As part of the Roosevelt Institute's 10-part series on the Jobs Crisis, running on the New Deal 2.0 blog from Nov. 12-25, I was asked to reflect on what can be done to get Americans working again. Here's my take.
Support of financial institutions is justified because they are too big and interconnected to resolve. Yet, households -- in aggregate bigger and more interconnected -- are being allowed to fail. The main assets of an average household are a job and a house. The mirror image of the banks' toxic assets is in households' negative equity. More important is the collapse in value of households' main asset: human capital. With nearly 16 million workers unemployed and a further 12 million with impaired earning potential, there is an urgent need for equal protection of households facing insolvency. The income loss is in the range of a half-trillion dollars, or 3 percent of GDP.
But there has been no bailout of households. Since households' personal consumption expenditures are a large part of our national income, small changes in household expenditures have a significant impact on the earnings of private sector employers, on their profits, and on their desire to offer employment. If banks are too interconnected to fail, then the interconnection between households' income with the earnings of the private sector makes support of households' assets as important as that of banks.
How can government give equal protection to households? House prices could be supported by purchase of housing -- house buyer of last resort. Alternatively, a write-down of the value of outstanding mortgages or adjustment of the tenor or interest rates could reduce negative equity positions. But proposals along these lines have not been fully implemented. They have been too small relative to the problem and are ineffective if the household loses employment, which makes it impossible to meet the reduced burden. Thus, these measures can only be effective if there is also support for households' major earning asset -- labor.
Action to support household employment earnings has taken the form of the Recovery and Reinvestment Act. But this is an indirect, temporary remedy that cannot guarantee an increase in jobs. Direct support equivalent to that offered to banks is required.
Direct transfers, such as unlimited unemployment benefits, would provide direct support. But they are wasteful and inefficient. Indeed, any direct transfer is inefficient as long as there is productive potential not employed in the private sector. Such transfers are the equivalent of destroying value to solve the problem. Thus, the indirect incentive provided by the government stimulus plan to offer more employment should be replaced by a more direct method of direct government employment of labor. Just as the Fed acts as lender of last resort to prevent bank insolvency, the government should act as employer of last resort to provide anyone willing and able to work at just below the going minimum wage. This would be more efficient than other means of supporting households' balance sheet, because it would provide an increase in public goods. It would also provide a modicum of equal treatment for all citizens, and meet the commitment in Article 23 of the Universal Declaration of Human Rights guaranteeing the right to work.
This post originally appeared on New Deal 2.0.