A Flight Plan for the American Economy

The good news is that the American economy is back to its precrisis size. The U.S. GDP is now about $13.5 trillion, a bit above what it was in 2007, before the financial crisis. The bad news is that we are producing the same amount of goods and services as in 2007 with 7 million fewer workers. The number of Americans who are unemployed has roughly doubled, and though that number is declining, it is doing so very slowly. Most new jobs are for part-time work at wages that average $19,000, less than half the median income. The official unemployment number does not include the millions who have stopped looking for work or are working part time. Add these categories and the actual number of Americans without a real full-time job would be closer to 24 million.

This disconnect between economic recovery and employment growth is new. Since World War II, recoveries from recessions have followed a fairly stable path. After the crunch, the economy bounced back vigorously, often growing at a rate of around 6%, and employment started picking up steam. We are banking on that pattern recurring. Except that it isn't. Two years into the recovery, growth is about 2% and job creation has reached around 250,000 a month, which might sound high but is actually barely enough to keep pace with all the new workers entering the job market for the first time. (See how the U.S. ranks in the Legatum Institute's index of prosperity.)

President Obama's budget assumes that the economy will create 20 million jobs over the next 10 years. That would be an almost magical acceleration. Over the past 10 years, it has produced only 1.7 million. If unemployment doesn't drop a great deal fast — as it shows no signs of doing — problems proliferate in all directions. The "new normal" of slower growth and job creation means lower tax revenues and more unemployment and health benefits to be paid out, hence a much larger deficit. But the most significant impact is on the lives of the unemployed. Studies show that after a few years of not working, people lose the talents, skills and work habits that make it possible for them to work productively. They risk becoming a lost generation, lost to their country, their communities and their families.

Ironically, it's the astonishing productivity of the U.S. that has brought us to this place. Usually, productivity gains translate into higher economic output, higher incomes and thus rising employment. That was the experience in the 1990s. This time, we've achieved productivity gains almost entirely by cutting jobs, finding ways of making the same products with fewer people. At many major companies, profits have returned to 2007 levels but with thousands fewer workers. "We've found ways to do more with fewer people," says Klaus Kleinfeld, the chairman and CEO of Alcoa.

Two powerful drivers have allowed for this new productivity. The first is technology, which is producing massive efficiencies across industries. It has already transformed manufacturing and is now beginning to transform white-collar professions, with computer programs able to do, for example, the basic discovery work performed by expensive lawyers. (See "Jobs: Some Light at the End of the Tunnel.")

The second force is, of course, globalization. There is now a single world market for many goods and services, and over the past 10 to 15 years, about 400 million people — from China, India, South Africa, Indonesia and elsewhere — have entered the global labor force, offering to make the same things Americans make for a tenth the price. That's why growth by itself won't create enough jobs. The economy increasingly has the capacity to grow nicely without adding many workers. America's largest companies have over $1 trillion in cash on their balance sheets. But the average American, who has seen his or her wages decline over the past decade, simply cannot find a good job. In a working paper for the Council on Foreign Relations, the Nobel Prize–winning economist Michael Spence and his co-author, Sandile Hlatshwayo, argue that "growth and employment are set to diverge" for decades in the U.S. They point out that over the past decade, most job growth was in two sectors — government and health care — and that neither is likely to grow dramatically over the next decade.

The bottom line: forget about the debt ceiling, Pakistan and Afghanistan. The crisis of our times is the employment crisis. And there are solutions to it. We need to focus on five areas that will create jobs.

Manufacturing. The image we all have in our heads when we think of bringing back good jobs is manufacturing. And such jobs fill a crucial space in the economy, allowing people with good skills but limited college education to earn a decent living. The trouble is, many of those people are now in places like China and Vietnam. But there is a way to keep manufacturing jobs in wealthy countries. Germany has managed to do so, bringing unemployment down sharply to an astonishing 20-year low in the midst of a global recession. See "10 Perfect Jobs for the Recession — and After."

