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Home Publications Blogs Beat the Press Getting to Full Employment: It Actually Is Not That Complicated

Getting to Full Employment: It Actually Is Not That Complicated

Saturday, 17 August 2013 21:20

There are two types of people in the world: those who make complicated things simple and those who make simple things complicated. Paul Solman seems determined to convince us he is in the latter camp with his insistence that there is little or nothing we can do to address unemployment.

He raises many points in his response to my post, but I will start with a small one. Economics actually does not teach us that “every decision has both benefits and costs.” For example, if we can find a shortcut on our drive to work, that is a decision that will only have benefits. Just like finding a faster way to get to work, there are in fact many cases in economics where we can identify policies that have benefits with little or no obvious costs.

Creating jobs in an economy that is suffering from inadequate demand, as is the case in the United States today, is in fact one of these cases. While Solman seems to believe  that something bad happens if we put people to work, he never even hints at what it might be. Will aliens descend from the sky and steal our children? Will rivers flow upstream? What exactly is the bad thing that happens if the government spends money to put people back to work?

Economists who oppose such spending usually argue that it will cause inflation, but most have recently  become more quiet arguing this case because the argument suffers from a serious lack of evidence at this point. Inflation has been falling just about everywhere in spite of substantial deficits and vast amounts of money put into the economy by the Fed and other central banks. Of course Solman doesn’t make the inflation argument, so readers can only guess as to what bad event he thinks occurs if we run deficits to put people back to work.

His main concern seems to be that demand will not come back to employ people even in the long-term, but this raises two issues. First, why is this an argument not to employ people now? Lives are being ruined today because workers can’t find jobs and properly support their families. Solman certainly gives no reason as to why he thinks demand will not return in the longer term, so what benefit are we getting by ruining people’s lives with unemployment?

The second point is that there are intelligent things that can be said about the loss of demand and the long-term prospects for its coming back. Unlike the overwhelming majority of people who talk about economics on the Newshour, some of us were not all surprised by the economic collapse in 2007-2008. I in fact warned about the housing bubble for years and that its collapse would likely lead to a recession. This was not a random bad event from the sky; the downturn was a 100 percent predictable for anyone paying attention to the economy and doing their homework.

It is also possible to describe the circumstances under which demand will return. In the short-term we can only make up the shortfall with more government spending. But this does not mean make work jobs as I will explain in a moment.

In the longer term we will have to get our trade deficit down, the current deficit creates a huge shortfall in demand. This can be done with a decline in the value of the dollar against foreign currencies , which will make our goods more competitive in international markets. This is all very basic economics – and by the way, zero of this is 20-20 hindsight. This is an argument that I made at the start of the downturn and even before the housing bubble collapsed.  

Let’s get back to the government creating jobs. For some reason Solman is obsessed with the idea that I want people to dig holes and give massages. In fact, state and local governments have cut back employment by almost 700,000 in the last four years. These are people who were working as school teachers, firefighters, or providing health care and other services. These don’t fit my bill of make work jobs.

If the federal government had given state and local government the revenue needed to sustain these jobs through the downturn, these workers could still be on the payroll. If state and local employment had continued to grow at its pre-recession pace (as it did in recessions under the well-known socialists Ronald Regan and George W. Bush) we would have an additional 1.7 million people employed by state and local governments. If we assume a modest multiplier effect of 0.5 jobs created as a result of the spending by each of the public employees, then we are up to 2.4 million more people working without a single make-work job.

Then we can deal with some longer term problems like global warming. The Obama administration had subsidies for people making their homes and businesses more energy efficient or installing solar panels. Why not have more and bigger subsidies? Yes, if we have a big program someone somewhere will find a way to rip off the government. If we applied the same standard to every program we would have shut them all down long ago, including the military and the courts.

What’s the downside here? We know we have unemployed construction workers and if we don’t reduce greenhouse gas emissions we will be giving our kids a ruined planet.

There also is no law against being creative. Suppose we gave local governments money to make bus service free for three years. People could take buses as much as they want at no charge. It would make the rides quicker (no one has to fumble for change when they board the bus) and people might find they like it. Again, what’s the downside? Rich people will take buses who could afford the fare?

And we can spend money on modernizing the infrastructure, research in a wide range of areas, and even subsidizing education for young people who can’t find work in the downturn. And, I would have make work jobs. How about time-limited (e.g. 2 years) jobs for young people in inner cities where the youth unemployment rate exceeds 40 percent? Is that too socialistic for a country that gives trillions of dollars in below market loans to Wall Street banks?

I and others have given our wish list of places to spend money that will both generate jobs in the short-term and make the country better off in the long-term. Since we have so many obvious needs, make-work jobs really don’t have a place on the list except in the extreme case of inner city youth.

