Stimulus and Jobs: We Can Do Better
The Obama administration came out with its first set of numbers on the jobs impact of its stimulus package. It’s pretty much along the lines of what was predicted. To date, the package has created close to one million jobs. That is good news, but in an economy with more than 15 million unemployed workers, it is not nearly good enough. We need to do more, much more.
Fortunately, there is an easy and quick way to begin to get these unemployed workers back to work. It involves paying workers to work shorter hours. The mechanism can take the form of a tax credit to employers. The government can give them a tax credit of up to $3,000 in order to shorten their workers’ hours while leaving their pay unchanged. The reduction in hours can take the form of paid sick days, paid family leave, shorter workweeks or longer vacations. The employer can choose the method that is best for her workers and the workplace.
If take-home pay is left unchanged as a result of the credit, then demand should be left unchanged. If workers are on average putting in fewer hours and demand is unchanged, then employers will need to hire more workers.
This logic is about as simple as it gets. The process is also quick and cheap. In principle, the government can go this route to save jobs at a cost of a bit more than $20,000 per job, far less than the estimates of the cost per job under the administration’s stimulus package.
We don’t even have to speculate about whether this sort of short-hours arrangement can work. Germany put a short-hours program in place at the start of its recession. Its unemployment rate today is 7.6 percent, about the same as the unemployment rate it had going into the recession. Imagine that workers in the United States, like workers in Germany, were dealing with the recession by putting in four-day weeks (while getting paid for five) or getting an extra two weeks a year of paid vacation. This sure beats being unemployed or being threatened with unemployment.
Seventeen states already have a “work-share” program in place that allows employers to use unemployment insurance money to cover a reduction in work hours, without a corresponding reduction in pay. More than 100,000 layoffs have been prevented as result of this program.
Sen. Jack Reed of Rhode Island has a bill that would increase funding for work-share programs and remove some of the bureaucracy that makes it difficult for employers to take full advantage of the programs that currently exist. The bill would also provide start-up money for the states that do not have work-share programs.
The Reed bill would be a big step towards following the Germany model, taking advantage of a program that is already in place. It could very quickly make a big dent in the unemployment rate, by preserving many of the jobs that are now being lost.
In this respect, it is important to clear up a common confusion about the economy. Every month, we get a figure from the Labor Department for the new jobs created or lost. However, this is a net figure. Approximately four million people leave their jobs every month, about half of these workers, or two million, lose their jobs involuntarily. If the economy creates more than four million new jobs, then we will have a positive jobs figure for the month. If the economy creates less than four million new jobs, then the Labor Department will report that the economy lost jobs in the month.
Suppose that this work-share program reduced the number of people who lose their jobs involuntarily by 20 percent, or 400,000 workers per month. This would have the same effect to our job count as adding 400,000 additional new jobs. If this rate could actually be maintained over a full year, then it would imply that the economy would generate nearly five million new jobs.
All the projections show that the unemployment rate is likely to continue to rising for the immediate future and remain high for years to come. The Congressional Budget Office projects that the unemployment rate will average 10.2 percent next year and even in 2011 it will average 9.1 percent. If this projection proves accurate, it would be a disastrous scenario for tens of millions of people.
There are quick and effective ways to increase employment, with shorter hours at the top of the list. Making tens of millions of people suffer for economic mismanagement and the greed of the bankers is not acceptable. We must do something.
Certainly an interesting proposal. But I have a question about stimulus packages in general. Of course they work, because they have worked for the last 70 years; the gov’t has stepped in to soak up the goods not purchased on the market, or to redistribute income from those less likely to spend it to those who will spend it very rapidly, and hence increase purchasing power.
However, it seems to me that these remedies work best in a closed economy or an economy with balanced trade. Our economy is neither. So if we stimulate demand, are we mostly stimulating the Chinese economy or our own?
Brilliant! Hire more workers, demand remains the same in the first period. Demand is far higher in the second period as a result of people who were not earning an income getting one. Demand rises, convert part time workers into full time workers. Remove tax break once velocity of money rises enough its not so hard to come by money to pay workers?
It’s an interesting idea. Essentially a variant of Randall Wray’s Employer of Last Resort (ELR) scheme, and I think open to the same potential criticisms. Essentially the government would be issuing more money directly to the private sector without increasing public or private production – an inflationary scenario. In the short-run, this is helpful, but there is no automatic mechanism for reabsorbing this money in the way that there is if reserves are directly injected into the banks (as per the Bank of England’s ‘Quantitative Easing’). This suggests the need for future tax increases unjustified by better infrastructure, or higher interest rates to persuade bond purchase.
The ‘stimulus package’ has at least the intention of much-needed infrastructure repair. If realised this should have both direct welfare benefit (giving more legitimacy to any additional taxation) and help to boost future production that can absorb the additional private-sector money injection. Perhaps we just need more of this?
The ideas on the above article appear fine as far as they go. However, we need to also keep an eye on the future on many other issues including employment. What is required is a global paradigm in which many socio-economic problems could be solved within a democratic framework.
