Business and Finance

With rising unemployment stymying the president’s economic revival plans, the Obama administration is huddling with business leaders, academics and other experts Thursday to find a way to jumpstart hiring.

Some 130 people will gather for the afternoon jobs summit at the White House on the eve of the government’s November unemployment report. The nation is expected to have lost another 114,000 jobs, with unemployment remaining at 10.2%, the highest in 26 years, according to an economists’ survey.

The employment picture is certainly grim. Nearly 16 million Americans are out of work, one-third of whom have been unemployed for more than six months. There are now six workers competing for every job vacancy.

President Obama and some lawmakers are searching for a way to stem this unrelenting loss of jobs, which is casting doubt on effectiveness of many of his economic programs, from his $787 billion stimulus plan to his $75 billion foreclosure prevention initiative.

"We are going to be bringing together people from all across the country … to explore how we can jumpstart the hiring that typically lags behind economic growth, but we don’t want to wait," Obama said last week.

Invited executives include Google CEO Eric Schmidt, Disney chief Bob Iger, Boeing head James McNerney and AT&T’s Randall Stephenson. Also expected are United Steel Workers president Leo Gerard, San Antonio Mayor Julian Castro, former Fed vice chairman Alan Blinder and Paul Krugman, the Nobel Prize-winning economist and New York Times columnist.

The guests will also include small business owners, academics and non-profit leaders.

On the schedule are discussions on green jobs, small business employment, infrastructure and exports. Also, breakout groups will look at ways to encourage business competitiveness and to better prepare workers for the economy of the future.

The discussions will be led by top administration officials, including Treasury Secretary Tim Geithner, Council of Economic Advisers Chair Christina Romer, Labor Secretary Hilda Solis and Energy Secretary Steven Chu. Obama will make opening and closing remarks.

There’s no shortage of job growth proposals being bandied about. Though all sides agree that rising unemployment must be addressed, the solutions run the gamut. Some left-leaning economists and politicians are pushing for another round of stimulus, while their conservative counterparts are calling for tax breaks, such as a hiring credit for companies who add to their payrolls.

Indicative of just how contentious job creation is, House Republicans are holding an alternate roundtable on Thursday to discuss what they call the administration’s "job-threatening" policies.

"From the Obama administration, which produced a trillion-dollar ’stimulus’ that didn’t create jobs "immediately" as promised, comes a "jobs summit" that won’t actually help create jobs," said House Republican Leader John Boehner, R-Ohio. "Now more than ever, America needs more jobs, not more debt online payday loans."

Just how much Washington can do to boost hiring remains to be seen.

The administration and Congress are tied up with health care reform and foreign policy issues. And their ability to institute new programs will be hampered by the nation’s record budget deficit.

Though experts say the economy is recovering, they don’t expect jobs to return anytime soon. The National Association for Business Economics pushed recently pushed back their expectations for when companies will start adding positions to mid-2010. They previously had predicted a gain of 12,000 jobs a month in the first quarter.

Some of the proposals

Some of the leading ideas under discussion include:

• offering a payroll tax holiday, which would temporarily suspend the 12.4% tax on workers’ first $106,800 of wages;
• creating a new jobs hiring credit;
• giving more money to states and localities to close budget deficits. These shortfalls could cost 900,000 jobs in 2010 alone, according to one think tank;
• and offering public-service employment.

One measure that is more likely to be enacted is an extension of unemployment benefits. One million people could lose unemployment benefits in January if Congress doesn’t lengthen the deadline to apply for federal aid beyond Dec. 31, according to the National Employment Law Center.

This week, two groups at opposite ends of the political spectrum offered a bevy of suggestions on how to spur job creation.

The U.S. Chamber of Commerce on Monday sent a letter to the president with seven policies that it said are crucial to job creation. Its suggestion include expanding infrastructure investment by removing regulatory and other requirements, as well as better preparing American students for future jobs and lowering tax rates on entrepreneurs.

"While the government can help support some jobs in the short run, the only way to meet this challenge over the long term is through a vibrant and dynamic free enterprise system," Thomas Donohue, the chamber’s president.

The Economic Policy Institute, on the other hand, supports more government spending on transportation infrastructure and school buildings, as well as the creation of one million public service positions.

The labor-supported group, which released a five-point plan Monday that it says will create 4.6 million jobs in its first year, also supports extending unemployment benefits and health insurance subsidies. And it wants to see the president and lawmakers send more funds to state and local governments and create a hiring credit.

"Some people have questioned whether we can afford to do more to create jobs, but they’ve got it backwards," said Lawrence Mishel, EPI’s president. "We can’t afford not to do more." 

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Dubai’s not the only onetime highflier that risks drowning in debt.

The Middle East city-state’s investment arm, Dubai World, is working with creditors to restructure $26 billion of debt it took on in a multiyear, global property binge.

Last week, markets briefly panicked after the firm signaled that it couldn’t make its debt payments and the Dubai government said that it wouldn’t step in.

While Dubai’s problems appear for now to be under control, there is no shortage of other nations suffering a combination of plunging income and outsize borrowings that could soon demand attention.

Greece is running a budget deficit expected to exceed 12% of gross domestic product this year. Another country on the bubble is Romania, which is holding a presidential runoff election Saturday whose outcome is key to securing additional aid from lenders led by the International Monetary Fund.

So far, aid agencies like the IMF and the European Union have provided emergency funding to limit the depth of the economic downturns in troubled nations such as Hungary, Ukraine and Latvia. The IMF said in September it has made $163 billion of lending commitments since the collapse of Lehman Brothers.

