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The Economy Is a Disaster: We Should Fix It

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Dean Baker
Truthout, January 19, 2010

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The unemployment rate is 10 percent and almost certain to rise further in the months ahead. This is truly a disaster. If anyone questions whether 10 percent unemployment is a big deal, consider that the first stimulus to boost the economy was passed in February of 2008 when the unemployment rate was 4.8 percent. We are now looking at an unemployment rate that is more than twice the level that was high enough to prompt George W. Bush to sign a stimulus package.

There is an incredible complacency about this unemployment rate around Washington even though all the official projections show it remaining high years into the future. For example, the Congressional Budget Office projects that the unemployment rate will not fall below 7.0 percent until well into 2012 and will not return to normal levels until 2014. Perhaps if more of the people in policymaking positions faced unemployment they would be more concerned about the problem.

The especially disturbing part of the story is that we do know how to get the unemployment rate down. In principle, we could create demand through another stimulus package, with the government directly or indirectly creating the demand needed to employ many of the 15 million unemployed workers. For political and superstitious reasons, a stimulus package large enough to substantially boost demand does not seem feasible.

However, we can also go the route that has proven successful at keeping unemployment down in Europe: work-sharing. The concept is very simple. Instead of paying workers unemployment benefits when they are not working, we pay companies to keep workers employed but working shorter hours at pretty much the same pay.

In Germany, under a typical arrangement, if the work week is cut by 20 percent, then the government picks up 60 percent of the lost pay (12 percent of total pay), the company picks up 20 percent (4 percent of total pay) and the worker ends up taking home 4 percent less than they had previously, even though they are working 20 percent fewer hours.

This strategy has proven remarkably successful. In Germany, the unemployment rate has not risen at all during this downturn even though its GDP has actually fallen more than in the United States. In the Netherlands, which also has had a larger fall in output than the United States, the unemployment rate is below 4.0 percent.

Work sharing is not just a foreign concept. Seventeen states have work-sharing programs tied to their unemployment insurance system that have saved a total of more than 300,000 jobs. There are bills before Congress (introduced by Jack Reed in the Senate and Rosa DeLauro in the House) that would provide funding to expand work-sharing in the states that already have it and to provide start-up money in the 34 states that do not.

This legislation could make a substantial dent in the unemployment rate, but it is possible to go further. Representative John Conyers has proposed a bill that would provide a tax credit to employers that reduced their workers' hours while keeping their pay unchanged. The credit would cover up to 10 percent of annual compensation or $3,000. This credit could be used to pay for any form of reduction in hours, including family friendly policies such as paid family leave, paid sick days or paid vacations, in addition to shorter work weeks.

A Conyers-type tax credit could also be targeted to disproportionately benefit hard-hit areas like Cleveland. Instead of being limited to 10 percent of work-time and $3,000, in areas of especially high unemployment the credit can be allowed to cover 20 percent of work-time and $6,000 of compensation. The rates could even be set higher in order to provide a larger boost to employment.

Polls show that the public is angry at the country’s leaders. They have every right to be. The policies put in place have made the Wall Street banks more profitable than ever, at a time when the unemployment rate is 10 percent and we are seeing close to 2 million foreclosures a year.

The refrain that we should be thankful we didn’t have a second Great Depression doesn’t cut it. The only reason that anyone is even talking about the Great Depression is because of the ineptitude of our economic policymakers and the greed of the Wall Street banks.

We know how to fix the problem. Instead of double-digit unemployment we could be enjoying shorter work weeks and longer vacations. We just need a Congress that cares as much about ordinary workers as it does about the millionaires and billionaires on Wall Street.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.