History Lessons For Job Creation

Regardless of what President Obama proposes in his jobs speech, history says that more of the same, be it tax cuts or repaving highways, is not the long-term answer to restoring good jobs to America.

Politicians in Washington are driven to fix the jobs numbers to the beat of the electoral cycle, but readily sacrifice quality for quantity in doing so. The lessons of the two devastating economic downturns that preceded our own era’s Great Recession — the Long Depression of the 1870s and the Great Depression of the 1930s — are, first, that when prosperity returns, it takes a long time to come back and, second, it, labor markets and society look a lot different from how they were before. Yet it is those changes that create the next generation of good jobs in new industries.

The process was similar both times, though taking different forms. Capital moved from financial speculation — bubbles in railroad stocks (1870s), Florida land grabs (1930s), sub-prime mortgages (2000s) — to the real economy via a wrenching deleveraging. That spurred a spurt of innovation, followed by a round of systems innovation that enabled the individual innovations to become more than the sum of their parts.

In the late 1800s, electricity remade factories, businesses, homes and cities with inventions from the telephone to the light bulb, AC motors, power generators and phonographs. New technologies expanded what could be done with iron and steel. Automation, assembly lines and managerial capitalism, even subways and shift work, were systems innovations that allowed new industrial economies of scale that revitalized the economy.

After the Great Depression a huge increase in R&D spending in the 1930s, overwhelmingly by companies and private universities, not the public sector, led to advances in radio, computing, astronomy, plastics, fluorescent lighting, electronic keyboards, speech synthesizers, air-conditioning, commercial television, airline travel, color film and supermarkets. Suburbanization, interstate highways and decentralized, professional management that enabled complex, dispersed, national and transnational corporations and their emerging supply chains to develop turned these innovations into the consumption-driven prosperity of the 1950s, and the new jobs, both blue- and white-collar, that came with it.

Along with the innovation and systems innovation, there is a step change in communications and transportation, increasing the velocity at which people, goods and ideas can move — the telegraph, telephone and railways (1870s), radio and automobiles (1930s), the internet and something still to be determined in our own time (2000s).

That something may be high-speed inter-city rail. Yet, as Europe and now China has found, the economics are challenging without huge state subsidies, for which Washington has little appetite right now. I would hazard that that something is intra-urban transport so creative people and industries can cluster in cities. It may even be the revitalized city itself, the inverse of suburbanization.

In short, the lessons of both recoveries are that policies to restore the old world were irrelevant to the new economies that eventually followed the downturn. Today Washington should waste neither time nor money anymore on conventional fiscal and monetary remedies such as QE3, tax cuts or near-zero interest rates or by propping up old industries. Government policy should be directed towards fostering the innovation and systems innovation that will eventually restore prosperity. That does not mean picking industrial winners. Not all innovations pan out. A wide range of innovators have to be encouraged.

It also means investing in long-term urban infrastructure and education. The new higher-paying jobs will be in the knowledge, professional and creative industries. Government needs to both support their growth and ensure that more workers are prepared for them. Both the Long Recession and Great Depression saw large scale expansions of mass education. And if the future is knowledge economies, and thus creative people and industries will need to cluster to stimulate innovation, America needs to rebuild its cities to be livable in a sustainable way. There are plenty of short-term ‘shovel-ready’ jobs in that undertaking, too.

It also means getting government and vested interests out of the way of local entrepreneurship, activities and projects. They, and new classes of innovators such as social entrepreneurs, social media businesses and environmental technologists, will be the ones that will design the engines of growth for tomorrow, and thus the new good jobs. Grand, big-idea infrastructure projects won’t.

There will inevitably be, in the words of English essayist J.B. Priestley, writing during the Great Depression, a “dreadful lag between man the inventor and man the distributor.” It is already proving painful for so many Americans. Government’s optimal role is to make that lag short. Politicians with barely a year to go to a general election understandably focus on the short-term, and propose what feels familiar to them and voters. History suggests it provides a false comfort.

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