Jobs discussion
GEOFF COLVIN: Jobs -- for millions of Americans that is today's most urgent topic. Wall Street is obsessed with it, responding instantly to the new report that employment jumped strongly again in April. Offshoring is still a hot-button issue that may signal a fundamental trend -- even with job gains, people feel terribly insecure, worried about their jobs going overseas.
The economy's booming, yet a new poll says most voters disapprove of how President Bush is handling the economy, and they say jobs and unemployment will be the number one factor in how they vote this November. But with the jobs picture changing fast, who wins and who loses -- which workers, which investments, which candidates? And where will tomorrow's jobs be?
Robert Reich was Secretary of Labor in the first Clinton administration and is now a professor at Brandeis University; he joins us from Berkeley, California. Glenn Hubbard was chairman of President Bush's Council of Economic Advisers. He's a professor at Columbia University, soon to become dean of the business school there; he joins us from New York.
Secretary Reich, two unexpectedly strong job reports in a row. This is no longer a jobless recovery. What's causing jobs to come back so strongly now?
ROBERT REICH: You've got several things, Geoff, going on at the same time. First, very, very low interest rates, historically low, 40-year low interest rates, combined with an extraordinarily stimulative fiscal policy, a $500 billion a year deficit. It's almost as far as the eye can see. You put those together, and also see the dollar dropping against foreign currencies, that means American exports are more attractive, and if you didn't have more jobs coming out of that stew, it would be amazing.
COLVIN To what extent would you credit President Bush's tax cuts?
REICH: I don't think the tax cut actually contributed to this job growth or to the recovery. The tax cut, 40 percent of the benefits went to people who are very wealthy, in the top 1 percent of income. They already spend as much as they want to spend. In fact, spending as much as you want to spend is the very definition of being wealthy. You don't turn around and spend your extra income from a tax cut. So it wasn't really a stimulation that did it.
What did it ultimately is the business cycle. You know, inventories get drawn down. Interest rates are very, very low. Homeowners took money out of their homes in terms of equity to continue to spend. Imports are a little bit in trouble because of a low dollar. Exports are a little bit better off. Eventually it's the opposite of Isaac Newton's law, Geoff. What goes down eventually comes up.
COLVIN Professor Hubbard, you helped design President Bush's tax cuts. Would you credit them? Or, as Secretary Reich says, were these jobs going to come back anyway?
GLENN HUBBARD: I think it's no question that the President's tax cuts played a big role, in particular in stimulating business investment. The recent turnaround we've seen in manufacturing and manufacturing jobs bears that out. But, yes, the bulk of the credit goes always to the private sector. We are seeing a very impressive turnaround, a turnaround that doesn't really need any additional stimulus.
COLVIN Well, offshoring is still a huge topic out there, and I think the big reason is that even with these job gains, we are still something like 2 million jobs short of where we were three years ago, and a lot of people blame offshoring for that. Professor Hubbard first, are they right to do so?
HUBBARD: No, not at all. The bulk of the job losses we've had in the past recession stem from just low levels of economic activity and from extraordinary productivity growth. Offshoring remains very small. In fact, the bulk of the offshoring that we've seen in the economy has been a net plus, actually creating more headquarters jobs in the United States than the jobs we're losing. The real issue is how we help train people who are at risk.
COLVIN Secretary Reich, it sounds like this might be a topic on which the two of you could agree. Is that fair?
REICH: Yes. In fact, I agree very much with Glenn. I don't think offshoring is nearly as large a problem as the media is making it or many people, because they're right now very insecure and may feel it (offshoring) to be (a problem). But once the economy gets back on track, once jobs come back on track, we're not going to hear very much about offshoring.
Although I do feel very, very strongly that the biggest issue, the biggest problem that we face as a country is that we are really basically creating a two-tiered workforce. At the top, professional workers, usually with college degrees, who are earning pretty well, pretty good salaries and a lot of benefits, and at the bottom, a large and growing group of people in the personal service sector of the economy without much education, without much training. They are bumping along at very, very low wages and they are losing their benefits. That gap is dangerous for our economy and it's also dangerous for our society.
