Create Jobs Now!
I have a conference in London starting Thursday (Association for Heterodox Economics at Kingston University) and have been busy preparing for that. But I suddenly find myself pretty much packed, so here’s a quick entry before I head off tomorrow! I wanted to draw your attention to two posts on the UMKC Dept of Economics web site, both authored by Pavlina Tcherneva.:
“Bring the Stubborn Unemployment Numbers Down Now”
and
“A Message to President Obama: Stop Priming the Pump, Hire the Unemployed”
What she is essentially arguing is that trying to create jobs by stimulating the macro economy (via spending and tax cuts) is too indirect. We are expecting private sector spending to pick up sufficiently to employ the unemployed or, at least, stop the layoffs. But the private sector has already failed us and is in headlong retreat. Banks, firms, and households are not likely to take any newfound tax savings or stimulus money and rush out to buy goods and services or build new physical capital (and remember from the series of lessons below that it is the latter that is the most crucial element in determining the overall level of economic activity). Money will be saved and debts paid down.
This is not to say that there will be no positive effect from the stimulus. Of course, some jobs will be saved/created, but we get very little bang for our buck. It very likely will not be enough and that may provide naysayers with the ammunition to block further efforts (which the Obama administration has generally right, but remains handicapped by the advice being proffered–a bit more about this below). Why not, argues Tcherneva (following a long line of Post Keynesian economists, including her colleague, Randy Wray) directly hire people through government works projects? She writes:
An immediate targeted intervention is precisely what Keynes would have prescribed–ambitious and creative public works projects that put the unemployed men and women to work. A number of us on this blog have long advocated large scale New Deal-type programs. If President Obama expects to meet (and possibly exceed) his job promise, targeted intervention in the form of direct job creation is in order. If he wishes to create 4 million jobs, he can immediately put 4 million people to work (recall that most New Deal programs were up and running in just a few months).
This is dead on. In this effort, I would argue that the government should find tasks that are 1) not profitable, since profitable undertakings are the realm of the private sector (there is no point in the government duplicating the efforts of the private sector by opening a chain of restaurants, for example), and 2) of obvious and accepted social benefit so that the jobs created are considered legitimate by the public. From an economic perspective, the latter is not strictly necessary, but it’s politically important and, why not? We might as well get something done we’ve all thought needed to be done, but wasn’t profitable to undertake (and therefore had not already been addressed, or addressed adequately, by the private sector).
We shouldn’t have much trouble finding projects that meet these criteria. During the FDR administration, historians were hired to, among other things, go around the country and interview the few remaining ex-slaves (all of whom had been children at the end of slavery). Their words and thoughts would have been lost forever, but they were recorded for posterity. Right now, we have the WWII generation almost gone. Who knows what stories are about to be lost forever? A far more important place jobs could be created is public education, which is constantly starved of resources (particularly right now when state governments are having to rein in spending). I don’t’ think those of us who are relatively well off have any understanding of how basic resources are in many school districts. My wife, who teaches in a working-poor neighborhood, remembers when a very controversial plan to shift funds to her area (and others like it) allowed them to finally buy carpet for their library. She said it made a huge difference in making it a quiet and comfortable place to sit and read. In terms of making jobs, keeping class sizes small and being able to pull students out for one-on-one work is terribly important, but will no doubt be among the first casualties of falling spending–hire more teachers and aids!!! This could be a source of important employment whose ultimate impact would be felt for years to come. It is an investment in our country’s future. There are many more non-profitable but socially-useful opportunities for hiring: long-term research, defense spending, infrastructure, law enforcement, education, social services, etc., etc. When we run out of social problems, then we’ll deal with that problem! Remember throughout all this that our economy absolutely and without question has the physical ability to produce plenty of goods and services for all. We have the capacity, but what we lack is a consistent means of generating sufficient jobs so that everyone can share in the output. And the private sector simply can’t do it alone. Nor can the stimulus package as currently designed.
President Obama, start hiring people now!
