No Job Growth Under ‘Regime Uncertainty’

As we near the end of August and prepare for Labor Day weekend, the latest in depressing unemployment news indicates that jobless rates rose in 44 U.S. states in July — “the most states to show a monthly increase in more than three years and a reflection of weak hiring nationwide” — and rose by 4,000 to a seasonally adjusted 372,000 in August, the second straight increase and the highest level in about a month. These reports underscore observations made by top CEOs in their latest “earnings calls,” teleconferences hosted by CEOs of publicly-held companies to discuss their quarterly earnings and current market trends. In reviewing the transcripts of 500 recent such calls, the Wall Street Journal found that a surprising number used them to “publicly vent” about woes in Washington:

“‘If you can’t plan, you can’t spend. And if you don’t spend you don’t hire,’ says one healthcare CEO. ‘It’s just hard to do budgets.'”

This phenomenon has been dubbed “regime uncertainty” by Independent Institute Senior Fellow Robert Higgs, rooted in his research on the Great Depression. Noting that the U.S. economy started to recover in 1935, Dr. Higgs points out that it instead plunged firmly back into depression when a new wave of regulations were unleashed as the “Second New Deal” — where it remained until after the end of World War II.

Investors — those individuals who funnel resources to enterprises that create jobs — and business executives — those whose jobs depend on producing a return to investors — are not gamblers. If they cannot predict what the rules of the game will be, they will simply adopt a wait and see attitude. Effectively, they will choose to do nothing.

Even FDR’s Secretary of the Treasury, Henry Morgenthau, recognized the problem for what it was, and urged the president to make a statement to reassure investors. As Morgenthau pleaded:

“Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? … Are we to have inflation or deflation, more government spending or less? … Are new restrictions to be placed on capital, new limits on profits? … It is impossible to even guess at the answers.
As wave after wave of new taxes, regulations, subsidies, and expansive new government programs left investors and businessmen fearful and uncertain, net private investment in the decade of 1930-1940 was actually a negative $3.1 billion.

The length of the current recession is alarmingly reflective of this same fear and uncertainty, resulting from unprecedented regulatory activism by Washington on a bipartisan basis. In the aftermath of the 2007 financial meltdown, the Bush administration pushed through the most massive intervention in financial markets ever seen, with federal takeovers of Fannie Mae, Freddie Mac, and AIG, and the roll-out of TARP. Bailouts of some of the largest financial institutions, on a seemingly capricious basis (Goldman Sachs was saved while Lehman Brothers was allowed to fail), were followed by the automaker bailouts. As a result, by December 2008, the chairman and chief executive of the China Investment Corporation expressed a lack of confidence in Western financial institutions due to regime uncertainty, and said that his giant fund would make no new investments in them:

“Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. ‘If it is changing every week, how can you expect me to have confidence?’ he asked.”
The years since have only compounded an environment of ever-changing rules, with President Obama building on the massively increased federal spending of the Bush years, and aggressive new and changing tax and regulatory policies. The nearly 2,000-page Affordable Care Act is perhaps the most controversial of these, with terms that leave so much to bureaucratic discretion that no one knows what the net effect will be. And, perhaps most pervasive to all American decision-makers, is the specter of the “fiscal cliff” of tax rates resetting at the end of this year.

All of this feeds an atmosphere of uncertainty under which businesses and investors hunker down rather than risk capital that would create additional jobs. And we’ve simultaneously entered a new era of “jobless entrepreneurship,” with new businesses increasingly consisting of sole proprietorships rather than firms employing others.

Washington has attempted to counter these trends with proven-ineffective economic policies: starting under Bush and continuing under Obama, the Fed has pursued round after round of “quantitative easing” supposed to alleviate a lack of liquidity in the economy and bring unemployment down.

In fact, American non-financial corporations hold more cash than they have for 50 years: $1.9 trillion, or 7% of all their assets, which is the highest level since 1963. The good news is that such resources, if deployed, could fuel a tremendous recovery in the private sector. But the future policy environment is simply too unpredictable for American CEOs to do so, and the current political divisiveness and campaign rhetoric isn’t doing anything to allay these fears. As the CEO of a public manufacturing firm put it, “People should be focusing on improving the economy instead of just bashing each other.”