But with economies everywhere under duress and investors fearful about the risks being assumed by free-spending governments, it is only a matter of time until the next chapter in the global debt crisis unfolds.

"The question that’s being tested around the world is, what is the limit to the support that has been offered to these stressed countries?" said Mary Stokes, an economist who watches developing Europe for RGE Monitor, the analysis Web site run by New York University economist Nouriel Roubini.

Greece is one of those at risk of failing that test. The southern European state, with a long history of loose finances, is coming under attack in the credit markets for its excessive spending.

The Greek government’s cost of borrowing money has surged following a rating agency downgrade early in 2009. The cost of insuring its government bonds against default has soared tenfold since the financial crisis started brewing in 2007.

Greek voters responded by toppling the government and putting in place an administration that proposed cutting the budget deficit by a quarter next year. Still, even the improved budget projects a budget deficit equal to more than 9% of GDP - triple the oft-ignored European Union limit.

Some observers say that Greece may have no choice but to go hat in hand to the EU, which has already provided ample support to Greek banks via cheap loans. But the finance minister of the newly elected socialist government, George Papaconstantinou, insists no request for a bailout is on the way.

Papaconstantinou pleaded instead in an op-ed piece Monday in the Wall Street Journal that "what Greece needs from its partners is, in effect, a ’suspension of disbelief.’ "

If Greece is the most humid debt hot spot after Dubai right now, others aren’t far behind. The export-dependent states of Latvia and Ukraine continue to struggle even with IMF support. And though the bigger economies of Spain and Ireland are much better diversified, they too are struggling to contain the damage of massive housing bubbles earlier this decade.

Even the biggest, most creditworthy borrowers aren’t beyond reproach following a year of record stimulus spending. Credit Derivatives Research’s government risk index has jumped almost 50% off its mid-September low, amid rising concern about fiscal imbalances in Japan, the United States and the U.K.

Yet the budget problem in the U.S. hardly counts as a crisis in itself. Federal debt held by the public is expected to soar to 60% of GDP at the end of fiscal 2010 from 41% at the end of last year, but that’s well below the triple digit readings being taken in some of the distressed nations and in Japan.

The bigger potential problem for the United States is the cost of servicing all that debt over coming years, and whether all that spending might dampen economic growth.

Federal interest payments already amount to 1% of GDP, according to the Congressional Budget Office, and could hit 2.5% of GDP by 2020 unless lawmakers make changes.

In any case, the lesson many people are taking out of the Dubai episode is that with asset values having fallen and debt levels still high, we can expect to see more unhappy surprises in coming months.

"Dubai was very likely NOT the last in the series of post-credit-bubble aftershocks," Gluskin Sheff economist David Rosenberg wrote in a note to clients.  

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State Treasurer Ben Westlund on Tuesday announced a $5 million investment in Marquam Hill Capital.

The Beaverton firm is launching a venture capital fund that will help Portland-area businesses connect with researchers at Oregon Health & Science University. The money is expected to help launch medical-related startup businesses developing products for the prevention and treatment of cancer.

The $5 million investment was made through the Oregon Growth Account, which is managed by the state treasurer.

Created in 1995, the Growth Account invests a portion of Oregon Lottery money in Oregon businesses.

To date, the program has invested roughly $93 million of state money. As of March, it had generated $18 million in earnings.

The investment is contingent on the Marquam Hill Capital Fund raising an additional $20 million.

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Dubai World’s debt problems are a wake-up call that the economic recovery is still fragile and that there are still risks, OECD Secretary General Angel Gurria told Reuters.

Gurria said the incident had reminded markets of growing debt concerns, something that should prompt governments to be cautious in withdrawing from large stimulus measures to boost growth after the worst global recession in decades.

Dubai spooked financial markets last week when it said two flagship firms, Dubai World and its Nakheel unit, planned to delay repaying billions of dollars in debts.

Dubai World “is a reminder of the fragility of the recovery process and that fact that it is still in its infancy and that there are still downside risks,” Gurria told Reuters during a summit of Ibero-American leaders in Portugal. “It’s a property development gone bad, but a big one.”

He said governments should “keep their guard up,” and err on the side of caution when deciding to cut stimulus packages.

“It’s better to stay a little longer than to withdraw too early,” Gurria said. “There is now also this parallel concern that debt is accumulating at a very fast speed and that obviously is a problem because markets are also getting very tense about that.”

Dubai has alerted markets to those risks in recent days as have growing budget deficits in some countries, such as Greece which saw a widening of its bond spreads last week.

Gurria said the downturn was taking its toll on balance sheets.

“So you are having a lot of pressure on many balance sheets because of market related portfolios, that are not subprime, they weren’t wrong in the beginning, but they are getting sour because of the economic situation in general,” he said.

Gurria also warned of the growing risks of the so-called carry trade, whereby investors borrow funds in a currency with low interest rates or countries such as the United States to finance investments in countries with higher-yielding assets like China, driving prices higher.

“There is a danger of creating a bubble, because if you have a very large flow into a relatively stable number of assets you create inflation in the prices that is not consistent with the real change in value of the assets,” he said.

He said assets such as Chinese stocks had risen much more than many other markets because of this process.

“You can create artificially high prices which can then with one piece of bad news or one movement in the exchange rate or interest rates suddenly burst, and that is when you have a disorderly adjustment,” Gurria said.

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