AN ASIDE ON ECONOMIC THEORY AND OBAMA’S ADVISORS
Keynes wrote in the General Theory, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist.” When I read this the first time in graduate school, I didn’t buy into it. But, over the years, I have come to realize just now correct he was. While we can certainly place a lot of blame on our current woes at the feet of various policy makers, it was the economics profession that gave them the intellectual authority to act. Had economists stood up and said, “No, don’t deregulate the banking industry!” for example, then it wouldn’t have happened. Indeed, many economists rushed to approve of policies that assumed that markets are rational, efficient, benevolent, and natural.
I argued in my series of lecture posts below that this characterization of markets is faulty. I won’t go into it again here, but, generally speaking, markets are nothing more than tools. For some jobs, they are ideal; for others, they are wholly inappropriate. It’s up to use to use our reasoning powers to decide which is which (without assuming the answer ahead of time). Furthermore, markets are every bit as fickle, ignorant, and arbitrary–or consistent, well-informed, and rational–as those populating it.
Going back to my main point here, it distresses me that Obama’s economic advisors are drawn basically from the same group that approved of the earlier policies that made the financial crisis possible. Christina Romer, Timothy Geithner, and Lawrence Summers are members of the Neoclassical school of thought:
Wikipedia Entry Neoclassical Economics
Though they belong to a less orthodox strain thereof, they still have as their basic premise the idea that the market economy works well and takes care of itself. They think that events like our current recession are transitory, unusual, and eventually correct themselves. I hope that this advice does not condemn the policy coming from the Obama administration to being too little, too late. Worse still, I fear that any policy failures caused by this timidity may give ammunition to those from the hard-core camp who believe that what we need now is to retreat and let the market “correct” itself on its own. It would very quickly correct several million more jobs out of existence.
Some Recommendations for Further Reading
Since I have been very busy this summer and am about the leave the country for a conference, I thought I’d recommend a couple of sites in lieu of doing something myself:
UMKC Economists Blog Spot: http://neweconomicperspectives.blogspot.com/
You won’t find the Department of Economics at the University of Missouri at Kansas City on any lists of “top” economics programs, but if those rankings really counted something useful then they’d be very near the top. It’s readable and relevant.
Levy Institute: http://www.levy.org/
One of the top think tanks in the world. You can spend hours sifting through the materials (and you’ll see some overlap in personnel with UMKC).
Duncan’s Economic Blog: http://duncanseconomicblog.wordpress.com/
Duncan’s economics is very much like mine, but he actually keeps up with his blog!
Now to finish packing for London!
P.S. I did an edit of the previous post–hope it comes across more clearly now!
Spending too much or earning too little?
I’ve seen a lot written on how the current downturn is a result of us “spending beyond our means.” This is a classic example of fallacy of composition, or the false assumption that the properties of the phenomenon at the individual level match those at the aggregate. Consider, for example, this statement:
If the Texas Rangers baseball team could improve their pitching then, everything else being equal, they would win more games.
Fair enough. But, does this translate to all of Major League Baseball?
If all baseball teams could improve their pitching then, everything else being equal, all teams would win more games.
Of course not, since at the aggregate level it is a zero-sum game: for every win there is a loss. The winning percentage for all of baseball is always 50%, regardless of what changes are made to the quality of the teams.
There are times, however, when the properties of the phenomenon at the individual level match DO those at the aggregate:
If the Texas Rangers baseball team added more free-giveaway nights, then they would sell more tickets.
And…
If the all baseball teams added more free-giveaway nights, then they would all sell more tickets.
Very possibly. The trick is knowing when the properties transfer and when they don’t.
Returning to economics, many have argued that our current problem is that people and firms “spent beyond their means.” The implication is that they took on commitments that, given their incomes, they could not honor. This lead to default and economic contraction.
Is this possible for the individual? Of course. I could prove this very quickly by rushing out right now and buying a new car, house, big screen TV, etc. I can obviously do so to the point that I will not be able to repay (particularly over the past decade when banks were very eager to loan and not so eager to double check your credit score!).
HOWEVER, THE ECONOMY AS A WHOLE CANNOT SPEND BEYOND ITS MEANS!!!
