How Obama Can Create Jobs and Decrease Unemployment

03/18/2010 05:12 am ET | Updated May 25, 2011

With the nation's unemployment rate at 10 percent, the highest in a generation, President Barack Obama could learn a thing or two about job creation by heading down Pennsylvania Avenue to the Smithsonian American Art Museum.

On display is an exhibit of New Deal-era paintings that show men building roads, laying pipe, and shoveling snow. The artists were paid by the New Deal to paint these portraits; and the people in them were paid by the New Deal to construct public-works projects and the nation's infrastructure.

New Deal programs were known by an alphabet soup of acronyms -- WPA, CCC, NIRA, FERA, AAA, and more. Almost every community in the United States has a park, bridge, or school constructed during the New Deal, built by the calloused hands and strong backs of Americans who were working directly for the government.

With the US unemployment rate surging to historic proportions, why has the White House avoided New Deal-type programs that could keep Americans employed? Aside from a small summer employment program for young people, Mr. Obama seems unwilling to create jobs on the public payroll. But feeling the urgency of the dismal job market, recently he proposed using some leftover money from the Troubled Asset Relief Program (TARP), originally allocated for bailing out failing banks, to lend to small businesses to create jobs. He also proposed modest increases in spending on infrastructure investment and home-weatherizing, also targeted to create jobs. That's in addition to last February's economic stimulus, which provided billions for investments in energy efficiency, broadband access, and other areas partly to stimulate job growth.

But that spending hasn't been adequate enough to produce many new jobs or even maintain existing ones. So what else should Obama do?

After visiting the Smithsonian, he should look across the Atlantic. Even as US unemployment has more than doubled, in Germany the unemployment rate has hardly increased. Germany was one of the first advanced economies to emerge out of recession and now has a considerably lower unemployment rate than the US, at 7.6 percent. The remarkable resilience of the German economy is directly attributable to shrewd policies that have better stimulated its economy.

The most important of these is known as kurzarbeit, which encourages firms that face a temporary decrease in demand for their products or services to avoid laying off employees by trimming the hours of all employees. Under such so-called "work share" programs, employers spread the burden, and the government then makes up some, or all, of the workers' lost wages. This encourages firms to use reductions of hours instead of layoffs.

The economic arguments in favor of such a policy are considerable. For workers, having a job that has been reduced to 80 to 90 percent of full time is vastly better than being unemployed, as it keeps you engaged in the workforce and puts far more money in your pocket than if you were living off unemployment alone. For employers, it keeps the workforce ready for an economic upswing. And for the government, supporting a worker whose hours are reduced is much less costly than paying full unemployment to more laid off workers.

The German program this year has cost about $2.9 billion. Adjusting for the larger US population, that suggests the US could fully copy the German system for $10.6 billion -- about 1/70th the cost of the $750 billion economic stimulus last February, estimates Kevin Hassett, economic analyst at the American Enterprise Institute.

A program based on Germany's work-share model would be attractive to firms, workers, and taxpayers because it is cheaper than paying unemployment and it keeps more people employed. That in turn would help maintain consumer spending, which is a big driver of the national economy.

Seventeen US states allow this sort of work sharing, but few companies are participating, mostly because, unlike in Germany, the government's contribution is not large enough to make work-share attractive. The public sector has used furloughs of some state employees, which is a form of work-share, and that has helped prevent layoffs. But without private sector participation, work-share has been too minimal in the US to prevent a doubling in unemployment.

Sen. Jack Reed (D) of Rhode Island and Rep. Rosa DeLauro (D) of Connecticut have attempted to remedy this by proposing bills to expand existing state work-share programs, but the White House refused to support them. That's because administration officials say they want to "create" new jobs rather than "save" old ones. But that distinction is silly, says economist Dean Baker. Reducing the number of layoffs by a million workers has the same impact on the labor market as creating a million additional jobs.

Obama's proposal to use some TARP money for lending to small businesses could help, as could his proposal for a modest increase in stimulus spending for New Deal-type jobs to rebuild America's infrastructure. But like so many of Obama's initiatives on so many fronts, his administration's efforts seem timid and unimpressive. China is spending billions in stimulus funds on public works projects. Indeed, China plans to spend $300 billion in the next decade to build a high-speed rail network, while the United States has allocated only $13 billion over the next five years. Europe and Japan already have been spent tens of billions to produce the world's most extensive high speed rail lines.

But it seem unlikely that an increasingly deficit-fixated Congress will go for such ambitious plans, whether for high speed rail or any other infrastructure stimulus spending. And Obama, hamstrung by the challenge of winning 60 out of 100 votes in the Senate, is being thwarted on nearly every major front by the most sclerotic form of minority rule that dominates in America's own House of Lords.

It's time for either some new ideas from across the Atlantic, where "social capitalism" is weathering this storm better than U.S.-style "Wall Street capitalism," or for an old idea from America's last president to deal with an economic crisis of this magnitude. If the White House can't figure this out, it may end up as Obama's "Katrina moment," hurting the country as well as his political fortunes.

Information for this article has been drawn from the author's new book, Europe's Promise: Why the European Way Is the Best Hope in an Insecure Age. A different version of this article was published in the Christian Science Monitor.