Chairman Bernanke joins business leaders at Ohio State University for “A Conversation on the Economy”
Jobs—we know where they went, but when will they come back?
That was the question before a panel of five business leaders and Federal Reserve Chairman Ben Bernanke when they met at Ohio State University’s Fisher College of Business on November 30. Even though the recovery officially began in the summer of 2009, unemployment still hovers near 10 percent, and millions of Americans cannot find work. In a discussion moderated by Federal Reserve Bank of Cleveland President Sandra Pianalto, the assembled chief executives candidly shared their perspectives on why job creation has been so slow, and what they think would improve the situation.
“The Federal Reserve is very oriented to getting this kind of on-the-ground intelligence,” Bernanke said at the session’s opening. “We spend a lot of time, of course, looking at data, sitting in Washington looking at the screen. But there is only so much you can learn from that.”
The CEOs of companies ranging from IBM, one of the Fortune 500, to a Columbus-based ice cream shop, consistently returned to four messages:
1. Uncertainty Is Killing Business
What, Bernanke asked, would CEOs most like to see coming out of Washington to help get employment back on track?
“Clarity,” said Samuel Palmisano, IBM Corp.’s CEO. “When you’re thinking about investments, you have got to think about the return on investment, so you have to know over what length of time [to achieve that return]. So you need clarity, you want some certainty of that length of time.”
Palmisano was referring to the lack of clarity for businesses on a number of fronts, including tax and trade policies. The government’s long-term budget deficit is an obvious source of anxiety, given the changes in tax and spending policies that will probably be needed to balance the budget.
More broadly, uncertainty about the economic outlook has been weighing down business and consumer confidence since the onset of the recession in late 2007. In July 2010, Bernanke used the term “uncertain” six times in his semiannual monetary policy report to Congress. And despite government and Federal Reserve efforts to support the economy, the uncertainty persists. The Federal Reserve Bank of Philadelphia’s most recent Survey of Professional Forecasters showed a doubling in the spread between the lowest year-ahead unemployment forecast and the highest since the recession.
All of this uncertainty has caused businesses and consumers to hold back on spending and investment as they wait for the other shoe to drop. Perhaps this level of indecision shouldn’t be surprising, considering the nearly unprecedented nature of the financial crisis and attendant recession. As Pianalto remarked in a May 2010 speech, the decline’s initial phase was closely connected to the collapse of the housing market, and many hoped it could mostly be contained there. Forecasting models suggested that a recovery would soon be afoot because the average recession lasts nine months. But as the housing market deepened into a wider financial crisis, it became clear that the models were wrong. They relied on data taken from episodes that did not resemble the housing crash and did not incorporate the complex financial markets of the twenty-first century. The models’ failure to accurately predict the path forward added to the country’s growing mood of uncertainty.
In this way, what started as a housing crisis swept across the entire economy. Dwight Smith, CEO of Sophisticated Systems in Columbus, has noticed a precipitous drop in demand for his IT services among clients worried about the future. “Our clients are affected by uncertainty.”
2. For Some, Access to Credit Remains Tight
Jeni Britton Bauer, president of Jeni’s Splendid Ice Creams, said that since opening in 2002, her operation has relied on loans backed by the Small Business Administration. Such credit has been harder to come by in the past couple of years, she noted, a view echoed by Smith. “Credit is much more tight today,” he said. “It has been a bit of a challenge with regard to the ease of obtaining credit from banks.”
Small businesses in particular depend on bank loans because they cannot tap the larger capital markets, where a variety of sometimes-exotic credit options exist. As their own cash flows diminished during the recession, and the value of their collateral—their physical properties and inventories—went south, small firms found it increasingly difficult to sell lenders on their creditworthiness. Meanwhile, banks were looking closer than ever at their own balance sheets, trying to offload as much risk as possible. In 2009 alone, commercial industrial loans fell by 20 percent. Curtis Moody, CEO of Moody Nolan architects in Columbus remarked, “[y]ou can be doing the same amount of business as you were pre-recession, and after that the lines of credit are more difficult to get, and they’re lower.”
More than anything else, tight credit seems to be a product of the weak economy. When consumers start buying again, banks will see robust cash flows from borrowers and will happily extend credit. Palsamino, for example, noted that “credit isn’t the issue” by a long shot for IBM, whose revenues climbed even during the recession. But for those still waiting for demand to pick up, the inability to secure funds to tide them over is another piece of the problem.
3. U.S. Firms Need to Think Globally
In Ohio and Pennsylvania, manufacturing employment fell by 15 percent after December 2007. A modest turnaround began in early 2010 in both states, as national manufacturing employment grew by 101,000 jobs through April.
Although the fall and rise of manufacturing jobs is closely tied to the business cycle, a portion of it is attributable to trade policies, which sometimes make it difficult for U.S. firms to compete internationally. Alan Mulally, CEO of Ford, said that while he was “excited that manufacturing has moved up the U.S. agenda,” he was frustrated with trading rules that are constantly in flux. Referring indirectly to the way in which protectionist trade policies, both foreign and domestic, hobble economic growth, he said that it will take a “huge attitude shift” among Americans to recognize that free and fair trade is a driver of job creation.
“We keep thinking it’s a zero-sum or we can’t all grow. We can all grow,” Mulally said. “We need to participate with everybody around the world and it’s OK, it’ll be OK. Because every time we design or make a car in India or China, that’s also helping to create more jobs in the United States.”
4. The Jobs of the Future Require an Educated and Innovative Workforce
The jobs of the future—and even of today—increasingly require deeper, wider skills. “If you have a college degree, unemployment is much lower,” Palmisano said, describing a “bifurcation” of the labor market between the educated and the uneducated.
The importance of community colleges in preparing young workers and retraining older ones is paramount, Smith said. And an effort to reach much younger kids—as early as the pre-kindergarten years—would also yield positive results, he said.
Those observations square with a wide body of economic research, including some conducted by the Federal Reserve Bank of Cleveland. The U.S. states that have the highest rates of educational attainment also have the highest per capita incomes. Moreover, the impact of early childhood education can set the stage for higher levels of achievement later.
Such was the enthusiasm among panelists that Bernanke joked at the session’s close that he was ready to go out and shoot baskets. Both he and Pianalto thanked the panel’s business leaders for sharing their perspectives. Gordon Gee, Ohio State University president, wrapped up with his own call to arms.
“It is my firm belief that the American Midwest will be the hub of this country’s economic renaissance,” Gee said. “Our values, our centrality, and our history of innovation will prove to differentiate us around the world.”