Navigating the Jobs Crisis: Time to Try Government as Employer of Last Resort
In the wake of the highest unemployment rate in 25 years, the Roosevelt Institute asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. Marshall Auerback calls for government to step in as employer of last resort.
At 10.2%, unemployment is now at its highest level since 1983. Nearly 16 million people can’t find jobs even, though we are constantly being told that the worst recession since the Great Depression has officially ended. Yet instead of trying to revive the productive economy, most of the Obama Administration’s recovery efforts still remain focused on cardio-shock treatment for Wall Street. The President still seems curiously hamstrung by his Herbert Hoover-like devotion to fiscal rectitude: he wants to spend but not add “one dime to the deficit,” as he announced at his Congressional address on health care in September. He does this even though deficits are a natural consequence of slowing economic growth, falling tax revenues and higher social welfare payments.
To all of the “Chicken Littles” (including the president), who fret about “excessive” government spending, we would simply point out that it is far better to deploy government spending in a way that reduces unemployment instead of settling for having it rise as a consequence of this spending.
We therefore suggest a new approach: Government as Employer of Last Resort (ELR). The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. A sizable benefits package should be provided, including vacation and sick leave, contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom-up reform of the current patchwork health care system.
Government as ELR would not be introducing another element of intrusive bureaucracy into our economy, but simply better utilizing the existing stock of unemployed, who are now dependent on the public purse — especially the chronically long-term unemployed. The current system we have relies on unemployed labor and excess capacity to try to dampen wage and price increases; however, it pays unemployed labor for not working and allows that labor to depreciate and develop behaviors that act as barriers to future private-sector employment. Social spending on the unemployed prevents aggregate demand from collapsing into a depression-like state, but little is done to enhance future growth and demand, which can be done via the ELR by providing the currently unemployed with jobs, greater education and higher skill levels.
The ELR program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption. It would also command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to ELR employees. Additionally, the guaranteed public service job would be a counter-cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. It would therefore remain a permanent feature of our economy. In effect, it would act as a buffer stock to put a floor under unemployment. The program helps maintain price stability whereby government offers a fixed wage that does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.
A more or less “free market” system does not (and, perhaps, cannot) continuously generate true full employment. And no civilized nation should allow a large portion of its population to go without adequate food, clothing and shelter. One of the best features of the ELR program is that it creates a stock of employed people, rather than a buffered stock of unemployed, where social capital depletes rapidly, and several long-term social pathologies develop.
The way we’re approaching our labor force now isn’t working. It’s time to try something that can put as many Americans as possible into productive employment.
~~~
Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security (http://www.epsusa.org/). He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute (www.jpri.org) and is a contributor to The Big Picture. Auerback is also a fellow at the Roosevelt Institute.
via New Deal 2.0
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February 21st, 2010 at 10:37 am
It is nice to see some of the University of Missouri – Kansas City influence represented here on The Big Picture. For those not familiar with this group’s work, a sampling is found here – http://neweconomicperspectives.blogspot.com/
February 21st, 2010 at 10:41 am
“It’s time to try something that can put as many Americans as possible into productive employment”
sounds good – but who determines what is “productive” employment?
question 2 – if we have an ELR program – does that mean we get rid of unemployment insurance (perhaps exceptions for disabled workers, etc)?? I thought i’d previously heard ELR advocates saying it would not supplant unemployment insurance, but Mr. Auerbeck seems to be suggesting here that ELR would replace jobless benefit programs (“The ELR program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption”) – I think ELR is much more feasible if it does replace these existing gov’t welfare payments.
February 21st, 2010 at 11:04 am
This just shows the naivety of Keynesians. Auerback must have dusted off the propaganda from the 1930s and thought it would be great to throw it out today. So people who are receiving unemployment benefits are stating to have their psyche affected because they aren’t actively employed. So giving them a shovel for government infrastructure projects will lift their spirits. At least with unemployment, they can pursue a job in their chosen career path or search for a new career. The reason the government instituted the jobs program in the 1930s is because there was no safety net.
Another point that baffles me is how Auerback thinks the government can smooth out the employment cycle, just as Keynesians believe the business cycle can be cured by the government. As we have seen, the eventual downturn is even worse when the government messes with the cycle. This current de-leveraging crisis is due to poor government and Federal Reserve decisions made during the previous downturns. It wouldn’t be any different if the government attempts to alter the employment landscape.
February 21st, 2010 at 2:03 pm
@SwimUpstream –
I would hope that something more sophisticated is contemplated than “giving them a shovel for government infrastructure projects to lift their spirits”, but the devil is always in the details. To my mind, the investments need to be made in areas which have the most significant long-term impact on productivity, particularly education and energy resources/efficiency. If there isn’t a macro productivity contribution, then I likewise would have difficulty with the concept.
February 21st, 2010 at 3:04 pm
I believe Marshall Auerback is proposing the following:
Just as there is never enough money in the economy to pay anything but the interest on outstanding debt, consistent under-employment is key component to maintaining corporate profitability (through downward pressure on wages).
When these major crises occur, the level of unemployment becomes socially unacceptable, and collective angst becomes palpable. In order to quell this collective irritability, social programs must be expanded/devised to take care of those unable to find employment. Direct welfare payments keep most off the streets, but do nothing to hide the enormous systemic economic failure. Although a workfare program would create jobs of questionable value, but would most importantly create the illusion of an economy, ‘not so sick.’
The cost of these programs can easily be foisted upon the middle class (or what’s left of it), just as the beneficiaries of the labor will be the current beneficiaries of nearly everything in this country. I think that this is probably what Mr. Auerback had in mind.