The German path is simple to describe but harder to follow. Focus on technical education, technical institutes and polytechnics, as well as apprenticeship programs. Specialize in high-end, complex manufactured products that can command a premium price. Call it the BMW model. Or, for that matter, the Pratt & Whitney model.

Retraining. There are millions of Americans in industries like automobile parts in which lost jobs are unlikely to ever come back, certainly not at the pay they once commanded. That means people — many in their 40s or 50s — need to find new jobs. We need to create retraining programs for an entire generation of workers. Nothing we have done so far matches the scale of the problem. We need a program as ambitious as the GI Bill, which put returning veterans through college after World War II and prepared a generation of Americans for good jobs. Like the GI Bill, it would have to be a program in which government paid a large share of the costs while educational institutions provided the services. The private sector should also get involved by identifying what jobs the economy needs and creating apprenticeships and internal training to match up with national efforts.

Growth industries. A huge part of any effort to create jobs should be to simply look at where jobs already are being created and to double down in these areas. America is the world's greatest exporter of culture: movies, TV programs, songs. Why can't we increase these exports dramatically? One obstacle is that foreign governments often block cultural imports or fail to protect intellectual-property rights. The Obama Administration should make it a priority to press governments like China's, which has adopted an extremely restrictive policy toward U.S. entertainment products. (See TIME's video "Why Cities Are Key to American Success in the 21st Century.")

Our contentious health care debate aside, the U.S. is a destination for people around the world who seek top-quality medical care. Why not try to double or triple the number of people who go to the U.S. for treatment? Similarly, tourism accounts for millions of jobs, yet we have no plan to think about it as an industry and to increase its size. Unlike almost every other major country, the U.S. has no department of tourism, no growth plan, no coordination, no national ad campaigns. Far from trying to get more people to visit America, we spend a great deal of time, energy and effort scaring them away. It works. In surveys by the U.S. Travel Association, an industry group, foreigners said the most important deterrent to traveling in the U.S. is an unfriendly visa and immigration process.

Small businesses. The Kauffman Foundation has found that from 1980 to 2005, nearly all net job creation in the U.S. occurred in firms that were less than five years old. That suggests that we should focus on improving the ecosystem for start-ups and small businesses by funding basic research, streamlining the patent process, limiting regulation and encouraging venture-capital and private-equity companies that fund new ventures. Perhaps the single biggest boon for small companies would be to let in more skilled immigrants. We train the world's best and brightest at our universities (often at taxpayer expense), and then, just when they will begin to file patents, make inventions, start companies and create jobs, we throw them out. Our loss is China and India's gain.

Jobs for now. While all the policies I have outlined above are important, they will take years to develop and take effect. The crisis, however, is with us now, and we need a short-term policy too. The bulk of the job losses in the past few years have been in construction and housing. We have armies of unemployed or underemployed workers in these fields. And we know America's infrastructure is crumbling. The American Society of Civil Engineers gave U.S. infrastructure a grade of D and estimated that we need to spend $2.2 trillion to fix our airports, bridges, highways and train systems. Senators John Kerry and Kay Bailey Hutchison have made innovative proposals that would fund infrastructure projects through a national bank, allowing the private sector to participate, as it does in many countries. (See "Out of Work in America: The Faces of Unemployment.")

Our entire economic conversation these days is about the country's debt, which is understandable and appropriate because our debt is unsustainable in the long run. But we also need to find ways to solve the unemployment problem, or everything else, including the debt problem, will get much worse. Without more workers, we will never have the tax revenue we need to fund even limited government. Right now we have our priorities badly skewed. We spend far too much on retirement and health care programs for the elderly, the Defense Department and tax exceptions and deductions for the middle and upper classes. But we spend far too little on the investment programs that will create good new jobs for the future. We need to do both in a grand national rebalancing — and we need to do it fast.