimulus targeted specifically at job creation, including a cash-for-clunkers program, and tax credits for businesses that hire. The latest proposals were greeted with bipartisan skepticism. Too little, says the left. “My big complaint is that he’s not grasped the severity of the situation yet,” said Dean Baker, director of the liberal Center for Economics and Policy Research. Baker points to a work-sharing proposal he drafted in which companies are given incentives to hire more people. The right, meanwhile, says Obama’s newest programs are poorly designed and misguided. “His plans are very much steeped in Keynesian economic policy, stimulated by the government,” House Minority Whip Eric Cantor said last week. At an occasionally contentious meeting in the White House on Wednesday, Cantor and his colleagues presented President Obama with their “no-cost jobs plan.” The proposals—halting regulations that would have an economic cost, eliminating impending federal tax increases, and freezing spending—sound an awful lot like John McCain’s 2008 economic platform.
It’s not surprising that pessimism surrounding employment endures. After what we’ve been through, our lack of faith in government and corporate America is understandable. There’s not as much to lose by being pessimistic in a good time as there is by being excessively optimistic in a down time. But the doomsayers don’t simply err by dismissing mounting evidence and embracing the narrative of decline. They mistakenly assume that companies won’t put their cash hoards to work, and that a new set of disruptive, job-creating technologies won’t emerge. Five years ago, Google had about 2,300 employees. Today, it has about 20,000. In December 2004, did any seer envision that? Economists can’t forecast what will happen in five months, let alone five years.
A version of this article appears in this week’s Newsweek. Newsweek’sDaniel Stone contributed to the story.
Correction, Dec. 15, 2009: This article mistakenly stated that the Boeing 747-8s were $1.5 billion each. (Return to the corrected sentence.)