JOBS, JOBS, JOBS: A Primer for Politicians who flunked ECON 101

November 9, 2010  |   Economics & Trade Politics and Policy

Workers without jobs can’t provide adequately for the basic needs of their families. The unemployment crisis is damaging families and contributing to a multitude of economic and social ills, including:

• We now have the highest poverty rate for working-age people between 18 and 64 – 12.9% in 2009 – since 1965. Today, 43.6 million Americans are living in poverty, 19 million of whom are in deep poverty.

• Workers who have lost their jobs through no fault of their own often cannot pay mortgages and rent, even when receiving unemployment benefits – that are not equivalent to wages lost. The foreclosure crisis – the outcome of misdeeds of bankers and mortgage brokers – is driving further declines in home values while destroying once vibrant neighborhoods. Joblessness also contributes to increased homelessness, which is not only tragic for families who lose their homes, but is accompanied by broader social harms and increased budget pressures on already strapped local and state governments.

• Unemployed workers – along with many who are still employed – are losing employer-based health insurance coverage. In 2009, 50.7 million people – the highest number of uninsured since the Census started collecting the data in 1987 – were without health insurance coverage. Joblessness is increasing pressure on public programs such as Medicaid, while increased use of uncovered emergency services by those with no other option for care is driving further increases in healthcare costs for small businesses and those still fortunate enough to have jobs and healthcare coverage.

• Workers without jobs can’t pay taxes that provide the resources to hire teachers, police and firemen, build and maintain roads, provide for appropriate national security, ensure product safety, protect the environment, and fill urgent long- and short-term national needs.

Despite the repeated claims in the media and by Republican politicians, voters did not overwhelmingly favor deficit reduction: Every national poll has shown huge majorities favoring job creation over deficit reduction. The mainstream media and Republican politicians know the results of these polls, yet continue to hammer the deficit as if it was the number one issue for voters. Someone needs to tell them that repeating a lie over and over does not make it true.

It’s clear that priority #1 must be job creation, and that cannot be done simultaneously with fiscal austerity as advocated by conservatives.

We must loudly and forcefully condemn the folly of deficit slashing while 15 million Americans remain unemployed – and 11 million more are under-employed or dropped from the labor force. Insufficient economic demand and idle productive capacity in the economy is, in the short-term, bleeding federal and state budgets, whether or not current economic conditions meet the official definition of “recession.” “Reckless spending” (except perhaps for two ill-conceived and poorly executed wars) is not the cause of our budget woes, as conservatives continue to claim. Conservatives expose the lie in their claim every time they decry the deficit, but cannot or will not name any specific government program they would slash in order to meet their demands for deficit reduction. Simply saying “we propose to cut the budget by 20%” is not an answer to the question, “What, specifically, will you cut?”

Job creation – and the economic growth that spurs job creation – is the only way to reduce a budget deficit that is primarily the result of high unemployment and 30% of American productive capacity sitting idle.

Unemployed workers represent idle productive capacity – lost wages and lost economic output. Lost wages reduce demand for goods, services, and investment, and depress tax receipts. Without consumers with money to spend, firms don’t invest or hire, leading to more joblessness and still lower output. That leads to declining tax receipts along with growing demand for automatic stabilizers (such as unemployment benefits) and safety net services (such as Medicaid, food stamps, and housing assistance). Government deficits are inevitable in economic downturns with high unemployment.

Since firms will not hire or invest where demand is lacking, and unemployed workers cannot expand consumption and increase demand, only the government can spur growth – through deficit spending and investment. Tax cuts may be helpful, but in the current climate, direct spending and investment will more quickly and more strongly stimulate demand. Investing now in America’s current and future prosperity is the remedy for both joblessness and the long-term budget deficit.

And just to be clear: when demand exists, firms WILL produce. Conservatives have been beating the drums trying to convince the public that “if only” there were less regulation, “if only” the government were more business friendly, businesses would hire and ramp up production. This is a red herring. Business will produce when demand returns. Period.

Conservatives argue that austerity will spur economic growth. That argument is based on evidence that fiscal austerity reduces interest rates (borrowing costs) for firms, and thus stimulates investment. But none of the evidence for this model mirrors current conditions. Interest rates in the U.S. are already at historically low levels yet firms are not investing or hiring. Moreover, few countries that experience rapid growth while practicing fiscal austerity adopted austerity when the economy was operating far below its potential level of output, and in no case was a country as far below its potential as the U.S. is today.

Furthermore, all of the evidence that austerity fosters growth comes from countries with a much larger percentage of their economy involved in export industries than is the case with the U.S. Trade provides a source of demand for countries with a large export sector. The U.S. currently cannot rely on export-led growth to stimulate sufficient demand to reduce unemployment. Domestic demand must be increased for unemployment to be reduced in the short run. Thus, arguments for slashing government budgets in order to stimulate jobs and economic growth are not credible under current economic conditions.

