In discussions about the Fed actions, it occurred to me that many of the explanations that link the Fed's moves to stronger job growth leave out a number of steps in the middle. It's of course not the case that the Fed buys MBS or announces they'll keep rates low and jobs that weren't there before suddenly appear. There's a chain of events that needs to occur and there's plenty of slip twixt the cup and the lip.
So let's talk about the process of job creation, both in normal times and in times like these.
Demand for labor is so-called "derived demand," derived from the demand for goods and services that firms sell to consumers and investors. That can be anything from a Snickers bar (consumer good) to a steel bar (intermediate good) to barroom (investment good). As I explained in greater detail here, in normal times, job creation is a function of a virtuous cycle where growth generates income which drives consumption, signaling investors to new opportunities, generating more growth, etc.
But, of course, stuff happens and the cycle breaks down. There are big market failures, like the Great Recession. There are high levels of inequality that divert growth from reaching enough consumers to generate robust demand throughout the economy. There are inflationary supply shocks (e.g., an oil disruption) that sharply reduce real incomes.
When that stuff happens, monetary and fiscal policies are needed to reset the cycle and a key part of that process is avoiding layoffs and adding new jobs. So how does that work?
With the Fed, it works through lower interest rates. The Fed has a number of tools to lower the cost of borrowing, the idea being that this leads people to take out loans and make new investments that they wouldn't have undertaken at higher interest rates. And those new investments are associated with new jobs.
So, a homebuyer takes advantage of a low mortgage rate, leading to jobs for homebuilders and real estate agents and furniture suppliers. A factory owner takes advantage of low rates to replace old equipment, creating jobs for machine manufacturers. An auto dealer invests in a redesigned show room, a buyer takes advantage of that dealer's low rates and buys a new car there, employing designers, salespeople, and auto suppliers.
And those are just the direct jobs. The newly employed construction worker goes out for lunch near the job site, and the diner needs to add another worker (the jobs multiplier effect).
Those are the links in the chain between monetary policy and jobs, but there are weak links. Low mortgage rates won't do much if the recession itself was a function of a housing bubble that left us with excess housing stock and deleveraging households (relatedly, with millions of homeowners underwater, the opportunity to refi into lower rates-another source of new demand-is also blocked). Even with very low borrowing costs, unless they see more consumer demand, investors won't see much return from taking on new projects. And with global opportunities, they can span the globe for better returns in economies where demand is stronger. In fact, corporate profitability in this recovery has largely been driven by foreign, as opposed to domestic, profits.
What about fiscal policy? How does that chain work to create jobs and what are the weak links?
Well, though economists tend to discuss fiscal policy as a lump, it actually comes in a lot of different flavors and they're not all created equal in terms of bang-for-buck job creation. Basically, the more indirect they are -- the more links in the chain between the policy and job creation--the less effective they are.
For example, for a stimulative tax cut to create a job, a) the recipient must spend, not save, the money from the cut, and b) she must spend it on domestic goods (I mean, of course, that's what has to happen for the tax cut to create a job here as opposed to in China). Again, if you're in a deleveraging cycle, step "a" is a problem. Also, if your tax cuts go to wealthy people who are not income constrained in the first place, don't expect much in terms of job creation.
Other fiscal measures have more reliable job-creation chains. Increasing unemployment benefits or food stamps helps because those folks typically spend the money. And new infrastructure is a pretty direct way to go. Same with state fiscal relief. I remember during the Recovery Act, mayors cancelling planned layoffs the day they received Recovery Act funds.
The punch line is a simple one, but it's one that seems to have been forgotten amidst our increasing love affair in America with laissez-faire economics: the more direct the policy measure -- i.e., the fewer links in the chain between the policy and the job -- the better it will work.
I've seen these processes at work close up and I've come to view this simple insight as a lot more important than I think most economists realize. Even Keynes had relatively little to say about implementation and the relative effectiveness of different types of stimulus. He famously quipped that if the government can't find something useful for people to do, just pay one group to bury bags of money and another group to dig them up.
Ha-Ha. Very helpful, Sir K. But I actually think the great man was onto something. The most direct way to create jobs, the only surefire way to be sure that stimulus will work, is direct job creation. Everything else, including all the Federal Reserve stuff, involves crossing your fingers and hoping the chain holds.
