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Date:
2
/
3
/2010
The Latest
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Obama’s State of Confusion
Some jobs aren’t coming back; so what’s the answer to 10 percent unemployment? Create new jobs, says Andrea Belz.
Did you know that the biggest management problem at India’s leading outsourcing companies is employee attrition? Employees are jumping ship for better deals as employee-driven turnover at the major outsourcing companies – Tata Consultancy Services, Wipro, and Infosys – has increased to over 10 percent. At the end of last year, they also all reported stronger than expected results.
These companies are having a terrific year. One week before President Obama’s State of the Union address, they announced that they expanded their workforces by an average of 5.1 percent last quarter, together adding over 16,000 employees. Similar activity took place after the dot-com bust 10 years ago and continued during the last cycle. So in the boom, we go overseas; and in the bust, we go overseas faster.
Meanwhile, in last week’s speech, Obama declared that he was looking for a jobs bill to correct the stagnant 10 percent unemployment figures. In the following days the White House provided details on a plan centering on a small business tax credit of $5,000 for every net new employee hired in 2010, as well as reimbursing Social Security payroll taxes for wage increases.
The good news is that the Obama Administration is finally focused more on paychecks than on health insurance reform. Unfortunately, today’s outsourcing economics are too compelling for the tax credit to be cost-effective; $5,000 is simply not enough to motivate hiring into a moribund economy.
At this stage, the administration really has three options: 1) expand the federal government as the employer of last resort; 2) finance innovation in large companies; and 3) motivate entrepreneurship in small businesses.
Option 1: Expand federal government further. This starts to resemble a Keystone Kops-style hiring blitz, in which the government hires people to administer the hiring of more people. We have a word for this hiring plan: Europe. Anemic growth and overwhelming unemployment dominate the gray landscape; unemployment in Europe will likely stay flat at 10-11 percent for quite some time. Generous pensions and other benefits have hijacked the economy (we are also running this experiment in California, with the same results).
People speak of the expansion of the federal government in a New Deal-style model. However, at that time the globalization infrastructure (communications, cheap shipping, etc.) simply didn’t exist to enable cheaper labor. Think about how much of that infrastructure lies ready, waiting for orders to pick up, when you see about 500 container ships lying off the coast of Asia, idle. Who would hire in the United States when cheaper capacity awaits overseas?
Unlike the New Deal era, we can’t even count on a war to improve our economy. Last month in this space, Deloitte LLP Vice Chairman Tom Captain wrote about the changing demographics of the aerospace and defense sector. Captain made a convincing argument that Rosie the Riveter is not returning to the United States; she will be replaced by Rosa or someone else. Keeping aerospace production here would force us to return to the days of $100 hammers because that is the impact of maintaining domestic production; but outsourcing the infrastructure of our national defense is clearly undesirable.
Option 2: Finance innovation: Last June, DOE loaned $8 billion to Ford, Nissan and Tesla Motors for development of novel engines in American factories. If administered efficiently, this kind of plan could be expanded because this high level of research cannot be easily duplicated or outsourced efficiently. Although analysis can in principle be done remotely, it is far more effective to maintain a close loop between experimental design and data analysis. It creates jobs at all levels in the form of support staff, mid-career engineers, and senior advisors guiding research and development.
Captain’s article also describes the sorry state of affairs in funding Science, Technology, Engineering, and Mathematics (STEM) education initiatives in the post-Cold War era. Investment in educating tomorrow’s workforce is critical and will maintain a steady influx of trained personnel for advanced activities. As a nation, we know this is key: Last month in this space, I referred to a Kauffman Foundation survey demonstrating that while 78 percent of people say innovation is important to the health of our economy, only 3 percent believe that the stimulus package encourages innovation.
Financing innovation could then include two components: 1) tax credits and accelerated depreciation on capital equipment related to innovation in key industries that would motivate hiring that cannot be easily outsourced; and 2) renewed attention to initiatives that finance STEM education. Although this second option has a longer-term payoff, it is just as critical to ensure that we do not fall further behind.
Option 3: Motivate growth through entrepreneurship: The Kauffman Foundation’s survey also shows that 72 percent of respondents say the government should encourage more people to start businesses. Clearly the health insurance issues wrapped up in the so-called health care reform package form part of the concerns regarding entrepreneurship; many people cannot afford the premiums imposed on small businesses. However, the Massachusetts election of Scott Brown has been widely read as a referendum on the health care proposal currently under discussion and it has rightfully been put aside (note that I personally believe the election to be more of a referendum on Democrat arrogance).
Regardless, it should not be contradictory to want health insurance for your family and the opportunities of an entrepreneur. If a creative tax solution exists for this issue, perhaps real hiring would begin. Ways to bundle small business plans to increase the power of the buyer could also be implemented in ways that are economically compelling for both insurance companies and entrepreneurs alike.
Of these three options, clearly the second two seem more appealing in terms of building a robust economy for the future. The jobs we know are not coming back, so the only alternative is to create entirely new ones.
Andrea Belz is principal at Belz Consulting, LLC, which serves companies that develop new technologies, use them in novel ways, or are otherwise seeking to capitalize from rapidly changing supply chains. Email her at andrea@belzconsulting.com or visit www.belzconsulting.com.
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