COLVIN Well, and it could be a very big issue in the election. It's shaping up that way. Certainly both candidates, George Bush and John Kerry, realize that this jobs issue is extremely important in the election. In fact, here's an excerpt from John Kerry's latest TV ad.
(video clip begins)
COMMERCIAL: He broke with his own party to support a balanced budget, then in the 1990s, cast a decisive vote that created 20 million new jobs. A lifetime of service and strength. John Kerry for President. I'm John Kerry, and I approve this message.
(video clip ends)
COLVIN The vote referred to in that ad was actually Kerry's vote for the 1993 federal budget. Now whether it actually created 20 million jobs, one could debate, but let's look to the future. Secretary Reich, John Kerry says he has a plan to create 10 million new jobs in his first term as President. And I don't think anybody imagined we were going to lose two or three million in the past three years. How confident are you that he could create 10 million in the next four years?
REICH: Fairly confident. That is if we go back to the policies that were so successful in the 1990s during the Clinton administration, getting the deficit under control, really embracing fiscal responsibility and also investing in education and job training, we could see easily back to a trend line of 2 1/2 million jobs a year. The economy certainly is capable of doing that. But it is interesting that the Democrats are now, after Bill Clinton and John Kerry, the eat-your-spinach party in terms of fiscal responsibility, while the Republicans continue to be, "Well, there are a lot of free lunches out there, just spend and borrow as much as you want."
COLVIN Well, it is a big deficit, as you mentioned earlier. Professor Hubbard, maybe that's one reason that President Bush isn't getting more credit for this. I mean all the recent news about jobs and the economy ought to be good for the president.
The latest poll shows that voters by a wide margin, 48 percent to 28 percent, think John Kerry would actually do a better job on that issue. Why isn't the president getting more credit?
HUBBARD: Let me go back to the 10 million jobs. I think almost all private forecasters think that's about what will be created, regardless of who's president. Senator Kerry or the president doesn't create jobs. It's American business people. So he's taking credit for the sunrise. The real question, I think, is what kinds of policies help business people keep jobs and create jobs, and it's hard for me to believe that raising taxes is the right answer.
COLVIN This does raise a question of where the new jobs, the 10 million or however many it's going to be, are going to come from. We have found some sectors where American jobs should increase in coming years, and where investors could find some hard-working stocks.
One is healthcare -- after all, India's a long way to go to see a doctor. If you combine that fact with an aging U.S. population, you get a booming industry. A couple of companies there rated highly by analysts are Da Vita, which provides dialysis services, and Province Healthcare, which owns and runs acute-care hospitals in non-urban markets.
Jobs should boom in education as well, as more workers need retraining. Much of that growth will be in private, for-profit education. Two companies analysts like there are Career Education Corporation, with 78 campuses around the world, and ITT Educational Services, with 77 schools in the U.S.
And surprisingly, even companies in the high-tech world of computer chips will be adding U.S. jobs. While chip manufacturing is moving overseas, these companies -- including giants like Intel and Solectron -- also need chip designers, electronic engineers, and marketing people, and those jobs will mostly be here.
Now where these new jobs are going to be beyond that, look, you're both teachers. What do you tell students when they ask you about where tomorrow's jobs will be? Professor Hubbard, you first.
HUBBARD: Well, I think you've identified some of the key sectors in health care and education. I also think there are exciting opportunities in tech and in biotech. What government can do is really help that happen by increasing support for research, for training, and to promote entrepreneurship, not through regulation and picking winners.
COLVIN Secretary Reich, what do you tell students about where jobs are going to be?
REICH: Well, I tell students that about a quarter of today's jobs were not even thought of 25 years ago. We don't know exactly,
but if they do continue with their education, ideally a year or two after high school or a four-year college degree, they are likely to be on the winning side of the great divide. They are innovators. They can recognize patterns. They can solve and identify new problems. And that's where the money is going to be. That's where the demand is going to be.
Unfortunately -- and I want to return to this, Geoff -- most of the new jobs being created are not at the high end: Retail, restaurants, hotel, hospital, surface transportation, child care, elder care. Very important jobs, and I don't mean to demean them at all, but they are very, very low wage jobs and their benefits are being slashed. We have a tremendous challenge in this country in terms of education and job training and making a good quality education available to all of our young people.