The basic question here is a very simple one, is the massive loss of jobs since 2007 a supply side story or a demand side story. It is easy to tell the demand side story. The collapse of the housing bubble that had been driving the economy cost the economy more than $1 trillion a year in demand. There is no easy way to replace this demand. As noted before, the economy is pretty much following the script that I wrote before the collapse.

As far as the effort to tell the supply-side story, frankly we are getting a lot of silliness that doesn’t add to much of anything. For example, Solman again tells us that the workforce is aging into retirement. That’s fine, but that explains almost none of the decline in employment. As I noted in my prior post, the employment rate for workers between the ages of 25 and 54 has dropped by 4.4 percentage points, a decline that translates into 5.6 million fewer people working. If we throw in the 7.1 percentage points drop in the employment rate of young people, it explains a loss of another 3.1 million jobs.

In other words, if the same share of people under age 55 were working today as in 2007 we would have another 8.7 million people working. That is simple arithmetic, we can talk about retiring baby boomers another day.

Solman also gives us the story of his reader who tells us about a job offer (apparently one of many) for $110,000 a year plus stock options. It’s great to hear someone is doing well, but it’s hard to know what this has to do with the time of day.

We have a fantastic young quarterback in Washington named Robert Griffin, who any team in football would gladly pay $25 million a year. Back in the Great Depression, Babe Ruth could have commanded a huge salary wherever he played. Are these examples of highly paid people somehow proof that there is no problem of unemployment due to a lack of demand?

The challenge that economists pose here is whether there is a significant sector of the labor market showing evidence of a labor shortage, most importantly rising wages. In my prior post I looked at obvious suspects like science and engineering fields and noted that wages are not even keeping pace with average productivity growth.  If Solman or others can find a major occupation or area where we do see evidence of labor shortage then we can have an argument, but finding a few people who appear to be doing well in labor market of 150 million really doesn’t tell us anything.

Again, this is a simple question of whether the plunge in employment is due to a lack of demand or supply problems. There is very clear story of how this is a demand problem created by the collapse of an $8 trillion housing bubble.

We know how to create the demand to put people back to work. Refusing to implement these policies means ruining millions of lives. (It's also worth remembering that we got here because of really awful policies from many of the folks now arguing against doing anything to lower unemployment.) The people who are suffering from this refusal deserve something more than hand waving from those who insist the problem is on the supply-side. They deserve a serious argument that squares with the data. No one has produced one to date.


Note: Typos corrected and parenthetical sentence added.

Comments (15)Add Comment
question of priorities
written by Jennifer, August 17, 2013 10:13
If, as most people regularly say, the economy is the most important thing, than reaching full employment is the most important thing because that IS the economy for 99% of the population. Is he really serious that we don't know how to employ people? Aside from major infrastructure projects, research, and energy projects you could just write checks to every state with the condition it go to jobs-boom you are done.
It seems that people who are anti-stimulus do a lot of hand-wringing about how it may not be the "right" way to spur the economy. They do not have alternatives, just more of the same. Aside from the unemployed themselves the high employment rate hurts employed people too, as employers can aggressively cut back on benefits and workplace conditions, even in white collar jobs, because they know there is a waiting pool out there.
a red herring
written by watermelonpunch, August 17, 2013 11:56
Yes, I think some people don't get out much.

Anyone who thinks there's no legitimate need for work to be done, should have to go drive from Mehoopany to Dushore PA on Route 87, and then from Peckville to Wilkes-Barre PA on Main Ave/St in a modest commuter car.

And then talk to a lot of people who are so fortunate enough to be employed about how they're doing the jobs of 5 people who used to work with them.
written by CMike, August 17, 2013 11:57
Maybe not any team and maybe not $25 million a year. NFL dot com says:

Spotrac [dot] com lists the top ten salary-cap figures in the NFL this season, and the top five all come at quarterback. The only surprise is that defensive players make up spots six to 10.

The players with the highest salary-cap figures don't necessarily have the highest salaries in a given year. Bonus money, incentives and proration of previous bonuses all play into a "cap number."

Still, the cap number provides an interesting snapshot into how a player is valued as a percentage of his team. Here are the top five cap numbers this year:

1. Eli Manning, New York Giants: $20.85 million
2. Matthew Stafford, Detroit Lions: $17.82 million
3. Peyton Manning, Denver Broncos: $17.5 million
4. Drew Brees, New Orleans Saints: $17.4 million
5. Philip Rivers, San Diego Chargers: $17.11 million
written by NWsteve, August 18, 2013 12:56
overmatched - unfair advantage to Dr. Baker - as Mr. Solman provides us only with *conversation* where argument is required...

