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Dealing With the Unemployment Problem

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President Obama has, reportedly, been frustrated with his administration's failure to devise insightful or innovative ways to resolve the problem of lasting and persistent unemployment. Let us review the record. He began by continuing the previous administration's bank bailout programs where the Treasury and Federal Reserve directly and indirectly supplied funds to large insolvent financial institutions through massive loans at shockingly low interest rates. Treasury Secretary Timothy Geithner and the Congress then enriched that agenda by adding 'stupid pet tricks' such as concealing bank losses through changes in the accounting rules and secretive but highly-publicized 'stress tests' that were supposed to enhance our confidence in these same failed institutions. To the administration's surprise, these banks failed to show their gratitude by using these funds to originate loans. On the contrary, they raised bonuses to pre-crash levels and hired lobbyists to forestall serious reregulation of their industry. Let's just say that, considered as an employment policy, this didn't work.

Soon thereafter the administration enacted a "stimulus" program that was in fact a step in the right direction, but self-evidently insufficient in light of the size of the downturn. Its core flaw was that it was built on the assumption that the financial meltdown was merely a liquidity crisis and for that reason something from which the financial system and the economy would rapidly recover. Hence it was limited to a few hundred billions of dollars for each of three years with 40% of the total taking the form of tax cuts. As predicted, it was useful, but woefully inadequate. Next, Obama worked out a "bi-partisan" agreement with the Republicans to continue the Bush tax cuts, of which more than half of the benefits were targeted to the very wealthiest Americans. As with its previous incarnations, this effort in "supply-side" economics proved to be expensive, ineffective, and unnecessary.

Judging from his State Of the Union speech, his widely-commented upon op-ed in the Wall Street Journal, and his recent speech of June 13th, 2011, Obama's next move to enhance American job growth will be to push for less regulation and the ratification of "free trade" agreements with South Korea, Columbia and Panama. I kid you not. Apparently, we are to believe that in the aftermath of the financial crash and the BP disaster a substantial source of our unemployment problem is a consequence of overregulation. As to more "free trade agreements," these will likely stimulate as many jobs as Bill Clinton's NAFTA and WTO treaties -- that is to say that they will only exacerbate the problem as they are certain to increase the trade deficit while eroding wage standards and thereby overall demand for U.S. goods and services. The latest proposal, unveiled on June 13th, is to train an additional 10,000 engineers per annum. This is a peculiar announcement in light of the fact that while American engineers are experiencing a lower unemployment rate than the nation as a whole, this is in part because they are leaving their profession in substantial numbers. Besides, 10,000 is so miniscule a number relative to the size of the unemployment problem that it raises concerns about the administration's grasp of the issue.

The core obstacle is that President Obama, his political entourage, the chattering classes, and the mainstream economists they consult, are each and severally incapable of contemplating the notion that the problem is neither a lack of "skills," nor a "mismatch" between skills and jobs, nor a failure to believe in "American know-how," nor a dearth of sufficient "optimism." Rather what is lacking is demand for goods and services, which, in turn, has induced firms to shy away from hiring and banks from lending. This is only to be expected in light of the massive loss of income and wealth recently experienced by American consumers.

In light of the size of the problem, its cause, and duration, the most obvious, efficient, and effective way to secure jobs for the mass of the unemployed is to have the government hire them (This does not mean that the Feds have to operate the program as it could readily be farmed out to states, cities, localities, or non-profit organizations). To ensure that such a policy is not disruptive and that applicants seek out government jobs as a last rather than first resort, compensation could be set at or just below the legislated minimum wage.

Such a program has several desirable properties. First, in stark contrast to tax cuts for the wealthy, it delivers money directly to those who need it the most, the unemployed. Second, those who still have jobs, especially jobs with good or even decent wages, will have little incentive to quit in favor of low-paying government jobs (unless the non-wage aspects of their private-sector jobs are highly distasteful). Third, the unemployed, whose needs are likely pressing as a consequence of a prolonged period without income, will reliably spend their earnings, thereby creating "downstream" opportunities for businesses to make sales and "multiplying" the income effect of the program. Fourth and finally, such a program does not require an extensive or intrusive bureaucracy to screen for eligibility, neediness, a genuine inclination to work, or any other subjective criteria. A willingness to work at the posted wage is an excellent and unambiguous filter for separating out those able and willing to work from those who are not. The starting wage should be, as mentioned, at or just below the federal minimum wage, but the program should provide for several higher levels so as to maintain incentives and some reward for seniority (so my working estimate will be an average of $8.00 per hour).

