Getting to Full Employment: It Actually Is Not That Complicated

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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.