The macroeconomy seen as a single unit does not have to “finance” projects. In fact, it cannot. Either we have the resources, technology, and productive capacity to make a big-screen TV or we don’t. If we don’t have enough steel, for example, to make a car today, then the economy cannot borrow “future” steel and thereby find itself facing some day of reckoning when it has to repay itself. Finance and debt are about shifting spending power from one entity to another, and that can only happen on the individual level. Thus, while individuals can find themselves with debt they cannot repay, the economy as a whole cannot. Therefore, it is incorrect to say that we tried to live beyond our means. The standard of living enjoyed up to the recession was perfectly within our means and there is no logical reason why it should not have continued.
So what was the problem? Think about this: if, as a macroeconomic unit, we had the resources, technology, and productive capacity to produce all those houses, cars, TV’s, meals at nice restaurants, etc., then why did people have to go into so much debt??? Why weren’t our incomes sufficient to buy those absolutely-affordable goods and services without debt or at least with minimal, and thus affordable, debt? Therein lies the problem. We didn’t spend too much, we earned too little. Not only is there a systemic issue with respect to market economies being unable to generate a reasonable number of jobs for all those willing to work (see the discussion below), but income distributions have been becoming more and more uneven. Those who form the backbone of consumer demand, the middle class, have been losing relative income shares to the rich. This is all great fun for the rich in the short run, but it leads to what we have right now in the long run: falling sales, default, unemployment, recession, etc.
Hence, the focus of policy right now must not be on cutting back spending. Why should we? We can afford all that stuff, and buying it is what creates jobs and incomes for others. Rather, policy should create income and offer incentives for spending money. The private sector cannot do this alone because as we stand right now, all individual incentives are to restrict spending.
Happy Memorial Day!
Those of you who know me, know that the one academic subject I love more than economics is military history. I therefore present to you my Memorial Day Quiz!
And shut up about the budget deficit!!!
TO ALL THE IGNORANT PEOPLE I KEEP SEEING ON TV AND MY COMPUTER MONITOR:
For crying out loud, there is simply no way to increase the level of economic activity at present without increasing the national debt. “Oh, no, what about our grandchildren?!?!?!” To whom do you think we owe the majority of this money?! 70% is owed to Americans, and of that over half is owed to the Federal Government. Furthermore, US debt is an extremely safe form in which to save, and at any given time there are trillions of dollars worth of saving worldwide. My point is that while each particularly treasury bill must be repaid, there is simply not now or ever any reason for the us to reduce the national debt to zero. Ever. People want to save, and US debt is a popular means by which to do so.
So a) trying to reduce the budget deficit in the midst of a deep recession is idiotic, b) it’s not like the national debt has to be reduced to zero at some point (far from it, in fact it’s been much larger as a percent of GDP), and c) even if we did have to do that, 70% of the money just goes to other Americans.
Sorry for my tone, but we are in desperate times and the sort of economic ignorance that I keep seeing labeled as “analysis” scares/annoys the hell out of me. It’s scaremongering and it’s liable to make things much worse.
Stop Looking at the Stock Market!!!
Just a quick note to officially record my frustration with the frequent use on the part of the media to measure the success of economic policy by it’s impact (or assumed impact) on the stock market. It’s those same financial geniuses that got us in this mess in the first place, and deciding whether or not we are doing the right thing by watching their reactions is not logical. We absolutely must break with the notion that financial markets are rational, reasonable measures of our material well being. They are not. GDP growth and unemployment are, and it will still be some months before we see them recover. God forbid that we sabotage that process because we felt as if we weren’t doing enough for Wall Street!
Honestly, I haven’t forgotten!
I’m just dead beat! This week is finals, then I teach a three-week summer course. Maybe I can do an update soon. Or, maybe something else will come up! Frankly, I’m shocked that I got as much written as I did!
Still no updates!
Working like crazy on the college undergraduate research festival and the paper I have to have finished by May 1 (not to mention the regular stuff I am supposed to do). I just haven’t had time to work up anything for this, though I have the skeleton of a forecast complete.
