American Made

Why Making Things Will Return Us to Greatness

Palgrave Macmillan

Contents

THE ECONOMIC CRISIS AND MISSED OPPORTUNITIES

A good leader deals with the crisis he's presented, not the one he wants to solve. The first rule of problem solving is to define the problem correctly. Get that part wrong and you're sunk. That's just the way the world works.

If the scale of the economic crisis facing the United States today could be summed up in one number, it wouldn't be $483 billion (the 2014 federal budget deficit) or $17.9 trillion (the national debt as of October 2014) or even $41.8 trillion (Medicare's reported unfunded liability).

The number we need to focus on first and foremost is 30 million. That's the number of jobs I believe the country needs to create by 2025 in order to close the federal government's budget deficit and begin reducing the nation's unfunded entitlement liabilities.

As of September 2014, according to the Bureau of Labor Statistics, total employment had finally returned to its 2007 peak. But in those nearly seven years, the American working population has increased by more than 15 million people. Over 6 million people who would very much like to work are out of the labor force altogether.

On August 1, 2009, when unemployment was still rising and the prospects of economic recovery remained very much in doubt, I sat face-to-face with the president of the United States and told him how to do his job. Respectfully, of course.

The president had invited me, along with three other CEOs representing some of the largest employers in America, to discuss the economic crisis. Howard Schultz of Starbucks was there. So were Walmart's Mike Duke and Verizon's Ivan Seidenberg. Combined, our four companies employ more than 2.5 million Americans. Valerie Jarrett, President Obama's most senior and closest adviser, was also in the room.

To be honest, I was surprised to get the call from the White House. I'd been a pretty vocal critic of President Obama, even before he took the oath of office. I didn't see any point in sugarcoating things now. The president needed to make up a lot of lost ground, in my opinion, and stay clear of any distractions.

For whatever reason that day, the president and some of my fellow CEOs wanted to talk about health care and capping carbon dioxide emissions. Here we were, in the middle of an unprecedented economic crisis, and we were addressing the problems at the margins, like it was just another item on a list. I didn't get it.

Please don't misunderstand me. Health care and climate change are important in their own way. But those topics should have been on the back burner until the real crisis was under control.

Most everyone remembers Rahm Emanuel, Obama's first chief of staff and now the mayor of Chicago, who said, "You never want a serious crisis to go to waste" because "it's an opportunity to do things you didn't think you could do before." That would have been pretty good advice. Too bad the president didn't take it. At the end of the day, the president decides what's the most important thing to be working on. And, I'm sorry, but health care wasn't it.

So I said, "With all due respect, Mr. President, the crisis you have at hand is the one you have to deal with. That crisis is jobs and the economy. Everything else has got to take a backseat. You need to focus on this."

"If you don't handle this crisis," I said, "you won't be remembered for health care or anything else. You'll be remembered as the president who failed to deal with the crisis at hand, and that's the economy and job creation." I still believe that.

As an engineer, I learned early on — and as a corporate leader, I learned a long time ago — if you don't deal with the problem presented to you, then you are by definition a failure. In my experience, everyone comes into a new leadership position with a game plan. But inevitably the real world comes in and ruins it.

Hardly anyone remembers that George W. Bush spent the first nine months of his presidency talking about faith-based initiatives, tax cuts, and education reform. When the country was attacked on September 11, 2001, whatever other grand plans he may have had were set aside.Bush wanted to fix immigration and Social Security, too, remember? Reality changed the agenda.

Whether or not you liked Bush or agreed with how he responded to 9/11 or the wars in Afghanistan and Iraq, he had his work cut out for him the moment the first plane hit the Twin Towers. Whenever Bush took his eye off the ball and strayed from the crisis, he got into trouble.

The same is true in business. Every time I've taken on a new leadership position, I've faced a crisis I needed to address right away. How you handle that kind of urgency sets you up for success or failure in the eyes of all those around you, whether it's your team in a melt shop in Utah, or a plant with 800 people in Arkansas, or the C-suite at a multi-billion-dollar corporation.

How you handle crisis speaks volumes about you, your leadership style, and your ability to get things done and deal with difficult issues in a way that brings people together as opposed to tearing them apart.