COLVIN Would that be your top recommendation for what government can do in this regard?
REICH: It certainly would be.
And the second recommendation would be to get some control over this sprawling, soaring budget deficit. Apparently the Bush administration doesn't seem terribly concerned about it, but even Alan Greenspan is now saying that these deficits spell tremendous fiscal problems ahead if we don't do something about it, and that means eating your spinach. That means cutting spending, but it also means raising taxes or at least rolling back the tax cuts on people over $200,000, and it means embracing fiscal responsibility in terms of everything we do from here on.
COLVIN Professor Hubbard, you have a different view?
HUBBARD: I guess Bob isn't running for President because Senator Kerry's plan would actually increase the deficit substantially. We do have long-term fiscal concerns in the country, and they're in the entitlement programs. The job market I'm more optimistic about than Bob, but I do agree that the best thing government can do is establish the right infrastructure and to have long-term fiscal responsibility.
COLVIN And what about the points Secretary Reich was making about the caliber of jobs, the types of jobs that are being created?
HUBBARD: I disagree there. Some of the categories of the greatest job growth are in nursing, in secondary education, in database management, in high-tech jobs. This is not all a bad story. The great part of our economy, as Bob himself said, is that entrepreneurs are always creating new jobs. We must believe, as there has been in the past, there will be another wave of very important and very impressive high-wage job creation.
COLVIN You know, I think a lot of people wonder what they can do, leaving aside what government does. What would be your advice to somebody who is worried that his or her job could be eliminated, either through productivity increases in the industry or through off-shoring?
HUBBARD: I think it's to continue investing in training. We all in our various jobs know that our skills need improvement, and all of us have to invest in training. That's not just a government responsibility. It's our own individual responsibility, and there are many opportunities available to people to do just that.
COLVIN Secretary Reich, what would be your advice to workers who are worried about losing their jobs?
REICH: Well, I would also say make sure that you are continually employable. Get job training on the job. Make sure that your employer is providing you with the kind of experience that you can use not only to upgrade your skills where you are but also to get a good job if it turns out that you lose your job. This job training issue is a responsibility certainly of workers, but it is also a responsibility that employers need to take on.
You know, there are two kinds of employers in this country, Geoff: those who treat their employees as assets to be developed, and those who treat their employees as costs to be cut, and it's the former who are really acting in a very socially responsible way, and I think that the markets ultimately are going to reward them.
COLVIN Well, and they generally have been the most successful companies. But, you know, listening to both of you, you're both fairly bullish on jobs. I mean you're both foreseeing considerable job creation. Why is there this disconnect with public opinion? In other words, most people still are very worried about jobs and see this as a huge concern.
REICH: Geoff, because the issue for many people is not so much the quantity of jobs, but it's number one the stability of the job, the security of the job, am I going to have it tomorrow or next week? And number two, it's the quality of the job. I'm not being paid very much, my health care benefits are declining, my employer is putting more and more co-payments, deductibles on me, my pension is decreasing. All of those things really affect kitchen-table economics, the way people, normal people address the economy.
COLVIN Professor Hubbard, what about you?
HUBBARD: I think it begins with the quantity of jobs. The recovery was pretty slow in the job market, although it is now accelerating. And I think that weighed on people's minds. We also are at a time of great structural change where people will be changing careers, will be changing industries, and it's not surprising to find a lot of anxiety there. We've been through this in the past in the United States and have always come out ahead.
COLVIN We're going to have to leave it there. Glenn Hubbard, Robert Reich, thanks so much.
Thornburg interview
KAREN GIBBS: Well, if these guys are right, the outlook for workers is pretty good. But what about investors? Mr. Greenspan has made it pretty clear -- more jobs mean higher interest rates.
Now there's a lot of conventional wisdom out there about what that means for stocks and bonds, and much of it is wrong, says Garrett Thornburg, whose family of mutual funds includes stocks, bonds and real estate funds.
Garrett, welcome.