Apologies for lack of posts!
Sorry, all, but I’ve been really busy with the work they pay me to do! And I’m afraid it may get a bit worse in the coming weeks as I am scheduled to give three exams, plus I am co-chair of our undergraduate research festival that is coming up. However, I plan to make two posts: “what we are doing vs. what should be done” and “when will it all end?” The latter includes a guess, err, estimate of when recovery should start. How exciting!
13. What Must Be Done? Policy Recommendations
[NOTE: Be sure you have read part 12 before this one! This is part of a series of posts that explain the operation of the macroeconomy and the current crisis and they build on one another.]
As I mentioned in part 10, economics is ultimately about policy. At the end of the day, the reason for all the graphs, equations, charts, data, etc., is to decide how we should organize the economy. In order to make such a determination, we have to know 1) what we think should happen, 2) what is happening, 3) why there is a difference between 1 and 2, and 4) how that can be corrected. With respect to 1, let’s say this boils down to low unemployment and high rates of economic growth. I’d figure acceptable unemployment to be around 4% and a decent rate of GDP growth to be 3% or so.
What do we actually have? As of this writing (February 8, 2009), we have 7.6% unemployment (January 2009) and a rate of real GDP growth of -3.8% (fourth quarter 2008). The former is the worst in sixteen years and the latter is our lowest in over twenty-five years, and forecasts are not optimistic. Those unemployment numbers mean we have 11.6 million people who are looking for jobs–more than the entire population of Cuba, Greece, or Belgium (in fact, more than most countries). Note, too, that the way unemployment statistics work, it’s actually rather easy to count as employed (one hour of paid work in a week means you are employed) and that folks who have given up looking don’t count in the numbers (which will occur as this drags on but probably isn’t a big factor at the moment).
Part 3, has this happened? This was already covered in parts 11 and 12 and can be boiled down to the following:
Systemic Factors (Part 11)
Fall in Investment
Fall in Consumer Durables
Increase in Debt Levels and Consequent Default
Panic and Collapse of Animal Spirits/Spontaneous Optimism
Historical Factors (Part 12)
Financialization
Housing Market Bubble
Income Distribution
These are the reasons why we find ourselves at the opening stages of one of the worst economic downturns since the Great Depression. That just leaves part 4, how to fix it. Following the pattern established above, I want to break the factors into those addressing systemic factors and those fixing the historical factors.
Systemic Factors
DOH! I didn’t realize that I’d already done this in part 10 and consequently spent several hours writing and rewriting section, always with a strange sense of deja vu. Let me salvage from my wasted efforts an overview that I did not include in the previous installment.
At any given moment, there is a finite number of jobs the private sector can profitably support. Critically, there is no guarantee that this number is equal to the number of folks who actually need a job. In fact, as productivity increases and we need fewer people to make the same amount, so it becomes even less likely that the number of potential jobs is equal to the number of people in the workforce. This long-term process is exacerbated when activity in the investment and consumer durable sectors declines at the end of the expansion. It is the great irony of capitalism that at the very moment when we should be enjoying our highest standards of living–when all the factories and restaurants are built and everyone has a new car, new kitchen appliances, additions to their homes, etc.–is when we suffer. Just two years ago, our unemployment was 4.4% and represented only 6.7 million people. Why not now? Because even though we have at least the same productive capacity as then (more, actually), entrepreneurs, quite reasonably, don’t find it profitable to employ people. When you employ someone, they get those little green pieces of paper that entitle you to a share of the stuff we can build and that in turn make it profitable to have made that stuff.
What we therefore need to offset these systemic problems is some source of those little green papers that do not depend on entrepreneurs deciding they can make a profit–the Federal Employment Commission (FEC) mentioned in post 10. The profit motive has done all it can, so the government sponsors employment that can fill the gap in the meantime. When the economy recovers, the government pulls back.