The other highly-touted policy prescription has been stimulus spending, which despite a spectacular lack of results remains a perennial favorite as a result of popular mythology that has grown up around the Great Depression and World War II.

Because World War II saw an explosive growth in GDP and the elimination of unemployment, it has become popular to assert that the war was responsible for ending the Great Depression. It’s certainly true that American output exploded during the period, with millions of weapons, thousands of planes, and hundreds of ships cranked out and sent into battle, resulting in a huge increase in measured GDP. At the same time, 16 million Americans served in the military forces over the course of the war — 10 million drafted and the balance enlisting — which naturally resulted in “unemployment” plummeting. But as the formerly unemployed were subsumed into below-market wage employment that could and did result in death and dismemberment, many of them might have preferred the alternative.

Meanwhile, on the home front, civilians saw none of the supposed increase in GDP, instead facing rationing in everything from food, fuel, and clothing, to the complete unavailability of products ranging from new tires through almost anything made of metal in a pre-plastics age, including automobiles or appliances, for the duration of the war.

This is hardly the picture of prosperity painted by those who continue to repeat the old saw that World War II “got us out of” the Great Depression.

Thus, as we dissect the statistics, we see that American businesses and consumers are responding to today’s regime uncertainty just as they did to that of the 1930s: saving rather than spending or investing, watching and waiting to see what next year will bring. And we can also see that massive spending by Washington actually resulted in a lower standard of living for the average American during World War II, just as it is doing today.

So what is the answer to today’s ills?

Looking again for parallels with the Great Depression, following the death of FDR, President Truman replaced the vast majority of his advisors and refused to listen when they warned that cutting government spending after the war would plunge the economy back into depression. Truman proceeded to cut federal spending by 60% in 1946 — concurrent with the release of 10 million men from the military. Rather than the depression the Keynesians had predicted, civilian output that year increased by 30% — the highest in U.S. history. By 1948, real output was back on its long-run growth trend, and the Baby Boom was underway. As Dr. Higgs summarizes in “The Great Escape from the Great Depression,” with the change in Washington’s policies,

“Because ‘regime uncertainty,’ which had dominated the later 1930s, no longer cast such a dark shadow over business and investment, the economy finally recovered from the Great Depression and the economic hardships of the war years, even as it simultaneously reallocated about 40 percent of the labor force from war-related uses to civilian uses.”

Washington today thus needs similarly to reverse the past decade’s pattern of runaway federal spending and mounting debt — settling monetary, tax, and regulatory policies to predictable, reasonable levels that encourage investment in enterprises large and small. That truly would get America back to work.


It’s estimated that between three to four million jobs are going unfilled in America. How is that possible, when so many individuals are out of work? Most of these jobs are “middle-skilled” positions, which don’t require a college degree, but demand more than a high school education. They include jobs in advanced manufacturing, healthcare, construction, “green” building and transportation/logistics.

This skills gap is the visible symptom of an inadequate and inefficient workforce development system. The economy has changed dramatically since the great recession. Many of the jobs that disappeared are not returning. Jobs requiring more advanced training and skills are replacing them. As a nation, we have not figured out how to get jobseekers ready and into the jobs that exist, or will exist, in their community. And that may be the key: There is no such thing as a national economy when it comes to workforce development. The jobs that are and will be available and the skill sets needed by employers vary by community and industry. There are countless local economies.

Fortunately, one locally focused initiative is helping to close the skills gap. Developed with the support of national foundations, the National Fund for Workforce Solutions (NFWS) workforce development model is being implemented in 30 communities nationwide. Each locality is creating its own unique strategy that transforms how workers get good careers.

Although it is driven by regional economic conditions, there is one common characteristic: a thorough understanding of key industry sectors developed through workforce partnerships led by employers. Every community works closely with employers to identify current and future business requirements and together, they create training specifically designed to meet these needs. The partnerships invest in a long-term relationship with their employers and develop unique industry intelligence that builds educational pathways to future skill needs. Without this deep understanding, smart investments in skills and competencies are unlikely.