Conservatives and mainstream economists, noted for their fealty to outdated ideas, will ritually claim that such jobs are "inefficient" or "make-work." And to be sure, instances of shamming, nepotism, false billing, and mismanagement will inevitably emerge, the media will periodically reveal them, and some correction or even penalties can be applied as needed. But let's get real. To begin, unemployment is itself a waste. Moreover, such a program would have to be spectacularly inefficient before it would be less effective at creating jobs and providing useful community services than the handing of hundreds of billions of dollars with no strings attached to the likes of AIG, Bank of America, Citibank, or their ilk. And what of tax cuts for the already wealthy? Is that not waste? Let us not even begin to discuss the wars in the Middle East or that paragon of waste and fraud called the "Rebuilding of Iraq"?

While the program could be readily financed by issuing Treasury Bonds, one might object that such an option would be politically impossible now that both parties are engaged in a bi-partisan and gratuitous round of "budget cutting." It follows that questions might be raised as to how costly such a jobs program might be, and if it could be financed through cuts elsewhere. First, let's estimate the expense (yes, these are "educated guesses"). Given that there are 14 million unemployed, and knowing that the official figure is generally too low by about half, we can infer that around 21 million people might be eligible for one of these jobs. If we assume half of those eligible choose to participate at any given time, at an average wage of $8.00 hour, 35 hours per week, and 50 weeks a year, and supposing an estimate of sixty cents on the dollar for "overheads," then the total annual cost will be $8 x 35 x 50 x 1.60 x 10.5 million = $235,200 million. Lets round up this estimate and call it $250 billion.

Now, let's turn to revenues and savings. Since the bulk of money that is earned is spent, thereby becoming someone else's revenue, what is called the "income multiplier" has to be considered. For the United States it is estimated to be just over 2.0 (and likely higher for the working poor). It follows that for expenditures of $250 billion, Gross Domestic Product should rise by at least $500 billion. If only 15% of this is returned in taxes (a low estimate), then we should recoup $75 billion right off. Another obvious candidate for savings is less expenditure on unemployment insurance. This could save about half of our current outlays, or around $10 billion a year. Likewise, the Earned Income Tax Credit will be less heavily drawn upon, so this might save another $10 billion. Now, we need another $155 billion.

Personally, I would ditch the Wars in Iraq and Af-Pak. Expense-wise these wars are, as a matter of principle and practice, grossly underestimated by the government. Even a low-end estimate suggests savings of $500 billion a year. But, it appears that Obama's new-found Washington friends really like these wars, so I guess we are stuck with them even if the voters want out. But do we really need 20,000 troops in Kuwait, Qatar and Bahrain? After all, nothing is going on in the first two countries and the Saudis are successfully suppressing Democracy in the latter without any help on our part. I'll bet that there is at least $50 billion to be saved by ending these expenses. And the 36,000 troops in Okinawa? Hey, World War II is so over! The residents of that island have been begging us to leave for some decades, so let's oblige them. As Japan actually subsidizes their stay, my guess is that this will only save another $40 billion. What of Fed-directed bank bailouts, guarantees, back-door subsidies and -- since 2008 -- the interest the Fed now pays banks for the reserves that they formerly held in interest-free accounts? We know the Fed has a long history of concealing or misrepresenting the cost of such giveaways, but they should be at least another $60 billion, and could easily be much more. So, lets add all of these up, 75 + 10 + 10 + 50 + 40 + 60 = $245 billion, and given that all my revenue numbers are deliberate underestimates, this program appears to be very affordable. Any remaining problem, then, can only be attributed to political will.


Robert E. Prasch is Professor of Economics at Middlebury College where he teaches courses on Monetary Theory and Policy, Macroeconomics, American Economic History, and the History of Economic Thought. His latest book is How Markets Work: Supply, Demand and the 'Real World' (Edward Elgar, 2008).