Getting Back to Full Employment (part 2)

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In the first part of their book, Dean Baker and Jared Bernstein argue for placing a higher priority on reducing unemployment, as opposed to the current policy preoccupations of holding down inflation and reducing the federal deficit. The later chapters discuss different ways of increasing labor demand and boosting employment.

Before the recent recession, the economy was creating more jobs, but growth was driven mainly by a housing bubble that both created a boom in construction and made homeowners feel wealthy enough to spend more. The problem now is to replace the economic demand that was lost when the bubble burst. That requires some combination of increases in consumption, investment, government spending or net exports.

The authors do not expect consumption to return to its former level by itself, since consumers no longer feel very wealthy, and “tens of millions of baby boomers stand at the end of retirement with little or no savings.” They also reject the view that “investment will surge if we reduce the tax and regulatory burdens on business.” Over the last fifty years investment has averaged less than 9% of GDP, and so it would take an enormous increase to make up for much of the lost demand. And I might add, why invest in more production until one is confident that potential customers are willing and able to consume more?

Increasing net exports by reducing the trade deficit has the potential to create millions of jobs. The authors estimate that balancing exports with imports could increase GDP by 5.4% and lower the unemployment rate from over 7% to under 5%. Investments in infrastructure and education may make American products more competitive, but that is a long-term project. Letting the dollar fall in value against foreign currencies would have more immediate benefits by making our products cheaper, although it would also hurt big importers of cheap foreign products, such as Wal-Mart.

In Chapter 6, Baker and Bernstein make their case for public spending to create more jobs. Their reasoning is solidly in the Keynesian tradition:

Downturns are characterized by a drop-off in demand that the private sector is unable to fill. The government, with its capacity to borrow on favorable terms, can afford to spend when everyone else is hunkered down. Some forms of spending are better than others in terms of reinvigorating demand, and one of the best forms is public infrastructure investment, which can employ hundreds of thousands of workers in projects that yield long-term, continuing returns on the dollar.

They also recommend public investments in areas where the United States lags behind other developed countries, such as rail systems, energy-efficient construction and high-speed internet access.

But won’t additional public spending make the federal deficit even worse? The authors reject the popular but simplistic argument that debt is just as bad for a government as for an individual. How much an individual can ever repay is limited by the human lifespan. The government never dies [unless Grover Norquist succeeds in drowning it in that bathtub!], and can draw on revenue from a growing economy to finance its debts. Public investments that stimulate growth pay off in additional tax revenues, while “austerity measures that would cut spending in order to generate growth have the counterproductive effect of hurting growth, and they typically fail to reduce deficits because slower growth lowers tax revenues and requires more spending on economic stabilizers” like public assistance and unemployment benefits.

The best way to measure the burden of debt on government is to consider the interest paid as a percentage of GDP. That percentage rose steeply in the 1980s but declined steeply in the 1990s. It has remained relatively low since 2000, as interest rates have come down. The ratio of the deficit itself to GDP has declined from 10% in 2009 to 4% in 2013. “The bottom line is that the government is nowhere near the limit of its ability to take on additional debt.”

The United States does have a longer-term problem of containing health care costs, which impact government through spending on Medicare and Medicaid. “The United States spends more than twice as much per person on health care than do other wealthy countries, with too little to show for it in the way of outcomes relative to these other advanced economies.” But that is a problem for the country whether we finance it with tax dollars or consumer dollars, and the best solution is to reduce health care costs, not reduce other economically and socially beneficial public spending.

Baker and Bernstein have an excellent response to the common argument that government borrowing is hurting the next generation:

One of the most peculiar arguments about deficits is that we must save our children from the phantom menace of future debt tomorrow by severely underinvesting in them today. We must defund Head Start, public schools, universities, libraries – not to mention our own employment opportunities. This absurdity is accepted wisdom in today’s fiscal debates, even though the extraordinarily low interest rates at which the government can borrow money would be taken as a signal by any private investor that now is a good time to borrow. If government were run like a business, it would be taking advantage of low interest rates to finance a wide variety of public investments. Franklin Roosevelt did that during the New Deal, undertaking infrastructure projects that still support the economy today.

The authors also recommend “a flexible program of publicly funded jobs that can ramp up and down as needed.” The jobs themselves can be in the private sector, with public subsidies to promote additional hiring, as long as regulations are in place to make sure that the new jobs are truly new, not just replacements for existing jobs.

Finally, they recommend policies to promote shorter work hours, more paid vacation days and more generous family leave policies. These would spread the available work among more people and reduce the number without jobs altogether. It would also save money on unemployment compensation and keep workers attached to the workforce so that their skills don’t deteriorate. Germany’s average work year is only 1,400 hours, compared to 1,800 hours in the United States. Germany also uses public money to supplement the wages of workers whose hours are cut during economic downturns.

Baker and Bernstein believe that a high rate of unemployment is unnecessary, and that it can be ameliorated with the right policies. Although the economic demand for labor is too low, the ultimate need for labor is not a problem. True, new technologies and higher productivity are reducing the need for labor in many traditional industries, but that’s been going on for a long time. In the twentieth century, new technologies like the assembly line also boosted productivity, but the country was ultimately richer for it. Workers whose productivity went up eventually received a share of the benefits in the form of higher wages, and the money they spent created new jobs in expanding industries. Workers also got some of the benefits in the form of a shorter work week, when the 40-hour week became standard with the Fair Labor Standards Act of 1938. So what’s not to like? Pay went up, hours went down, massive unemployment was avoided, and living standards improved dramatically from the 1940s until the 1970s.

The point here is simple: We need never worry that a reduced need for labor will lead to massive unemployment. If workers are sharing in the gains of productivity growth, and they take a portion of these gains in the form of more leisure time, then the supply of labor will to some extent adjust to any reduction in need due to improved productivity. When productivity growth is translated directly into shorter work years, the sense in which these gains are a source of wealth rather than impoverishment is more clearly visible. If workers can have the same living standard by working fewer hours, then they are obviously better off.

What is stopping us from making the same kind of progress again? In Baker and Bernstein’s view, the policies that tolerate high unemployment and stagnating wages derive from the mistaken belief that any measures to stimulate economic demand can only bring back inflation. That in turn depends on the assumption that the productive labor is already employed, and that the rest just aren’t worth being paid a wage they could live on because they can’t produce enough to justify it. The weak demand for labor hurts the bargaining power of all workers, helping to hold wages down even when their productivity is rising. So we try to keep the economy expanding and profits growing while refusing to place a higher value on human labor. Except, of course, for executive labor, since executives, after all, are the “job creators”(!)

I would also suggest that an underlying problem here is a zero-sum mentality, a fear that nothing can be done for the unemployed, or for low-wage workers, without taking something away from someone else, either in higher taxes or higher prices. Anyone who speaks up for workers is quickly accused of engaging in “class warfare,” which is another way of calling someone a communist. How did we lose our confidence in our nation’s ability to prosper and to create opportunity for all?

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