The American Recovery and Reinvestment Act (ARRA, or “the stimulus”) may have created or saved up to 3.3 million jobs and averted a second Great Depression, according to CBO estimates. But simple math shows that it was woefully insufficient to offset the loss of $2.4 trillion in economic activity over only a two-year period. Add to that $3.4 trillion in lost home values; and $7.4 trillion in lost stock values, in 2009 and 2010. Not only was $787 billion in stimulus insufficient to offset the losses, it was also swamped by an estimated $570 billion in spending cuts by state and local governments over the 2009-10 period. Thus, the stimulus provided by ARRA and other measures amounted to only about $130 billion per year for 2009 and 2010. The total effective stimulus was perhaps only 12% of the output lost! Of course it didn’t create enough jobs to replace the 8 million jobs lost! It was far too small!

Thanks to the Administration and Congressional Democrats trying (in vain) to appease conservatives, 40% of the stimulus was in tax cuts, which are both LESS TARGETED as a form of economic stimulus (much of a tax cut may go to paying down debt, which is good, but doesn’t stimulate the economy; or it may be spent on imported goods, which make the trade deficit worse and still doesn’t stimulate the economy very much), and tax cuts have a LOWER MULTIPLIER effect as stimulus than does direct spending by government (deficit spending, in a recession and period of high unemployment).

Tax cuts have a multiplier effect of about 1.1 to 1.3…you get about a $1.10 to $1.30 at most in economic activity for each dollar of taxes cut. Direct spending, on unemployment benefits, on job creation like infrastructure investment, on basic research in clean energy…has a multiplier of 1.3 to 1.6, plus long-term economic benefits based on advances in basic science, enhanced broadband, and improved transportation infrastructure.

For non-economists, especially those who hold elective office, it’s probably a good moment to step back and explain some basic economics, because I can hear you saying, “But, why do liberals insist that government spending is the solution to the current jobs crisis?” Here is why:

• The broad components of GDP are: consumption, investment (including inventories), net exports, and government purchases. Which of these components can be counted on to stimulate GDP growth and jobs creation?
o Consumption: No. As long as house values are flat or declining (thus, no wealth effect to stimulate consumption); household debt levels remain high; job security and consumer confidence is poor; and savings portfolios held in retirement accounts are worth less than they were in 2008, consumers cannot be counted on to stimulate demand and lead us out of the jobs crisis.

o Investment: No. So long as consumers aren’t buying, businesses will hold investment to a minimum…and the last thing they will do is hire new workers. That’s why employment is always a lagging indicator…firms try to avoid firing workers in the early stages of a recession, and they look for other ways to boost productivity in the early stages of recovery. If neither consumers nor investors can be counted on to stimulate demand, who can? Keep reading.

o Net exports: No, this won’t stimulate demand in the U.S. either. Unless the value of the dollar comes down, the U.S. can’t export its way out of recession. Our exports simply are not sufficiently competitive on world markets. The dollar will be overvalued as long as it is the dominant reserve currency of the world. We ought to get over the chest-thumping pride over the dollar and promote a new type of reserve currency, such as IMF SDRs (Special Drawing Rights, based on a basket of major currencies…too complex to deal with in detail here, but it would add a lot of stability to global exchange rates and allow the U.S. dollar to decline to a realistic level). Exports account for only about 13% of GDP. This is not going to change rapidly enough to stimulate jobs growth now, given global economic and exchange rate fundamentals.

o Gosh, that leaves us only GOVERNMENT PURCHASES! And, conveniently, the federal government can engage in deficit spending. State and local governments, households, and firms don’t really have that option, especially given the current level of lending available from the bailed out financial sector.

Government spending, therefore, is the way to create demand that will lead quickly to jobs growth. And that spending can be done in coordination with the Federal Reserve, which can buy up US Treasury debt, as they recently announced they would do (but again, on a relatively timid scale given the size of the problem). Few people, apparently including politicians, understand that the Fed rebates interest paid on the government debt it holds back to Treasury, so it costs NOTHING. The Fed rebated $70 billion to the Treasury in 2009. In a period of economic growth, such a policy risks inflation. But with near 10% unemployment, 0.6% real annual economic growth (after factoring out a spate of inventory buildup earlier in 2010, which has now stalled), and forecast further declines in home values, we’re much more at risk of deflation right now. So there is no reason not to expand government spending and investment through debt held by the Fed.

A program as described above would not be unique. Japan has been doing exactly this for over a decade. Japan has a public debt of over 220% of GDP, mostly held by their Central Bank, and while Japan shouldn’t be held out as an example for the U.S. to follow, the U.S. debt situation is not near that of Japan. U.S. government debt is at 61% of GDP.