Of course, we live in a dark age where any fiscal policy to create jobs is viewed as European socialism, despite the fact that Europe's gone even more austere than we have. And even among the majority of economists who understand the need for stimulus, direct job creation by the government reeks of an earlier age, invokes boondoggles, and is way too interventionist. They'd rather give a tax cut and let consumer sovereignty and market forces take over.
They're not crazy to feel that way. It would be better for consumer demand to signal which industries should expand and which should shrink. But we just don't always have that luxury, especially in a global economy where investments can flow abroad and import leakage dampens the impact of domestic tax cuts on job growth. And we especially can't count on that sort of stimulus when households are deleveraging.
So, the next time we hit a recession, I'm going to be out there advocating for, if not direct jobs in the public service, something as close to that as we can get, like infrastructure, fiscal relief to states, and subsidized jobs for the disadvantaged.
In fact, I'm not going to wait until the next recession. I'm starting now!
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
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Few families can afford the atrociously huge COBRA premiums.
Companies dump employees who attained 55 years of age because the extra $1,000+/month for their insurance wrecks their budgets.Even Wall St companies demand higher participation to pay for their employees' regular premiums.
Once the Affordable Care Act is up and fully running, during President Obama's second term, the universal care will start looking better and better. Then we can dump the insurance companies, whose averice will surely keep their high officials shoulder deep in their procured riches despite the small 5% tax for their earnings over $250,000. That will pay for all added administrative healthcare costs, along with the controls that disallow fraudulent medical billing,
That huge revenue will also take care
of the national debt, once it becomes
necessary to keep earnings here and tax offshore dealings.
If anyone doubts that, just go to old articles that list incomes of the rich and famous, calculate what their incomes over $250,000 are, and multiply that by .05%. Stunning results will be exposed, while the remaining 95% will more than suffice future
generations of their children.
They cannot possibly spend all they have in 10 lifetimes, living free of "recreational" drugs and excessive gambling.
Let's look at how the regular market works. Employers hire employees to do a task because they need the work done, and getting the work done is more valuable than the money they are paying. A worker getting $20 an hour produces $25 of output, so for every hour he works, $5 of new wealth is created.
Now let's look at government programs. By definition, they involve doing work that no one is willing to pay for - otherwise, it would get done. They pay $20 an hour to produce $15 worth of output, causing the total wealth of society to decrease. Eventually, as in the former Soviet Union, society becomes bankrupt and collapses.
(although Mitt may think it should)!!!
However, when the lives of disadvantaged people are improved, the relief of stress creates a worker who can go off supportive programs.
Right now, no social workers exist in welfare programs and high school (?) graduated have taken their place. It takes someone skilled in motivational science and the art of increasing peoples' self esteem, to correct the horrors that our society created!
I have been subjected to the trauma of a bank foreclosing on a home I could well afford (as have others), by my timely mortgage payments in the correct amount of cash being refused when I presented it. When I called the San Antonio offices
There is a solution to the jobs problem and it could quickly put hundreds of thousands of people back to work. It is not pro left or right. It is not from any corporation, it's outside the government control, it's totally voluntary, works in about one week, and helps all with little sacrifice from anyone.
National Hiring Day - This is a day that corporations are encouraged to hire new employees. Corporations are called on to put patriotism first and help their country in
hard times. Those corporations that cannot hire, are asked to stop firing for that month.
http://wp.me/p5S9X-nv
They and corporate dilitants might pay lip service to a National Hiring Day,
but results will reveal their true
intentions. Insurance companies will continue massive overcharges for employees' premiums who are over 55. Therefore capable, educated, experienced job holders will be replaced by younger, less stringently educated, less experienced
and ethically challenged, motivated
individuals. I've seen that happen over and over again, especially in medical professions.
The two main responses I get to a National Hiring Day are these -
the conservative says "Why should a major corporation hire a person for the country?
- and the liberal says "Why would a major corporation hire a person for the country?
I think most corporations are somewhere in between - they see that supporting the country during tough times like this is not a burden but an opportunity, an opportunity to not only help those out of a job, but get the economy going and help themselves to new customers with those new jobs.