February 21st, 2010 at 9:25 pm
Americans don’t have enough money to spend, save or invest. The government can create limitless money. The government either can mail money to Americans, ala the initial $150 billion stimulus or it can pay money for work. Either approach, if done in sufficient volume, would end the recession.
The problem with the $150 billion stimulus mailing: I was too little, too late, which I predicted way back on April 9, 2008 (http://www.rodgermitchell.com/medialetters.html April 9, 2008 Email to the Chicago Tribune). Hiring people to receive money for work, is thought by some to be preferable to merely giving them money. I’m not sure, as it would require setting up yet another bureaucracy — but then again, that alone would employ people.
What the government really should have done, and still should do, which I have recommended for many years, is to support Medicare and Social Security without the FICA tax. Do that and the recession will end tomorrow.
Rodger Malcolm Mitchell
February 21st, 2010 at 9:39 pm
Mr Auerback,
what you naively and in a Utopian fashion are proposing has already been tried and IT DOESNT WORK. Oh, no, I don’t mean the USSR (that too), I mean the…USA. If you work for the government you can retire at 55 and you cannot get fired and you will belong to a union and you will have EXCELLENT benefits, including health care..; and the taxpayer will NOT get his money’s worth of services, witness say the IRS or the Post Office…Want my opinion? stop whining and get the Government OUT of the way…
February 21st, 2010 at 10:34 pm
At some point, people are going to realize that we’ve been deliberately impoverished.
Also, it is time we recognize that government surpluses cause recessions.
I know the neo-classical theory says otherwise, but my empirical evidence says the theory is bullshit.
Three multi-year government surpluses in the last 110 years. 2 were over 3 years. All had recessions immediately following, and 2 had depressions.
1926-1930 Anything bad happen after that?
1997-2000 How has the last 10 years been?
Has Japan ever run a Surplus? Oh yeah, that’s right – the late 1980s! Japan has been a great economic growth story after that, right?
You would think that overwhelming empirical evidence would make people question a theory. But if you are a neo-classical UoC guy, you don’t need no stinkin’ data!
February 22nd, 2010 at 11:30 am
Mike is correct, but the debt hawks mentally are fixed with the notion that since large debt is bad for people, it also must be bad for governments. The facts that are ignored by debt hawks:
–All six depressions in U. S. history have resulted from a series of federal surpluses (Go to the bottom of http://www.rodgermitchell.com)
–Every recovery has come during deficit spending
–The federal government has the unlimited ability to pay its debts.
–The government borrows by creating T-securities out of thin air, then selling them. The government, just as prudently, could create money directly, also out of thin air. Functionally, no difference, but it would eliminate all the debt that scares debt hawks.
–A growing economy requires a growing supply of money and deficit spending is the government’s method for creating money. Without deficits, the economy would go into free-fall, and never recover.
Talk about printing money to a debt hawk and he (she?) reflexively will say “inflation.” While it theoretically is possible for excessive money creation to cause inflation, that seldom happens in the real world, and when it does, it easily is cured by raising interest rates. Following the end of the gold standard (1971) all inflationary periods have been caused by high oil prices. Reagan’s massive deficits didn’t cause inflation, though they did introduce a long period of prosperity. Today’s huge deficits have not caused inflation.
If you ask debt hawks for proof, they either will ignore you or call you names. Example: Go to the Concord Coalition web site and see if you can find one piece of evidence that deficits are harmful. You’ll find none. Then write to them and ask for proof. You’ll receive none.
They simply believe, believe, believe.
Rodger Malcolm Mitchell
February 22nd, 2010 at 11:56 am
Whoops! You made a mistake. You clicked on the wrong site to post this article. The site you want is:
theonion.com
They really appreciate your form of satire there ;)
February 22nd, 2010 at 1:11 pm
Quote from Mike S.
“Also, it is time we recognize that government surpluses cause recessions.
I know the neo-classical theory says otherwise, but my empirical evidence says the theory is bullshit.
Three multi-year government surpluses in the last 110 years. 2 were over 3 years. All had recessions immediately following, and 2 had depressions.”
My god!!! How many times do we have to go over the fallacy of correlation versus causation???
This is quite possibly the most misguided example I’ve ever seen. It’s akin to whenever I get a runny nose, I get sick, therefore the runny nose is what caused me to be sick. The surpluses seen prior to the recessions/depressions, most likely were caused by common factors…. overleveraging and debt buildup that overstated earnings (and therefore tax revenue) in the good times and ulitmately ended up damaging the system (recession/depression). Come on, use a little bit of intuition and logic people.
February 22nd, 2010 at 1:22 pm
Until I saw this post –
http://www.ritholtz.com/blog/2010/01/steve-keen-on-the-modern-economy-and-the-outlook/ -
and followed the links suggested by Tom Hickey, along with a subsequent exchange of thoughts with Rodger, I held similar misconceived notions about deficits, gold standards and employment. I still have some concerns about the details of some of the employment ideas, but now have a fundamentally different view of how economies work as a results of reading Wray, Minsky, and others from the University of Missouri crew.
February 22nd, 2010 at 4:44 pm
Thatguy said, “Come on, use a little bit of intuition and logic people.”
And therein you see the problem. To debt hawks, it’s only logical and intuitive that debt must be bad. Forget all the facts. Ignore all the data. Debt simply must be bad. And those recessions and depressions — they “most likely” were caused by debt buildup — or something.
I remember when it was logical and intuitive that stress caused stomach ulcers — until evidence showed that a bacterium does. Of course, it also is logical and intuitive that the world is flat.
You’ll notice that Thatguy does not supply any evidence to support his belief that federal debt should be minimized or reduced — or something. The debt hawks never do. They just say, Debt is big; big debt is bad. Why? Because it’s logical and intuitive.
Rodger Malcolm Mitchell