GARRETT THORNBURG: Thank you, Karen.
GIBBS: Well, what do you make of this big economic picture?
THORNBURG: Actually I think this is really good news. I mean 288,000 people that didn't have a job at the beginning of last month now have a job. That's some really good news for the economy.
GIBBS: But it also means that interest rates are going to rise, and conventional wisdom says that's going to be bad for stocks and bonds. What do you say to that?
THORNBURG: Conventional wisdom -- I guess it depends on rising from where. First of all, you're starting with a Fed funds rate of 1 percent, not 10 percent. And so even if it goes, let's say, all the way up to 3 percent, which would be a really big increase, it's still a relatively low number historically.
GIBBS: One of the things that's been really helping the housing market is these incredibly low interest rates, people refinancing. Won't a hike in interest rates kind of cool that engine for this economy?
THORNBURG: Maybe a tiny bit at the margin, but you also have 288,000 people that can now afford houses. So it's not a question of just the interest rate. And there was a recent report in The Wall Street Journal that was saying that it really didn't affect affordability until it got up to the 8 percent level, and we're talking about 6 percent today or less if you use an adjustable rate mortgage.
GIBBS: That is pretty good for going forward. But now, just taking a look at what's happened in this past quarter for real estate investment trusts -- REITs have really taken it on the chin. And in fact, if you compare for the past 52 weeks what the S&P has done versus real estate investment trusts, the S&P is beating them. How do you explain that?
THORNBURG: I think it's also the fear historically of rising interest rates being bad for high dividend paying stocks, which all REITs are, whether they're equity, or like ours, a mortgage REIT is. And I think that people don't understand that there are new techniques. We use a lot of interest rate hedging and swaps and caps to extend our maturities, to basically run a matched book of assets and liability. So when things reprice, everything reprices together.
GIBBS: Garrett, research has shown that the stock market continues to rise even after the first three rate hikes, but Wall Street still says that rate hikes are bad for stocks. What do you say?
THORNBURG: Probably the reason rates are going up is that the economy is strong in those scenarios. If you look back historically, that would typically be the case. And by the time they get to the third or the fourth rate hike or wherever this breaking point is, people become convinced that the Federal Reserve is serious and that they're going to try to actually slow down the economy. It's this game of speeding it up, slowing it down, try to slow down the economy.
I'm talking about over a longer period of time now. But what it means is, is that we don't buy the whole stock market. We pick companies, and we are picking and our biggest portfolio is maybe 50 companies. So we're very much picking on companies that we think will survive and thrive in a higher interest rate market and in a booming economy.
GIBBS: I'm surprised that some of the stocks in your holdings are financials, and again I'd point to conventional wisdom. When interest rates rise, financial stocks are supposed to really get slammed. What's going on now?
THORNBURG: This is what makes you a value investor I guess. If you look at some of these companies, a company like Wells Fargo, they have a tremendous amount of very low-cost demand deposits and equity capital, and as interest rates go up, they have more opportunities to profitably invest that money. Citibank, the same kind of thing, and they're fully hedged.
GIBBS: One thing that really does get hurt by rising interest rates are bonds, particularly long-term government securities you see very steeply in the yield curve as people anticipate higher rates from the Fed. What do you think about holding government securities, and particularly the long bond?
THORNBURG: We think holding long bonds actually are always a bad bet. Our firm does not run any long bond funds. What we do, and what we have always done, is we run short, intermediate, laddered portfolios of bonds.
GIBBS: What does laddered mean?
THORNBURG: Maybe switch it from a ladder to an escalator and it will be a little easier to get. Visualize an escalator with like 10 steps on it.
GIBBS: Yes.
THORNBURG: Okay, one year this one pays off, you put it back in at the new, now higher rate, today's new higher rate. For example, on the 10-year Treasury. And then as you gradually replace the portfolio, your yield moves in the direction of where interest rates are going. So if interest rates are going up in a situation like this, and your time horizon for investing in bonds is more than a couple of years, you actually want to own -- this is a yield rally -- you actually want to own that, because you're replacing the bonds that are being paid off with higher-yielding interest rates.