These local efforts have brought together more than 3,000 employers to form 100 workforce partnerships. They have helped thousands of low-income Americans get back to work and/or retrained on sustainable career paths in growth industries with good-paying jobs. Perhaps most important, they are teaching us how communities can develop their own answers to the skills gap challenge.

Each year, NFWS conducts an assessment of its programs and publishes the results in an evaluation report, which is available on Results show that employers are seeing a return on their investment. The derived benefits include more engaged workers, better workplace results, and cost-effectiveness related to searching and training people for available jobs.

Reports out from some of the NFWS sites reinforce these findings. For example, in Cincinnati and the tri-state region, the model is being used by Health Careers Collaborative of Greater Cincinnati, a workforce partnership that is building career paths for frontline workers at healthcare institutions. One participant, a large employer that trains low-skilled individuals for occupations requiring associate degrees, realized a net return of $216,127 on costs of $1.82 million — an 11.9 percent return on investment.

Job Opportunity Investment Network creates workforce partnerships in the Philadelphia region. Data show that its training programs, developed in close collaboration with local employers, delivered a fourfold return on direct investments made by businesses.

In central Wisconsin, Workforce Central serves a rural, 823-square-mile region and operates three workforce partnerships. These include managerial training in advanced manufacturing, advanced certification in food processing, and accelerated GED or occupational certification for low-income individuals. A new report issued this year documents that each partnership successfully delivered career advancement for incumbent workers and/or job placement for unemployed jobseekers.

When it comes to addressing the skills gap and the future needs of employers — we must think local. The NFWS and its 30 communities are showing that effective working partnerships led by employers not only help get unemployed or under-employed workers into sustainable career pathways, but can also lay the groundwork for economic recovery.

Companies need to look at ways to make their hiring processes more efficient to adapt to the changing economic reality. With more job seekers than ever before flooding the market, processes need to be streamlined to find the right people. One way to do this is to speed up overall hiring. The time from application to job offer currently averages about 45 days when using a career site. This is a long time for everyone involved, especially the job seeker that’s been unemployed for some time.

I’m not suggesting speeding up the hiring process will cure unemployment. However, it can make a difference by getting talented job candidates into jobs faster. Employers should seek to get to know candidates on a more personal level earlier in the process. Whether this means employing one-way video interviews or getting everyone together at once to meet the candidate, a personal connection earlier can get the right candidate in your open position sooner. Ideally this means positions can be filled and candidates can finally put aside the job hunt.

Part of getting a better personal connection is asking the right questions in the interview. Good interview questions can illuminate a candidate’s personality, work history, and organizational fit.

Here are the six essential questions to ask in the video interview to speed up the hiring process, nab great candidates, and take a bite out of unemployment:

Question: Tell me about your proudest achievements at work.

Why Ask? This question is a great way to evaluate a candidate’s prior work history. Instead of the usual “tell me about yourself” you’re instead prompting the job seeker to tell you the best they’ve done on the job. This question will let you know what the candidate can do at the pinnacle of their achievement.

How to Evaluate the Answer: Look for candidates who are confident and concise in their answers. You want to know the background of their achievement and how they added value through initiative and creative thinking. If the anecdote the candidate recounts doesn’t seem impressive to you, ask for context. If you’re still underwhelmed, remember this is what the candidate chose as their proudest moment and evaluate what this means for their future in your company.

Question: Where do you see yourself five years from now? How will this position help you get there?

Why Ask? This question will give you insights to a candidate’s organizational fit and long-term career goals. With the tough economy, many job seekers are now looking for whatever jobs they can get. This means as soon as the economic forecast brightens, they’ll be leaving the position to follow their true passion. You need to know if this position is a stepping stone along a career path for your job seeker, or if it’s just a way to pay the bills. This will also affect how well the candidate fits into your organization, since employees not dedicated to the position or industry are likely to be less motivated and less excited about the company’s goals.