"...mainly, that the jobs created *may* be unsustainable..."
---really? even if this estimate is correct, what have we lost in the meantime?---

"If the cyclicalists are right, spend a trillion dollars and new jobs will eventually
emerge, as they indeed regularly have throughout American (and world) history."
----and what is the *problem* with this?----

Mr. Soloman's one claim for "evidence" is to replay a *response* to his blog claiming to be from a very unique and fortunate job-seeker; without any reference whatsoever as to how exceptional this individual's particular situation is or how it could be instantaneously converted into several million employment opportunities for others...

the present economy is NOT in an either/or situation: "structural" modifications simply cannot solve the unemployment problem anytime soon-enough to lift sufficient quantities of people out of their personal dilemmas; while "cyclical" programs, properly designed, executed, and revised as needed have the potential to lift everyone in both the short and long term with no current negatives...

let's get busy...now...

written by Site is Well?, August 18, 2013 3:08
Your site should be doing well: although it's Saturdary night, you quickly had FOUR post.

That is a reflection of our sad society of people who have nothing better to do like WAPO and other economists.
the new deal
written by Grouch O., August 18, 2013 3:42
... most of those ARA jobs were unsustainable, but would anybody say that electrification of rural Appalachia was a waste? And it helped ALCOA meet WWII production demand. Was Hoover Dam a waste? Those jobs created millions of jobs, by making them possible in the first place, over the decades. Hoover tried to get the market to do these type things, but there was no demand to impel any sane businessman to act.

Solman is yet another "do nothing" faux-conservative, who himself is receiving a salary and generous benefits from the government's hand, who doesn't have even a basic grasp of statistics but attempts to use data nonetheless. Pfft.
wow it looks so different in Bangkok...., Low-rated comment [Show]
Legalize Stimulus
written by LSTB, August 18, 2013 6:54
Solman's argument is just a reformulation of the "drug hit" model of debt-financed stimulus. Once the borrowed money is spent it ceases to exist by operation of the Twilight Zone, leaving the government worse off than it was before, like a junkie. This is what he and others mean when they claim that stimulus isn't "sustainable" or "doesn't work."

In the real world, when government spends money on a bridge, real construction workers are paid real dollars to build a real bridge that shortens real people's commutes by real minutes. Likewise, when government hires teachers, it pays them real dollars to teach real children (results may vary), and they spend their salaries on real rent/mortgages, real groceries, real baseball games, etc.

The only way stimulus "doesn't work" is if (a) the government prints the borrowed money as currency and then catapults it into the sun, (b) the money is spent on extremely low velocity projects, like paying people to hoard dollars.

The only "cost" to government spending is reinflating untaxed land values, but that's avoidable with systemic fiscal reform and still better than mass unemployment.
Thank you, Dean, for solving the mystery!
written by Pauley, August 18, 2013 8:58
I've long wondered whether TDS's leather muppet knows his hat from a hole in the ground.
Paul Solman Thinks Counter-cyclical Employment, Alcoholics, Goverment Spending and Taxes are the Same Unsustainable Thing in a Fairy Tale Sort of Way
written by Last Mover, August 18, 2013 9:39
While Solman seems to believe that something bad happens if we put people to work, he never even hints at what it might be.

Yes he does. His main theme:
Should we create productive government jobs that are sustainable? Few would argue in a country where something like 17 percent of us already work for government. But critics argue that as it is, many of those jobs are not productive. Can we really create another trillion-dollar's-worth that would be?

Solman goes on to use an example of subsidizing one-hour long massages per week with tax reductions or direct subsidies in a way that both givers and receivers benefit. Besides the false notion that demand can be created this way, the message here is intended to contrast with the message above, that the givers - taxpayers - receive nothing for financing a stimulus that does nothing because the jobs in question are not sustainable, making the holders of those useless jobs as outright takers from the givers - unlike the situation of massages in which both receivers and givers benefit.

A more apt analogy from one suited to Solman's perspective would be the typical failure that results when attempting to assist someone without a job and associated problems by simply giving them money with no strings attached.

For some that won't work because they will immediately waste the bad money thrown at frivolous or harmful things that will set them back even further rather than hold them over until the prospect for a job improves.

Because it's obvious that giving them more money in this situation is "not sustainable" Solman wants you to think of this as a general rule that applies to both, macroeconomic spending to reduce unemployment as well the presumed economic superiority of private over public goods.

Solman's fixation on interpreting unemployment as structural over cyclical is directly linked to this fatally flawed intuitive thinking based in old school lecturing from a fatherly-wise persona who knows best from household experience at the local level.

For Solman, the problem with stimulus spending is as obvious as giving an alcoholic more money to stimulate a reduction in the consumption of alcohol.

This gross mistake of interpretation by Solman between micro and macro economics, between private and public goods, therefore insists that incentives at the household level to waste money are the same at the macro level that cause unemployed people to take taxpayer money and waste it on unsustainable jobs.