GIBBS: That does make sense. What about municipal bonds? And I'm talking particularly about the Schwarzenegger bonds that received an incredible reception, not only from individual investors in California, but institutional investors. What's going on there?
THORNBURG: I think, one, they put a double-barreled credit behind it. They had the state's general obligation and they pledged part of their sales taxes, so these bonds are actually better than the general obligation of the state of California. So, one, they made it a very good credit, and secondly, there are quite high California income taxes together with the federal taxes to make these attractive. I think the effective yield is something over 8 percent if you were buying those bonds in California. Well, there's not a lot of places to get that kind of yield in today's market in a high credit quality instrument.
GIBBS: Do you recommend individual investors looking at the municipal bond market as part of their portfolio?
THORNBURG: Oh, absolutely. I mean we do a study all the time that talks about real returns on investments and looking at returns after taxes, inflation and expenses. And only two things really work over the long haul if it's in a tax-paying account, and that's common stocks and municipal bonds.
GIBBS: Most people think that the most valuable asset they own is their home, their house. You have a different view. Tell us about it.
THORNBURG: It may be the most valuable asset they own. I don't know about that. In looking at real returns, we looked at the average house price in the country, so we're not talking about beachfront in La Jolla here, okay?
But in looking at that over a long period of time in the study on inflation and taxes, for example, if you had your house that you paid $100,000 for in 1972 and you sold it to me right now for $400,000, you would have no gain. That's all inflation from 1972. Now if you paid a sales commission, you'd lose money, and if you had taxes on it, if it happened to be an investment property or something, you would lose even further real wealth. So you have to look at the real returns you make on your investments after inflation, after taxes, and after whatever the expenses are. In a house case, it's a pretty high commission on selling it.
GIBBS: Garrett, can you give us some specific examples of stocks that you would buy that are expected to do well in a rising interest rate environment?
THORNBURG: Things that will do well that really are dependent on the interest rate environment, they'll do well in a rising economy. Media stocks. Okay, we own Fox. We own Time Warner. We own Comcast, some of the different media stocks. They'll do well. There will be more advertising. And there's lots of other ones out there, but those happen to be ones I can remember off the top of my head.
GIBBS: In the media stocks. Any other sectors that are attractive?
THORNBURG: Oil touched $40 a barrel today, and we own some oil companies in our portfolios, Exxon and a few others. And then medical care, for example. I mean there's one that's really, the demographics are just coming to it. My whole generation of baby boomers is coming and we need more and more medical care. You know, I don't need the cane yet, but...
GIBBS: I'm right there with you.
THORNBURG: You know, soon you'll be investing in the cane makers. And so there's quite a few of those that are well-run organizations in spite of, you know, again in spite of the few that had scandals, there's some really good ones. And we own some of them.
GIBBS: And those factors that you look at in terms of the company, top line revenue growth, bottom line earnings per share growth. Anything else? Cash flow?
THORNBURG: You need to look at cash flow. They look at everything. Look at market leadership. Look at the quality of the management. Look at whether they're innovative or not. I mean you can really see some in the international fund. A stock we happen to like a bunch that we've loaded up on lately in our international fund is Puma, which has done a really interesting job of marketing itself, bringing a brand back from the dead.
GIBBS: Those are gym shoes, right? They're sneakers, athletics.
THORNBURG: Yeah, gym shoes, clothes, all of this stuff, yeah. And they've done a tremendous job.
GIBBS: Any other ones that are kind of different?
THORNBURG: That are different?
GIBBS: Yes, challenging conventional wisdom.
THORNBURG: Challenging conventional wisdom. I don't know if it's challenging it so much, but Embraer in Brazil. It's a Brazilian company. They make all these regional passenger jets that everybody is flying on these days. And they have a tremendous back order and they've been doing very well.
GIBBS: And again, a function of a growing economy.
THORNBURG: Yeah.
GIBBS: Garrett Thornburg, a pleasure talking with you. Thanks for joining us.
THORNBURG: Oh, thank you.
Next week
GIBBS: Well that's our program. Next week we're going to take on what may be the single most confusing issue for investors and consumers alike: The new drug benefit cards.
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