Those that would oppose America just to save one job, would get an incredibly negative response from customers that would be much much worse than the cost of one job. But this is a voluntary hire - let's try it and find out who is right and which companies want to support their nation for all they have been given.
Our government seems very adept at finding potholes where there are no roads. The government seems eager to pour money into these potholes. With a governmental history of waste and fraud why should we expect anything different?
An unemployment benefit is not a job. When the benefit exceeds premium and trust fund it becomes another social entitlement by another name. When the funding source becomes over loaded it saps a businesses discretionary income that might have been devoted to business needs. Additionally the cost is treated as another overhead factor that further tips the balance to moving production.
A grant from above does not change core inputs, therefore does not save a job for the long term. The "saved" job remains "saved" until the grant expires. This is clearly seen when examining the Stimulus. The money has been spent and nothing was created that might generate income flow to make the job self sustaining. The only way a public sector job can be sustained is through private sector jobs that add enough value to goods to pay a skim. Again, the cost of supporting a public job SUBTRACTS from the ability of an economy to be self sustaining.
The KEY statement the writer makes is
"But we just don't always have that luxury, especially in a global economy where investments can flow abroad and import leakage dampens the impact of domestic tax cuts on job growth."
The luxury that we do not have is taking measures that increase the need for future skim because the ability to create that skim is stunted by capitals reaction to the pressure of the future skim.
Increase progressive income taxes including capital gains and use the revenue to build infrastucture.
End legalized gambling by the financial sector including hedge funds and speculation on commodity futures like oil.
Boycott foreign made goods; buy local and only American.
The amount of money spent on elections is obscene and would be better spent elsewhere so limit election campaigning to only two months before the election. Set limits on campaign spending and
abolish lobbying of all elected officials.
There you have it.
Both parties say they believe in patriotism and want jobs - now it's time to really prove you mean it by supporting a National Hiring Day.
There is a solution to the jobs problem and it could quickly put hundreds of thousands of people back to work. It is not pro left or right. It is not from any corporation, it's outside the government control, it's totally voluntary, works in about one week, and helps all with little sacrifice from anyone. National Hiring Day.
National Hiring Day - This is a day that corporations are encouraged to hire new employees. Corporations are called on to put patriotism first and help their country in
hard times. Those corporations that cannot hire, are asked to stop firing for that month.
Dividing the country into 2 camps does not work. Working together does.
Small/Medium sized businesses.....60%
Big Business.....20%
Big Government.....20%
Most jobs in ALL developed countries come from Small/Medium sized companies.
SME [small/medium sized enterprises] get no tax loop holes, rarely use tax havens, and never get bail outs. Yet these companies create 60% of the jobs. They are rarely on stock markets and rarely ever lobby corrupt left and right wing politians.
In Sweden 64% of all jobs are created by SME. SME are the most productive part of any developed nation.
North Korea has no SME, Sweden and South Korea have many, thats the only differnce economically between them.
Oh and SME and their employees pay for 85% of all taxes via, business rates, income tax, corporate tax and VAT.
Where do jobs come from..."the little people" is the answer.
Until the the world gives massive tax cuts to SME there will be no growth.
What government does do is interfere with the natural order, a system of survival based on market forces. By inserting itself into all sides of that equation, (from contract to taxes to favoritism to financing) it certainly is not more of the same that will improve it.
Jobs are created through the investment of capital based on business case outlook. If that is dim, there is no investment. In the micro world of small businesses, money for that is loaned through collateralization of assets gained through savings or the acquisition of profits.
By reducing interest rates to zero, there is little incentive to save but risk your assets to achieve the growth necessary for collateralization. Thus, the boom and bust cycles and increasing reliance on banks for financing, where many times the largest scam wins, and the small entrepreneur is left out in the cold with nothing but a good idea when the market inevitably crashes.
In other words, it is a fixed game for any small business that envisions hiring an employee, who must bring $400K in new sales to make it worth their while, while marketing to a base of people with diluted income streams and no significant investment returns.
And then we wonder why many fail.
If giving tax breaks to millionaires produced lasting job-creation, we would be at full employment.