How to Evaluate the Answer: Don’t just accept what the candidate tells you, but listen critically and use the candidate’s work history as background. If your candidate has a vastly different background than the position, is it possible they’re just saying what you want to hear? Or are they looking to switch career paths and see your company as a first step along a new road? If your candidate’s career goals align with the position and your company, they’ll be a good match now and for the future. If you find that things aren’t a perfect fit, it’s a glass-half-full situation where at least you recognized this before making an offer and scrambling to fill the position again quickly in the future.

Question: Tell me about a mistake you made and what you learned from the experience.

Why Ask? Everyone makes mistakes, even in a professional setting. The lessons we learn from these errors can be invaluable. This question can show whether your candidate has truly learned from their mistakes and used them as stepping stones to greater knowledge.

How to Evaluate the Answer: You want candidates who are going to own their mistakes, not skirt over the issues. If a candidate is getting too defensive this could be a sign of an employee not willing to own up to errors. You want a candidate to concisely explain the mistake, how the issue was fixed, and the important lesson taken away from the experience. This shows candidates are willing to face mistakes head on, an important attribute of any great employee.

Question: How do you stay current?

Why Ask? To adjust to the constantly shifting marketplace, you need employees who aren’t complacent with the status quo. Your company needs employees who are always learning and growing, not staying stagnant in their knowledge. This question allows you to find out how willing a candidate is to put in the extra effort to stay up-to-date.

How to Evaluate the Answer: You’ll want to look for candidates who can answer concretely on how they’ve continued learning in their lives and their careers. Perhaps they’ve taken a certification course or a training program. Even if it’s just staying up-to-date on relevant industry trends, you should look for job seekers keeping tabs on the issues of the day.

Question: How would you bring value to our company?

Why Ask? This question serves to find out what candidates know about the company without directly asking. You want candidates who understand your company, it’s values, and it’s unique challenges. Candidates who have done proper research prior to the interview are more likely to be the detail-oriented type you need in your organization.

How to Evaluate the Answer: If a candidate has done proper research, they should be able to get specific with how their experiences can bring real value. If they seem vague or unsure, it’s probably because they don’t understand the company. Look for candidates able to apply their skills to specific issues in your organization.

Question: If you got this position what are the first five things you would do to add value to the company?

Why Ask? This question will help you match how well a candidate’s skills match the position, and the overall company. It will also show you a candidate’s drive and initiative. Are they just naming tasks from the job description or do they have ideas for how to make the position more efficient? It’s a great way to discover how well they understand the current position and its challenges.

How to Evaluate the Answer: Look for job seekers who incorporate what they’ve learned about the company through research and back up these facts with the value their qualifications can bring to the position. If a candidate comes up with a creative idea for how to improve a process, this is a sign of an employee who can think independently with an eye towards the future.

Getting to know candidates on a more personal level is the easiest way to shorten the process and improve hiring at the same time. Companies will be reducing unemployment while at the same time finding great candidates who will truly fit both the position and the company culture.Two diametrically opposed views of Wall Street and the dangers posed by global megabanks came more clearly into focus last week. On the one hand, William B. Harrison, Jr. — former chairman of JP Morgan Chase — argued in theNew York Times that today’s massive banks are an essential part of a well-functioning market economy, and not at all helped by implicit government subsidies.On the other hand, there is a new powerful voice who knows how big banks really work and who is willing to tell the truth in great and convincing detail. Jeff Connaughton — a former senior political adviser who has worked both for and against powerful Wall Street interests over the years — has just published a page-turning memoir that is also a damning critiqueof how Wall Street operates, the political capture of Washington, and our collective failure to reform finance in the past four years. The Payoff: Why Wall Street Always Wins, is the perfect antidote to disinformation put about by global mega banks and their friends.Specifically, Mr. Harrison makes six related arguments regarding why we should not break up our largest banks. Each of these is clearly and directly refuted by Mr. Connaughton’s experience and the evidence he presents.

