It's the new chicken-and-egg debate: housing or the economy

Source: U.S. News & World Report

Today, the Obama administration announced two more pieces to the president's "We Can't Wait" package of initiatives, a series of executive actions designed to promote job growth without congressional approval. The newest programs are designed to encourage entrepreneurship and small-business hiring. Congress has also managed to eke out a couple of measures that might spur hiring as well. Action on jobs looks good for any politician at this point, and for out-of-work Americans, any help counts. But the scattershot array of proposals that Washington has produced remains a tiny band-aid for an economy with a badly wounded housing market.

Data from the Labor Department shows that the U.S. economy is a much changed place from past recessions. Despite small recent gains, manufacturing employment is down more than 37 percent since the last major recession, in the early 1980s. Healthcare is a bigger share of the economy than ever, and has continued to grow unfazed by downturns of any size. And construction has shrunk considerably, having experienced its biggest dip in employment on record since 2007. However, as with past recessions, housing—one area on which Washington has taken little policy action—appears to be the key to fixing the economy.

By comparison, many other initiatives for boosting economic growth seem insignificant. Free trade agreements, like those signed with South Korea, Colombia, and Panama earlier this year, were trumpeted as potential boons for U.S. manufacturing. However, the Great Recession didn't kill American manufacturing; that has been on a relatively steady decline since 1980. "Speaking strictly about employment shares of industries, generally the service industries have fared better than the manufacturing industries," says Ban Cheah, an analyst at Georgetown University's Center for Education and the Workforce. With an economy that is changing structurally, decidedly moving away from manufacturing and toward services, creating meaningful job growth in manufacturing could prove a Sisyphean task.

Likewise, some experts see cutting taxes for businesses as similarly wrongheaded—the equivalent of treating a patient with a cold for a broken foot. However, this is also one of the few areas on which lawmakers have made any headway. The House of Representatives this week passed legislation to repeal the 3 percent withholding tax government imposes on contractors, marking the first time that the Republican-controlled body has passed a piece of President Obama's American Jobs Act, which the administration is pushing through congress piecemeal. "Businesses have all the money in the world. They're investing like crazy. The reasons for not hiring is nothing to do with tax policy," says Joel Naroff, president of economics consulting firm Naroff Economic Advisers.

Indeed, the recession seems to have taken the most decisive toll on two sources of employment: construction and government. Government employment has fallen by more than half a million jobs since mid-2008, with a vast majority on the state and local levels, and construction has lost more than 2 million jobs—roughly 28 percent of its workforce—since mid-2007.

Simply spending to rehire workers in state and local governments appears unlikely at best. Those governments are cash-strapped, and the federal government doesn't have the means to provide aid, particularly with the so-called congressional supercommittee already struggling to find $1.2 trillion in deficit reduction.

Growth in home construction has in the past been a sure route to recovery. "[Residential construction] grows usually the first quarter that the recovery begins, sometimes at double digits. Job growth begins to pick up very quickly in that sector. ... This is a very, very labor-intensive and huge job-generating segment." And while construction perhaps cannot itself drive recovery, the jobs it produces—in manufacturing, lumber, and all the other areas related to home-building—usually can help kickstart a recovery. Indeed, one reason that the public sector has been hemorrhaging jobs, particularly at the local level, is a reduction in property tax revenue. Though it would be a slow process, boosting the housing market—moving homes through the foreclosure process and boosting home values—would eventually help government again add the jobs it has shed.

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