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The Reason for 15 Million Unemployed: Poor Thinking at the Top

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Dean Baker
Truthout, December 7, 2009

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The United States has more than 15 million people unemployed. This is not their fault. It is the fault of really bad policy decisions by people who get paid more than almost all of the unemployed ever did or ever will. The failure of economic policy makers to recognize and attack an $8 trillion housing bubble led to the downturn. The continuing failure of economic policymakers to think creatively is why 15 million people remain unemployed.

The basic problem of unemployment is in fact a very simple one; we don’t have enough demand in the economy. The collapse of bubbles in both residential and non-residential construction led to a falloff in annual construction of close to $700 billion. The disappearance of more than $6 trillion in housing bubble wealth has forced consumers to pare consumption by approximately $500 billion a year. This creates a total shortfall in annual demand of $1.2 trillion.

In the face of inadequate demand, people lose their jobs. There is not enough demand for houses, cars, restaurant meals and thousands of other goods and services to keep everyone employed.

One way to fix the problem is to create more demand. That was the point of the stimulus package passed last February. This helped, but it was nowhere near big enough.

Subtracting out tax accounting measures (the alternative minimum tax fix) and spending to come in 2011 and later, the stimulus was about $300 billion for both 2009 and 2010. The federal stimulus is also being offset by approximately $150 billion in annual budget cuts at the state and local level. This leaves a net stimulus from the government sector of around $150 billion a year. This will not offset a loss in annual demand of $1.2 trillion; it’s like trying to fill a swimming pool with 5 buckets of water.

In principle, the federal government could spend much money on stimulus until it has generated enough demand to get the unemployed back to work. For political reasons, this doesn’t seem possible. The deficit fixation in Washington is preventing effective action, just as a balanced budget craze in the 30s forced Roosevelt to cutback the deficit in 1937, throwing the economy into another recession.

If politics makes it impossible to increase the demand for labor, an alternative way to create jobs is through decreasing the supply of labor. Specifically, employers can be given an incentive to cut the hours of their current workforce, while keeping their pay constant. This should then cause them to hire more workers. This is not an untested idea. Germany has used work sharing tax credits to keep its unemployment rate from rising in this downturn, even though its recession has been more severe than ours.

There are proposals for using this sort of work-sharing being considered in both houses of Congress at the moment. Senator Jack Reed (D-RI) and Representative Rosa DeLauro have both introduced bills that would build upon work-share programs that already exist in 17 states. These programs allow employers to use unemployment insurance funds to keep workers employed at shorter hours, rather than laying them off and collecting unemployment benefits. These bills would provide additional funding to the existing programs so that they would be more widely used and help the other states establish work-share programs.

Representative John Conyers has proposed a tax credit that would allow employers to reduce work time, while still maintaining their pay, and thereby creating the demand for more workers. This route has the benefit of allowing employers to try to innovate at their workplace, even if they are not currently planning layoffs, so it could have a much broader impact.

However, it is important to remember that nearly 2 million workers are still losing their job each month. The jobs figure that is reported each month is a net figure. It shows how many jobs the economy has gained or loss after adding up all the workers hired or fired. If we reduce the gross monthly job loss figure by 10 percent, or 200,000 workers, it has the same impact on employment as adding 2.4 million jobs. This means that even though the Conyers will would have a broader impact, even the Reed-DeLauro bills could lead to many more jobs being created.

It is important to realize that work sharing can also have a lasting impact on the structure of work. There have been major efforts by labor unions and women’s organizations to make the workplace more family friendly through paid family leave, paid sick days, and paid vacation. These work share programs offer an opportunity to both quickly reduce unemployment and lay a basis for lasting change in this area. Companies can take advantage of these programs to experiment with paid sick days or family leave. If they work, they are likely to leave these policies in place even after the public funding is no longer there. 

It is absolutely unacceptable to have 15 million people unemployed just because the people who call the shots are too dumb to figure out how to get them back to work. We got into this mess because the people on top didn’t know what they are doing. We shouldn’t have to stay here because they still can’t figure things out.

In Germany, they are experiencing the recession through shorter workweeks and longer vacations, rather than mass unemployment. We should be doing the same here.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of 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.