Breaking the Momentum of the Job Cuts

Posted by: Michael Mandel on March 06

Is healthcare and education spending the most reliable fiscal channel for creating jobs?

This morning’s employment report is horrific. Nonfarm payroll employment is down 651,000 in February, down almost 2 million in last three months. The unemployment rate is up to 8.1%. The unemployment rate for college graduates is up to 4.1%, I believe the highest on record.

The only piece of good news is that private healthcare and education employment is up 26,000 in February, 467,000 over past year. Employment in state and local education is up 16,000 in month, 54,000 over past year.

It now becomes clear that the floor for the labor market is going to come from healthcare and education—both with heavy government funding. These two sectors, plus government, employ about 41 million workers, which accounts for roughly 30% of the nonfarm workforce.

The question: Is this floor strong enough to break the downward momentum of the job cuts? Can hospitals and schools keep hiring, or will the economic collapse force them to start laying off workers as well?

As long as education and healthcare keep hiring, they are the most reliable fiscal channel for the government to put money into the economy and create jobs. Tax cuts may have an effect, but people are just as likely to save the money as spend it. Bailout programs for banks keep them afloat, but are unlikely to stimulate new lending as long as the economy is heading downwards.

It may be time to accept that there is a new policy lever which did not exist in the Great Depression—the health-education channel. ‘Entitlement’ is usually said with a sneer in Washington, but the fact that Medicare is an entitlement program and local education is a quasi-entitlement (through union contracts) means that the spending keeps flowing even during a downturn.

We should keep pumping money into health and education to ensure that this hiring continues. Especially in healthcare, it helps people of all education levels, and it provides a service that people want.

I can easily imagine health, education, and government employment rising to 35% or more of the labor market before this downturn is over. Under the circumstances, that’s not a bad thing. It does set the stage for a mammoth fiscal crisis 5 or 10 years in the future—but for now, we need all the jobs we can get.

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Reader Comments

KarenEditor

March 6, 2009 12:53 PM

Despite my personal opinions, the academic question that now arises is: does quality come with quantity? Education is especially one area where we lag behind the rest of the world (as Arne Duncan put it so eloquently the other day). We need to work on not only expanding, but also *improving processes*--yes, funding the system is one very worthwhile way to boost economic indicators like employment (and some would argue that appropriate education funding is really long overdue anyway). But how do we avoid the gross inefficiencies and damaging bloat that comes with such rapid growth spurts? Budget cuts are never good, but one silver lining of the last several years is that constricting budgets have finally forced municipalities to begin closing down failing schools or eliminate underperforming teachers, if for no other reason than to use shrinking funds more efficiently. Where education is concerned, I will always support more funding instead of less, but student-to-teacher ratio is useless when the teachers in question are subpar. Now that funds are available, and teacher selectivity is not nearly as pressing as it was under tight belts, will we be essentially reversing progress made on the quality front?

...because 10 years from now, we'll have a whole host of new teachers that have tenure and are impossible to let go...

Viking

March 6, 2009 02:25 PM

I can't believe what I am reading!!Mike,you are willing to keep pumping money into health and education without any thought of making these sectors more efficient.You acknowledge this will cause a mammoth fiscal crisis 5-10 years from now,so what have we accomplished,except pushing the problems further down the road?If this painful downturn does not make our economy more efficient in the long run,we will never be able to pay for the massive deficits we are creating now.Furthermore,you claim that these are services that people want more of.That may be true,but who have money to pay for it and most people have other priorities right now,such as buying food and keeping a roof over their heads.

Kartik

March 6, 2009 03:20 PM

But these are the least productive sectors of the economy.

The policy level that DID exist during the GD was military buildup. That does not really exist today.

The only way out of this is innovation. The solution is simple, but will not be implemented in what is now a left-wing, anti-business country.

The solution :

Give a tax break to entrepreneurs. Anyone who starts a new company get a 0% tax rate on capital gains on the stock/stock options of that company. This only goes for founders, not employees.

If you start a tech company today, grow it a bit, and sell it, suppose you make $2 million. In California, half of that goes to Federal and State taxes. I think the tax rate on founding entrepreneurs should be zero.

The details can be worked out to minimize abuse.

This will supercharge the economy, and INCREASE tax revenue as the employees working at these startups still pay the normal rate. But there are jobs for them where the otherwise would not have been.

So a 0% tax rate on stock/option gains for successful entrepreneurs. It will generate 20 times more than it costs in revenue.

Lord

March 6, 2009 03:52 PM

Education and healthcare are not my priorities, but without doubt they are the priorities of the wealthy and since they are going to be the ones paying for it, then so be it. At least the research on treatment efficacy and healthcare IT should help improve efficiency. I just wonder what we will will do when most of it will be demonstrated to be for nought.