First, Mr. Harrison claims that megabanks are the natural outgrowth of requests from customers, rather than the result of extraordinary resources spent on lobbying over the past 30 years. Mr. Connaughton’s book contains all you need to know — and more than you can stomach — about the realities of how the influence industry has worked diligently to build and defend megabanks. The people who really wanted the banks to become bigger were the executives in charge of those organizations — like Mr. Harrison. They spent a lot of money to make this happen.Second, Mr. Harrison takes the view that global megabanks at their current scale provide some special services that cannot be otherwise provided by smaller financial institutions.As Mr. Connaughton points out — including in a new blog post — there are no economies of scale or scope in banks with over $100 billion of total assets. Our largest banks, properly measured, now have balance sheets between $2 trillion and $4 trillion. Plenty of people have attempted to show megabanks produce some magic for broader economy-wide productivity or multinational nonfinancial firms, but there is simply no evidence. Again, read Mr. Connaughton’s book for more detail — or look at my book with James Kwak on this topic, “13 Bankers“.Third, Mr. Harrison claims “large global institutions have often proved more resilient than others because their diversified business model ensures that losses in one part of the enterprise can be cushioned by revenues in other parts.”Mr. Connaughton’s book reminds us, with some eloquence, that Citigroup and Bank of America — the largest U.S. financial institutions in 2008 — would have failed if it were not for the government bailouts that they received. As a matter of simple historical fact, the “more resilient” in Mr. Harrison’s version of history is exactly the same as observing that those banks were seen by officials as “too big to fail.” Their resilience came solely from support provided by the government and the Federal Reserve.Fourth, Mr. Harrison denies that very large banks receive any implicit government subsidies. To support this view, Mr. Harrison suggests we should compare borrowing costs across financial and nonfinancial firms that share a similar bond rating (e.g., AA); he points out that the interest rate paid by financial firms in this comparison is higher. But the interest rate at which a company borrows depends not just on the risk of default, but also on the “recovery value” in the case of default (i.e., how much do creditors end up with after the company has been wound down). If you think you will recover less when I default, you should charge me a higher risk premium — and thus a higher interest rate.Mr. Harrison compares apples (finance) with oranges (nonfinance) — and fails to mention that the recovery rate in the latter case is much higher. How much will investors recover in the case of Lehman, for example — perhaps 25 cents after more than four years? For most nonfinancial companies, default does not by itself result in a big reduction in value (the deadweight costs for bankruptcy of such firms in the US are quite small); large financial firms are quite different (the deadweight bankruptcy costs are typically huge). Mr. Harrison’s proposed comparison is simply uninformative — you need to look at comparisons within the financial sector.The right comparison is the funding cost of financial firms with and without implicit government support. The funding advantage for those perceived as Too Big To Fail is estimated to be between 25 and 75 basis points; most people close to the issue think it is at least 50 basis points. The idea that megabanks do not get huge, implicit subsides is simply priceless — again, read Mr. Connaughton’s account to see the lengths to which the banks will go to ensure these subsidies are kept in place.Fifth, Mr. Harrison says that “complexity can be an antidote to risk, rather than a cause of it”. On the contrary, the evidence suggests that management has consistently lost control over financial institutions with hundreds of thousands of employees in 50-100 countries. Think about the scandals of this summer: Barclays and Libor; HSBC or Standard Chartered and money laundering; and the severe breakdown of risk management at JP Morgan Chase. In each case, executives claim they did not know what was going on. The very largest banks have become too big to manage.Sixth, Mr. Harrison claims regulators are not cowed by banks. The Payoff is all about how lobbying really works — and how legislators and regulators are brought to heel. Money brings influence and influence is used to make more money. It is not about “cowing” anyone; it is about persuading them that you are right and should be allowed to do exactly what you want to do, even though your arguments are completely specious. Mr. Harrison’s op ed is a nice example of the genre.Some regulators have started to stand up to big banks on some issues, and this should be encouraged. But overall, Wall Street prevails on all the major issues, and most top officials at Treasury and the Federal Reserve are only too happy to cooperate.Mr. Harrison makes strong claims. All of his arguments are demonstrably false. If you think Mr. Harrison and the other defenders of megabanks have even the slightest veneer of plausibility, you must read Jeff Connaughton’s book.