The Economic Lessons the Rest of the World Could Teach Us

Passion is not enough to change the Republican Party. Despite the Tea Party’s massive burst of energy, it looks increasingly likely that the GOP will nominate Mitt Romney, the front-runner, the guy who ran once before, the former governor who waited his turn to be the standard-bearer. This is a familiar pattern for a practical, hierarchical organization — the same one that chose George Bush senior, Robert Dole, George Bush junior and John McCain. (The Democrats, by contrast, often nominate an outsider — John Kennedy, Jimmy Carter, Bill Clinton, Barack Obama.)

Yet something has changed in the Republican Party. You can see it in the attacks on Romney. He is portrayed as a private-equity tycoon who buys companies, hollows them out, outsources jobs and pays 15 percent in taxes. Instead of celebrating Romney’s work as an example of how the market functions — driving out inefficiency, generating productivity and creating a lean, mean capitalist machine — the other Republican candidates are criticizing it.

Even in the GOP, people understand that the American jobs machine simply is not working. The Hamilton Project estimates that even if job creation almost doubles, from last July’s rate of 117,000 per month to the 208,000 jobs experienced monthly throughout 2005, it would still take until 2024 to close the gap opened by the recession.

This problem began a while ago. Over the past decade U.S. job gains were matched by job losses. Simply put, there was no net gain in jobs. During the George W. Bush years, job growth was almost entirely fueled by growth in government, health care and the massive boom in residential real estate. From 2001 to 2007, investment in equipment and software — the kinds of investments that boost productivity and create good jobs — declined 15 percent as a share of gross domestic product. The economy recovered after the recession of 2000, but the recovery was powered almost entirely by government spending, cheap credit and a real estate bubble.

In contrast, the current recovery, while anemic in terms of number of jobs created, is more broad-based and more durable. Business investment is rising, having boomed 18 percent since the end of 2009. Manufacturing has rebounded faster than other sectors, adding 334,000 jobs over the past two years. Exports are growing at an annualized rate of 16 percent, which means that U.S. exports should double earlier than 2014, the goal President Obama set in 2009. Labor productivity in the United States is now the highest among Group of 20 countries, and this boost means that unit labor costs in the United States have dropped more than in any G-20 country except Taiwan.

Why is this happening? Costs have dropped here because of the recession, making U.S. labor more competitive. Transport costs have risen, so “insourcing” has become more sensible. The boom in natural gas is fueling job growth.

But America is becoming a more attractive place to invest because the government has been making key investments in infrastructure, training, and research and development that have encouraged businesses to jump in. Chief executives such as Andrew Liveris of Dow Chemical and Jeffrey Immelt of General Electric are frank about the steps that foreign governments take to create incentives for investment.

The great winner of this recession has been Germany. That country faced a crash just as dramatic as all others; in fact, Germany’s GDP declined more than that of the United States in 2008, yet its unemployment rate rebounded fast. There are many explanations for German success, but as Elisabeth Jacobs details in a new paper from the Brookings Institution, government policies that created incentives for business to think long-term, value their workers and invest in capacity all helped. The German system gives incentives to train workers and keep them employed; in contrast, the U.S. system emphasizes flexibility, the ability to hire and fire, and keeping wages low. Jacobs points out that, in a world filled with cheap labor, rich countries are better off with highly skilled workers, making premium products, with a focus on long-term growth and social stability. The German system, in other words, might be a better fit for the globalized world.

When asked how they will create jobs, Republicans simply talk about cutting taxes and regulations and getting government out of the way. Yes, it is important to have competitive tax and regulatory policies. But the lessons from East Asia to Northern Europe suggest that government policy and investment can play a vital role in providing incentives for the private sector. If Republicans want to get practical, they might learn from this.