I told the president all of that in 2009. He sat there nodding his head. I know he heard me, but I don't think he was really listening. In any case, his subsequent actions suggest he disregarded everything I had to say.

As a leader, you can't do that.

Now, a good leader also admits when he's wrong. I warned the president that if he didn't tackle the crisis head on, he likely wouldn't have a second term. Obviously, my prediction was way off.

But a leader learns from his mistakes. And the problem Obama avoided confronting directly, or tried to address only with half measures, during his first term is plaguing him in his second. Voters gave President Obama four more years to get the job done, and done right. He still hasn't acted. He still has time.

UNDERSTANDING THE NUMBERS THAT MATTER

U.S. political leaders think too small when they talk about solving the jobs crisis. All you have to do is compare past recessions with the current economy to understand how lackluster this latest "recovery" has been.

In the 1990s, the economy added an average of 321,000 jobs a month during the best years. The United States added an average of 208,000 jobs a month before the 2008 crash. Now people are cheering over 150,000 jobs a month. In 2013, the economy added just 194,250 jobs a month on average. At that pace, it would take more than eight years to return to the peak employment level the United States enjoyed in 2007, taking into account the millions of Americans entering the workforce. That also assumes the United States won't experience another downturn during that time.

Also, it's important to understand that the government's official unemployment figures often don't tell the whole story.

Every month, the U.S. Department of Labor's Bureau of Labor Statistics releases a jobs report that includes the "official" unemployment rate. It's supposed to measure the percentage of unemployed Americans who have actively looked for work in the previous month. It's a favorite statistic among politicians and journalists. As of September 2014, official unemployment was 5.9 percent.

A month before the November 2012 election, the government reported that official unemployment for September was 7.8 percent. That was the first time since Obama had taken office that the number dropped below 8 percent. Former General Electric CEO Jack Welch caused something of a media firestorm with his response on Twitter: "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers." The night before, Welch wrote, "Tomorrow unemployment numbers for Sept. with all the assumptions Labor Department can make … wonder about participation assumption??"

Welch took to the opinion pages of the Wall Street Journal to defend himself and elaborate. He pointed out that "official" unemployment doesn't take into account the falling labor participation rate. (See Figure 1.1.) The government doesn't consider the millions of Americans who have stopped looking for work to be officially unemployed. Somebody who's been out of work for six months or more who gives up the hunt and no longer claims unemployment benefits does not count in the official unemployment tally.

The fact is, almost the entire decline we've seen in "official" unemployment since the recession ended can be explained by all of those Americans who have dropped out of the workforce, as opposed to people finding jobs. Some of them are retirees, but a great many are able-bodied people in the prime of their working lives. And about 7.1 million are working part time when they would rather be working full time — what the government calls "involuntary part-time" workers.

Another fact: in no other economic recovery since 1980 has labor participation dropped. Labor participation is supposed to go up during the good times. Not this time.

In his Wall Street Journal op-ed, Welch also made some points about all of the flawed ways the government tabulates its unemployment statistics. But he didn't answer the big question: If "official" unemployment is such an unreliable number, then what's the "real" unemployment rate?

At the beginning of 2009, when companies were laying off hundreds of thousands of people every month, real unemployment was 14.2 percent. That includes all of those "involuntary" part-time workers, plus 2.5 million people who have stopped looking for work. Real unemployment peaked at 17.1 percent in October 2009 and remained more or less stuck there for the next year. At the end of 2013, three years into "recovery," real unemployment was 13.1 percent.

As the graph above shows, we need to create 30 million jobs by 2025 not only to put people currently unemployed back to work, but also to add 1.4 million jobs every year just to keep pace with our population growth.

The goal can't be to create 4 or 5 million new jobs and claim we're back to where we were prior to the crisis. We can't settle for 1 or 2 percent growth every year and call it recovery. We need to be much more ambitious than that.

Some political leaders and economists point to recent improvements in the unemployment rate and say, "See! We're making progress. We're recovering." But right now, we can't even produce enough jobs to cover those who are coming into the workforce.

Unemployment may not appear as bad as it was at the bottom of the recession, but it's still much worse than when the crisis began. The U.S. economic engine of job creation is not working anywhere close to capacity, and millions of middle-class families have lost income, benefits, and security, which continues to dampen the recovery.

There are still an awful lot of underutilized people out there. But even that doesn't quite tell the whole story.

