This is a follow-up to my previous post on a Q&A/discussion with former President Bill Clinton at the Clinton Global Initiative last week. On the night of Sep 20th, during a meeting/Q&A with some bloggers and journalists, President Clinton spoke about his views on where we need to focus on to rebuild the jobs market in the US: small businesses, manufacturing and clean energy. He has made this point in other contemporaneous interviews as well. I'd like to explore these areas a bit because there are some challenges that I don't believe we are adequately addressing today.
The conventional wisdom generally is that small businesses create the majority of new jobs. However, several recent studies make it clear that the picture is more nuanced and the age of a business is more predictive of its potential to create net jobs than its size. The Kauffman Foundation has published a number of recent research papers on job creation. Their inference is that net job creation in the US is dominated by very young firms - in particular startups - in part because they demographically constitute the largest percentage of businesses in the U.S. They have found that over the last few decades, startups created the most net jobs in the US and that net job creation tends to occur primarily in firms less than 2 years of age, although "survivors" or "gazelle" firms that are on a growth path are also good at net job creation. A separate study published in Aug 2010 by Haltiwanger et al. also emphasizes that it is not the size of the business per se but its age that is a strong determinant of its potential to create net jobs. In addition, it is worth referring to some prior research by Acs et al. that found both small and large businesses add net jobs based on their growth level and to the work of Neumark et al. The key takeaway here is that a constant reference to small businesses as being generators of new jobs might result in defocused public policy that treats all small businesses as the same and de-emphasizes the role of startups that hold the greatest potential within the small business community. This OECD paper lays out five areas where new firms and startups could be helped by good public policy - Financing, Business Environment and Regulations, Technology Diffusion, Management Training and Access to Markets.
There is a separate issue of how governments should deal with larger employers, whether or not they are "high-impact" or high growth firms, because large corporations often employ disproportionate numbers of employees at certain geographic locations and larger companies could also face declines due to successful competitive entries by new or existing smaller firms (also see comments by Vivek Wadhwa). Another dynamic that some of the aforementioned studies are probably not accounting for in any significant manner is the impact of modern globalization and the dramatically increased availability of key technology and skillsets outside the U.S. in recent years. Former Intel CEO Andy Grove's recent article - "How to Make an American Job Before It's Too Late" discussed this in part, although it is not clear some of the solutions he offered are the right ones. The reality is that countries like India and China, among others, now have much of the skillsets and knowhow to compete directly with Western nations including the U.S. and will in the near future largely be on par with the U.S. This imposes two constraints on U.S. companies, including startups. Owing to the fact that the dollar is much stronger than their currencies and that their labor markets are less expensive, even innovative companies - who are forced to achieve good earnings growth to remain competitive - will generally tend to hire more and more employees in those countries rather than in the United States. Even companies and business leaders who might genuinely wish to grow employment in the US will be challenged both by US competitors and increasingly by small and large competitors in countries like China and India who hire aggressively outside the US and can deliver innovation at lower overall cost. This is not just a phenomenon in the high-technology industry but in the service and manufacturing sectors overall. So, any enlightened US jobs policy must take this reality into account. When asked about this, President Clinton suggested that it is likely that some of these jobs will not return to the US but that there is yet significant potential for new job creation in the US. He is probably right - but his view doesn't overtly take into account the impact of exchange rates (e.g., what if the dollar were to weaken against foreign currencies in the coming years?) and labor markets in high-growth geographies (e.g., what if non-US labor costs even in emerging Asia grow to very high levels?).
The second category mentioned by Pres. Clinton - US manufacturing - is in worse shape than the US service sector. The U.S. has been losing technology and product leadership in manufacturing to countries like China (in part due to capital and labor cost differences) and for this secular trend to be reversed, policy prescriptions have to be substantial and workable. What I believe is sorely missing in the US today is any kind of broad strategic thinking or position on the type of manufacturing leadership that we believe the U.S. should continue to have in order to preserve our leadership and security over the next 50 years - and - a vision on how we should concomitantly engage with governments and private enterprises to make that strategy a reality. In the absence of a strategic long-term view and any substantive broad-based dialog with the U.S. business community (not in the vein of political talking points, but in the spirit of driving American leadership through enlightened policy and deep engagement), dreams of re-building US manufacturing leadership will remain out of reach.
This area definitely has more potential for US jobs growth than many others but even here, we are in danger of losing a great opportunity. In areas like solar power and wind, US companies are making strides but companies outside the US are making big strides as well. For the reasons discussed above (capital costs, labor costs), clean energy firms will and do face similar kinds of competitive pressures, especially with firms outside the US located in countries like China. Government sponsored US R&D and initiatives in clean energy are occurring and this is welcome but it is unlikely that these 'point' solutions will provide sustainable long-term jobs growth.
What CGI Should Do
I'm not going to be shy here and would go so far as to suggest that President Clinton should use CGI as a platform to initiate and drive a sustained, long-term collaboration with the US government, State governments and American business, labor and community leaders to:
- Establish a strategic framework for areas and functions where the U.S. should seek to have strong private sector leadership and American jobs for decades - in order to preserve long-term American security
- Define short-, medium- and long-term solutions that governments and the private sector will commit to over the next 2-20 years to lay the foundation for American leadership - which in turn will translate to a more robust American jobs market (NOTE: Even when we come out of the current weak economic situation, the long-term prospects for US economic and jobs growth looks pessimistic, as can be seen in this analysis from the Economic Cycle Research Institute)
- Continue an annual strategic dialogue at CGI, accompanied by CGI action networks and progress reports on commitments, such that there is persistent focus on this topic, outside of the traditional political realm
President Clinton's legacy of balancing the budget and creating millions of American jobs is something that I believe he ought to leverage in helping drive this much needed discussion and an action plan for American jobs.