Why

March 6, 2009 07:12 PM


I fail to see the logic here. Just because these sectors are hiring, the government should pump money into them? That might encourage them to hire even more than they really need, but that would be true about any sector.

Investing in education makes sense because, regardless of what Kartik says, there is a good return on that investment. (Kartik, how exactly do you think the innovators learn to innovate?)

Investing in health care, unless it is in efficiency improvements like electronic records, makes less sense until we fix our health care system. We get a lousy ROI on health care in this country.

Someone also needs to explain to me why it's so bad for people to save their money instead of spending it. Doesn't that saved money pay off debt and recapitalize banks, who then become more likely to make loans?

I think in the short run, inflation is our best hope. We need to devalue the dollar.

In the long run, we need to fundamentally restructure the economy to reward productivity. The last 15 years have been full of phenomenal wealth creation for people who were, in retrospect, terribly unproductive.

The Mad Hedge Fund Trader, San Francisco, CA

March 6, 2009 11:12 PM

February nonfarm payroll came in at -651,000, taking the unemployment rate up to 8.1%, a 25 year high. The unemployment rate in California is now well over 10%. There were huge revisions up in the December and January figures. Remember when the market used to have a heart attack over a job loss of 100,000? Those were the days! More than 4.4 million workers have lost their jobs since December, 2007, taking the total unemployed to a record 12.5 million. It may be only a matter of months before we surpass the 1981 peak unemployment rate of 10.8%. These figures suggest that the current quarter GDP could be as low as -8%, the worst since the thirties. www.madhedgefundtrader.com

Consumatopia

March 7, 2009 12:06 AM

First a tech bubble, then an asset bubble, now a health/education/government bubble.

FFN

March 7, 2009 02:07 PM

Health care and government are both widely acknowledged as the least efficient forms of economic activity; education is little better. Massively expanding the least efficient and least productive sectors of the economy is a recipe of financial disaster.

Further, is it simply not possible to retrain people rapidly into health care jobs - requiring typically 4 to 7 years of college and beyond education.

And all that we end up with is a massive transfer of wealth with no new wealth being created.

If globalization and unlimited free trade are so wonderful, then why - after the greatest elimination in trade barriers in history - are we in the second worst economic collapse in 100 years? Please apply your economic theories and explain this to us.

Brandon W

March 7, 2009 07:34 PM

I work in higher education and my wife works in healthcare. Hiring has fallen off a cliff in higher ed. State universities are struggling as states cut funding due to financial problems. Private schools are struggling too as their endowments have crashed in the markets. My wife has been looking for a job but has had 2 that she was in the running for suddenly be put on a hiring freeze.

I wouldn't rely on these as drivers much longer.

empedos

March 8, 2009 09:42 AM

Lowering health care costs to increase available households' income to spend on other goods, requires a significant downpayment. Out of this effort, new jobs and innovative tech solutions will emerge as well. I hope this is what the new administration bears in mind. There is a huge internal market out there (millions of uninsured Americans) to start with and a potentially big source of revenue for software firms, bio-tech firms and so on. What about America's auto industry? Let's be realistic, others have lower costs and can do it equally well, but they are too busy now to look into new technologies applied in medicine plus America is ahead of them in research. This is one way out of this mess. Won't come quickly, but will be sustainable. If you are looking for quick fixes (bad banks or other tricks on paper), tough luck, the new Administration seems not to have the same priorities as stockholders and investors who are hoping for a one-shot cleaning up of balance sheets to continue their favorite game of creating paper wealth.
An educated work force won't come quickly as well. But it does create jobs in the short run, and it does increase the nation's potential to create wealth in the long run. Pumping money into education to create more MBAers for Wall Street is a waste. But bio-tech, green tech, nano-tech are worth it. Preparing the ground for boys and girls to find jobs in these sectors after their graduation by developing these sectors should start NOW.Education alone may not be enough.Health Care alone is not enough.
I am neither for nor against health and education. It all depends on where the money will go, on what the goal is.

Matt

March 8, 2009 05:24 PM

Whoa!

This is exactly WRONG! We have a shortage of health care workers, and they take years to train!

The same is true with education. Certification takes at least a year.

How can a middle manager in manufacturing go into health care? THEY CAN'T!

The most efficient way to get people back into jobs is to stimulate sectors that actually need it (these don't) and get people back into the jobs they are trained for!

Construction jobs will come back if you give the private sector a reason to build something. If you give tax credits for buying appliances or cars, some of those jobs will come back. Tomorrow, not next year or 3 years from now.

Stimulating sectors with labor shortages and barriers to entry only causes overtime and wage inflation. It leaves a lot of workers who cannot take the time and money for retraining screwed.

This post is EXACTLY WRONG.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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