Too much of our debt is held by foreign countries, and we do need to address that issue, but it is separate from the solution described here. The trade deficit is the reason China holds $900 billion of U.S. government debt. Currency issues account for some of that. Chinese export-led growth policies (such as subsidies to export industries) account for more. And U.S. lack of a viable manufacturing policy accounts for more still. But all that’s a lesson in economics and trade that I’ll leave for another day, because the solutions are medium to long term, and we need jobs now.

By 2014, the independent Congressional Budget Office (CBO) projects that total lost output will reach $3.4 trillion – more than $11,000 per person – assuming unemployment returns to normal levels by then. That figure will be worse if unemployment remains high. Additional and substantial economic stimulus that more realistically accounts for current economic realities is required, both to create jobs and to begin building the foundation for a prosperous future in which budget deficits can be reduced without causing economic contraction during a period of record unemployment.

One final point bears making with regard to the whole “austerity and smaller government” arguments of the corporate mainstream media and the political right: Government IS smaller. The size of the federal workforce compared to the overall U.S. population has dropped steadily since the 1960s, thanks to a booming population and cutbacks made during the Reagan and Clinton years. The size of government is, necessarily, somewhat correlated to the number of constituents and the size of the economy it has to serve. In 1962, there were 13.3 federal employees per 1,000 population. Under George W. Bush, in 2003, that figure was down to 9.1. And under Obama, it’s dropped to 8.4 in 2010. Now, it’s still not as small as Grover Norquist would like…he has said he wants government to be small enough to “take into the bathroom and drown it in the bathtub.” The fact is, government will never be small enough to satisfy the “government is the problem” crowd. Just like border security will never be adequate to convince the same crowd to deal rationally with immigration reform. You can’t deal with irrational people who will never be satisfied. At some point, you just have to say: “Enough!”

So, hopefully, dear reader, you are now overwhelmed with facts, convinced that government spending is the only way to get the unemployment down to an acceptable level, and ready to go out and do battle with conservatives who argue otherwise (with few specifics to support their position).

We should agree with the right that in the long run, we need to work to bring down the level of government debt relative to the size of the U.S. economy. The way to achieve that goal is with a sound banking system and rational approach to monetary policy and exchange rates; government investment (recognizing the difference between spending and investment); and full employment at decent wages and benefits.

We need jobs, and we have much work to do.

A great nation can’t remain great with crumbling bridges and schools, bursting water mains, leaking untreated sewage, grossly inadequate transportation systems, over-dependence on foreign oil, unaffordable higher education, and broadband preparedness that ranks 15th among OECD countries.
A great nation can’t remain globally competitive without a vibrant manufacturing base. Not only can we reduce the trade deficit by making things in America, but we can reduce the amount of fuel used to transport goods from China…thus reducing the carbon footprint of every American by a bit. There is also increasing evidence that a manufacturing base is a prerequisite to technology leadership: you need to have human capital feedstock for technological advances. A few of the most talented manufacturing workers will become engineers, and a few of those engineers will develop the new products and processes that will keep a leader in technology on the cutting edge. This is happening in India, China, and Germany. The U.S. is falling behind in technology – once our great strength – because we have lost our manufacturing base.

A great nation consists of livable cities and towns that work for people, with decent affordable housing, quality public schools, well-designed and functioning public transportation systems, and jobs that provide decent wages. Cities cannot be warehouses for vast numbers of homeless, jobless, and impoverished people who have no prospects and no hope.

A great nation will be at the forefront of addressing global problems that have resulted from past mistakes. Global warming, polluted water, and energy insecurity require investment in high-speed railroads and mass transit systems; emission-free vehicles and the infrastructure to power them; research, development, and construction of renewable energy sources, such as solar, wind, and waterpower. These investments must be made at home, creating jobs in America, with enforced fair labor standards and collective bargaining rights.

A great nation prepares its young people to create the prosperity for tomorrow. That means we should invest in schools and teachers, in programs to help families cope with the challenges they face, in keeping our universities the best in the world, and in creating opportunities for young people to gain real-world experience and a sense of connection to their communities, their country, and the world. We ought to double funding for programs to employ youth immediately – including high school dropouts, high school graduates, and college graduates. This includes expanding Job Corps, AmeriCorps, and Peace Corp, and a renewed Civilian Conservation Corps to restore or national parks and forests, a Neighborhood Corps to protect, maintain and revitalize (or as necessary demolish) distressed housing, and Home Care Corps providing services to the elderly in their own homes.

These ambitious programs, sparked by public investments, will generate millions of jobs that pay middle-class wages, serving urgent national needs and restoring the private economy. These are the necessary underpinning of a strong America.


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