The recession hammered younger workers and older workers especially hard. A kid coming out of school used to have real choices, with multiple career paths. Today his options aren't very inspiring. Anyone who graduated from college in the past four or five years has found it next to impossible to get a well-paying job geared to his skills.

More than half of young college-aged adults are either jobless or underemployed, more than at any time in 11 years. Today, millions of college graduates live at home, often saddled with huge student loan debt.

I read a survey recently that showed an incredible 85 percent of recent college grads said they planned to move back in with their parents. Maybe they're saving on rent, or maybe they're playing around on Twitter and Facebook all day. In any case, instead of building or making something useful, millions of college graduates are slinging hash or selling Chinese-made tennis shoes someplace. What a waste of young, energetic talent!

The longer a college graduate is out of work, the worse her career prospects look over time. After just six months of unemployment, a 23-year-old with a bachelor degree can expect to earn 7 percent less than her peers on average by the time she reaches her fortieth birthday. And because the cost of college tuition has increased twelvefold in the past 30 years, she'll have massive loans to repay and fewer options to repay them.

At the other end of the spectrum, a couple of very unhealthy trends have taken hold among older workers. First, workers nearing the end of their careers — people in their 50s or early 60s — who lose their jobs are much less likely to return to the workforce the longer they're out of work. The longer anyone is out of work — six months, nine months, or a year — the harder it is to land a new job. But it's especially tough for older workers, who usually commanded higher salaries before they were laid off.

I hear that a lot of employers look at older workers as overqualified for most jobs, when in fact they're perfectly qualified. They have skills, knowledge, and decades of experience. In this economy, who wouldn't want that?

Imagine a 59-year-old cabinetmaker that got laid off three years ago when his company closed its factory in Ohio and moved operations to Vietnam. He made enough money to buy a nice house for his family, and maybe a couple of cars. He could afford to put his son through college, but he lost his job just as his daughter graduated from high school. So his daughter has taken out $30,000 in loans to go to school. Meanwhile, he's making minimum wage at a temp agency and doing odd jobs where he can find them.

That man's skills are going to waste, and his middle-class lifestyle has disappeared. And his odds of finding another job like the one he lost aren't good, but at least he's working part time. If his 62-year-old neighbor lost her job around the same time and didn't find another job within 17 months, her chances of finding another job in the next three months would be roughly 6 percent.

Now what is that lady supposed to do? She might try to collect unemployment for a while and keep looking for work. Or she could apply for Social Security three years early. She wouldn't be the first. The federal government says four in ten workers who lost their jobs in the recession did just that. The downside, of course, is that her monthly benefit would be cut between 20 and 30 percent. And, no, it won't go up on her sixty-fifth birthday. She'll have to live with drastically reduced benefits for the rest of her life.

Lest we forget, the stock market crash and recession hurt millions of people who staked their retirements on Wall Street's success. Many older workers who managed to keep their jobs during the downturn lost their 401(k) savings. They're working longer to rebuild some of the savings they lost, deferring or postponing retirement as long as they can — and crowding out younger workers. It's madness.

WHERE THE JOBS ARE — AND WHERE WE REALLY NEED THEM

It's a scandal that so many of our people aren't working, but it isn't a surprise. The reason boils down to the fact that almost all the jobs that were created over the past couple of decades were in fictitious "service businesses." Those jobs are gone.

Just as we need to understand who was hurt most by the economic crisis, we also need a clear idea of where most of the jobs were lost — and where we need most of the new jobs. The two aren't necessarily the same. But if we're going to resolve this crisis and create 30 million jobs, we need more Americans building, making, and innovating things, and fewer people working in low-paying service jobs.

Construction and manufacturing accounted for half of the 8 million jobs lost between 2008 and 2010. Parts of the manufacturing sector — the automotive industry in particular — have recovered somewhat since 2010. But recent gains are tiny compared to long-term losses. In the meantime, service industry jobs, which declined 5 percent during the same period, have returned to prerecession levels and continue to grow.

According to the Bureau of Labor Statistics, the fastest-growing occupations in the next five years will all be in service-oriented businesses, including things like health-care support staff, customer service, and food preparation. None of those jobs require a college degree, but the bigger problem is that very few of them pay well.