Full stop right there. Solman indicts himself as willfully or hopelessly ignorant not to address the obvious elephants in the room that contradict everything he says, specifically:

So even more spending from the private sector on the wildly inefficient and destructive health care and financial industries that actually subtract value instead of adding it, would produce jobs more "sustainable" than government spending on obviously dilapidated infrastructure essential to all jobs?

So gutting even more government jobs for private contractor jobs that perform much worse and raise cost dramatically at the same time is the answer to "sustainable" jobs?

So non-inflationary stimulus spending that increases growth and tax revenue through demand not otherwise available, to create jobs not otherwise possible, all to reduce the burden on taxpayers rather than increase it - is equivalent to spending a trillon on structurally unemployed alcoholics who would only produce more alcohol for themselves because they are not actually cyclically unemployed?

Do come sit on my knee dear Solman, so I can tell you the wise old fairy tale about the three economic predator bears who punished Goldilocks because she kept complaining that the chairs, beds and soup in the household were not optimal, always too big or too small, too hot or too cold ... for which the bears promptly demanded that Goldilocks adapt a new set of skills or else, so as not to be structurally incompatible with access to every chair, bed or bowl of soup in the house.

Unlike politics Mr Solman, all economics is not local. Get a grip. There's macro economics and there's micro economics and the two can actually work in the opposite direction.
written by skeptonomist, August 18, 2013 10:17
There are "theoretical" objections to fiscal stimulus that are trotted out by conservatives, but most of them were falsified by actual instances of massive government spending, especially by that in the US in WW II. The high wages paid to workers and the eradication of unemployment, combined with the lack of availability of consumer goods, allowed a reduction of private (consumer) debt and a huge buildup of demand, which came into play when government spending was cut back. The government debt was steadily eradicated by growth of the economy.

But this kind of stimulus is not necessarily simple or easy. Rationing in WW II kept prices down and thus preserved some of the buying power that workers earned. There were excess profits taxes on industry, all tax rates were high, and many executives voluntarily served for a dollar a year. After the War, most other major industrial countries were devastated and in no shape to satisfy the demand of the US - we were selling to them. The general industrial capacity of the US was unaffected by the War.

As Dean says, if US consumer demand continues to be satisfied by foreign industry a lot of the stimulus would be wasted (as far as the US is concerned). Other economists, for example Krugman, seem to think that globalization is irrelevant or somehow beneficial to US workers. But Dean's dogmatic insistence that currency valuation will solve the problem is not justified empirically. The very significant drop in the dollar 2002-2008 did not reverse the trade deficit. This may have been partially due to the increasing price of oil, but the demand for oil is part of the equation.

Spending on development of alternate energy would help with this particular problem in the long run as well as the short run. (Carbon taxes would not help in the short run).

written by skeptonomist, August 18, 2013 10:28
In theory, many international imbalances could be solved by wage adjustments. But in practice such adjustments turn out to be undesirable or just impossible. US workers are not going to accept a reduction of wages to Chinese levels. Greek workers are already paid much less than German workers, so will strongly resist further reductions - in fact they will riot in the streets.

Currency adjustments mean comparable changes to living standards - purchasing power - through inflation. Would US consumers start rioting in the streets if the price of everything in Walmart suddenly went up 50% and this could be pinned on action by particular authorities? It would be interesting to see what would happen.
Obama making simple complicated
written by Jim, August 18, 2013 3:12
The economic initiatives of cutting government employment by 600k, attempting to focus employment growth visa vi industries that are highly capital intensive and allowing banks to run wild are never going to succeed in getting us back to full employment. Why do Republicans complain about a guy that has employed every economic ideal associated with their party including a health care proposal championed by the Heritage foundation and implemented by their presidential candidate in Massachusetts. Please give us a list of ideas that should be implemented.
written by Calgacus, August 19, 2013 1:52
Sigh. Pete: As Keynes and Krugman agree, the issue in the U.S. (and Greece) is that real wages are too high.

No, that is NOT what Keynes said. Keynes said high wages GOOD. Lowering wages BAD - just makes unemployment equilibrium worse, in all but a ridiculously long run which has never occurred anywhere, because revolutions always break out beforehand. Try understanding Keynes, not ninth rate imitations.
I did NOT say higher wages were bad....
written by pete, August 19, 2013 11:07
I said REAL wages were too high...not NOMINAL wages. Geese. The idea of stimulus is to increase the demand, so that firms will build more widgets at HIGHER PRICES (thats the way demand and supply work) So that workers are working for LOWER REAL wages. I call this fraudulent economics, Marx knew it was horrible. Even the AFL CIO did not like Keynesian stuff for this reason. Here we are, 70 years later, lower real wages after 70 year of this kind of demand management. Keynes was not a Marxist, or a socialist. He was pro business. And it works, unfortunately.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.