Before I move on to the historical factors, let me quickly mention that the way government spending is structured, we already have some built-in automatic stabilizers. I’d much prefer something along the lines of an FEC, but even now, when the economy goes south, government spending automatically increases (in terms of unemployment insurance, welfare, food stamps, etc.) and the average tax rate and tax revenues fall (since incomes go down). This has definitely had an impact. Before WWII, when the government was tiny and the free market was given greatest freedom, the average recession was around 21 months and the average expansion was roughly 25 months–almost exactly the same. Since, WWII, recessions have lasted 10 months and expansions…wait for it…52-months!!! The latter number is heavily influence by the 120 month expansion in the 1990s, but even dropping that out gives a very respectable 44-month duration for pots-WWII expansions. This is certainly a successful record, but I believe that there must be more careful consideration and monitoring of the programs we undertake so that we can better position ourselves for future challenges. This is particularly so given that the orientation of the private sector has become so short term, a problem created by the historical factors discussed next.
Historical Factors
Of the three items listed here, financialization and the housing market bubble can probably be addressed together. They are a function of the slow but steady shift in our economy from a focus on producing goods and services to managing financial wealth. This is discussed at length in part 12, and we saw the consequences play out over the past year. Increasingly complex and opaque assets were created by people who had no long-term interest in whether or not the assets would be profitable in the long run because they wouldn’t own them any more. The goal was to make a quick buck without really adding anything of value to our pool of goods and services. Furthermore, we are outsourcing low-profit activities in order to raise stock prices. Those activities are typically the ones that employ the most people.
We must reverse the trend of financial market deregulation. The rules limiting the ability of financial institutions to take risks (the costs of which fall upon others) were originally implemented around the Great Depression and because of events very much like those we are witnessing today. Policy makers decided starting in the 1980s that we didn’t need them any more since we hadn’t had any serious issues for many years. That’s a bit like saying that we no longer need seatbelt laws because traffic deaths have declined! They were encouraged by economists who argued that markets were rational and could not consistently make errors.
Finance should be the servant of output and employment and not the other way around. Stock prices and banking news should be a footnote, not the headlines. This is going to be a bitter fight and I am frankly not optimistic because those in the financial sector have a vested interest in keeping things as they are. Let me close this section by quoting from an excellent article in the New Yorker (http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy):
The greatest need is for intellectual reappraisal, and a good place to begin is with a statement from a paper co-authored by Minsky that “apt intervention and institutional structures are necessary for market economies to be successful.” Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it. Among the problems at hand: how to restructure Wall Street remuneration packages that encourage excessive risk-taking; restrict irresponsible lending without shutting out creditworthy borrowers; help victims of predatory practices without bailing out irresponsible lenders; and hold ratings agencies accountable for their assessments. These are complex issues, with few easy solutions, but that’s what makes them interesting. As Minsky believed, “Economies evolve, and so, too, must economic policy.”
Very well said.
As I suggested in part 12, economies with uneven income distributions have weaker economies. There are several reasons for this, but one is the fact that the rich don’t spend much money. The same $10 million dollar salary spread over 100 people generates much more spending that it does if it’s all one person. Income distributions have been deteriorating for the past 40 years and they did the same thing before the Great Depression. Economic growth, when it comes, must be directed toward wage earners and not those scraping the profits off the top. As I mentioned in part 12, this is not a fairness issue, it’s a question of the survival of our system. We can address this through the tax structure, health care reform, and education. If the poor continue to get poorer, the core set of people of create demand for goods and services will be made impotent.
We also have to thing seriously about controlling immigration. With a limited number of employment opportunities, they are not only taking some of those jobs, but they are driving wages down because they are increasing the supply of labor. Mexico certainly has no incentive to help in this process since the status quo provides for them a release valve for their myriad and increasingly serious social, political, and economic problems. Ideally, the best immigration policy would be a strong, healthy Mexico and we cannot forget that. But, that’s not going to happen overnight, and so we need to think seriously about finding some stop gaps while at the same time encouraging long-term reforms that help the poor work their way up (something about which those currently in power don’t care too much about).
That’s it for now. I’m giving exams all week so I may not have another update for a while, but what I want to do next is review the policies currently being discussed and talk about how they fit with what I’ve recommended here.