I would recommend my work in progress progress known as Transfinancial Economics. It could well the key to the future. See my p2pfoundation entry.
My basic ( and for the moment unrefuted…) paradigm is that the root of this ( and that as well ) crisis lies below a skewed income and wealth distribution toward the upper layers which depressed aggregate demand. Shorter working hours maintaining the same salary could be effective as long as it is a tool for redistriubtion of wealth and income ( i.e. higher labor share )since it could oblige employers to hire more workers at a higher absolute cost. Nevertheles, If this initiative maintains the actual and distorted income structure it should be considered ( from my humble perspective) as another nice but useless attempt to rescue demand , in a similar fashion to the “successfull” a-la Kyenesina bailouts ( more is already needed…), “monetary policy” etc.
I am entirely with the spirit of Dean Baker’s “less employment for same pay”, but John Medaille is right, though http://rwer.wordpress.com/2009/10/28/trading-on-thin-ice/ shows monetary closure to be a political rather than an economic issue.
There is a curious but inverted correspondence here with the Christian story of “the crafty steward” (Luke 16). “How much do you owe? Halve it!” The point being made is that no-one can be the slave of two masters [money and people]; “he will either hate the first and love the second, or be attached the first and despise the second”. But who can love money once he understands how bankers create it out of nothing to represent our debts to others and (via interest charges) con us into accepting fictitious debts to them?
Working less does not repay our real debts to society and nature, but not working so much for an employer would leaves us time as well as responsibility to do that directly in our own way. Not paying interest could more than halve the work needed. Treating banks as stewards of our personal bank accounts rather than owners of our wealth would stop them circulating our debt money, which would be written off when earned rather than foisted on speculative and overseas investors in the hope of conning them too into supplying real goods for half the value of their cost to real workers. Separating the variables of livelihood and incentive into credit proportional to responsibilities and rewards or debt-writeoffs honouring real (rather than hoped for) contributions to our well-being would leave bankers and traders eligible – like everyone else – for both.
Now I understand the money scam, all this seems obvious to me. I wonder if it would do if I had been taught half-baked and often mendacious economic theory in my youth, rather than general science so challengingly inadequate that I had to learn to think for myself?
No, it isn’t inflationary (if overall taxes are raised to match the tax breaks, and production is kept up – see below), and there is an automatic mechanism there to the extent that employment rose to make up production – which might even rise more than that, putting more goods and services out there.
To me it looks more like a variant of Edmund Phelps’s proposal or that of Kim Swales, which are more precisely aimed at unemployment and make the correction mechanism more automatic – the latter’s modelling indicates a percentage GDP increase of about half the improvement in employment, too. I recently based some related Australian policy recommendations on their work and my own researches.
In response to P.M.Lawrence, I think I made it clear that adjustments in taxation could offset any inflationary impact. The problem is then whether these are politically acceptable. More generally, it is important to be clear that these sort of schemes are not free of direct economic cost. That is not to say that the social benefits might result in indirect economic savings (lower costs of crime, health impairment, poor parenting etc, etc) but this is a much wider argument.
The scheme Dean Baker proposes would result in reduced production in the first instance (as a consequence of shorter hours) for the same income. The revenue loss to employers is made up by government money. Total money circulation greater, total output smaller. Assuming a linear relationship between hours and output, to offset this effect would require production associated with new employment of twice the value of the subsidy. Given that the hourly costs of new employment are bound to be greater than that of existing employment, I think there is a problem here under the existing terms of economic debate.
Phelps’ proposal is interesting, but I note he accepts it has a definite direct economic cost. It appears to be directed at offsetting the additional costs of new employment, and its argument is based in part on psychosocial rather than economic grounds. In particular he seems to be backing the point made by James Galbraith in ‘The Predator State’ that, contrary to conventional economic wisdom, higher wages may actually be associated with lower unemployment. Thus showing the pressure for employment ‘flexibility’ to be most misguided.
DW, the way I read it, you were talking about separate tax increases repairing inflation subsequently, and that you might not have appreciated that background tax levels could be raised at the same time as implementing the tax breaks without undoing the effects of the tax breaks but still heading off any inflation from happening in the first place.
“…these sort of schemes are not free of direct economic cost”.
That happens not to be the case in general, unless you are referring to the fact that there are always some individuals and groups who have found a vested interest in the status quo. Certainly, Kim Swales’s modelling indicates a GDP increase. My own work sees the situation as an externality at work, with the tax breaks as a Pigovian solution. As such, we should expect overall costs to fall – there would be a gain.
Phelps’s description is actually consistent with this. He is merely describing the budgetary cost of putting in tax breaks, i.e. the amounts background tax levels would be needed to rise to compensate; but this isn’t an actual increase in taxes but just an intermediate calculation value, as the overall effect of both tax breaks and matching adjustments is to keep tax levels initially the same but change the marginal amounts. If you put in both tax breaks and matching adjustments together (as in Swales’s UK work and mine for Australia), the system would be both budget and revenue neutral in the short term, and budget neutral in the medium and long term as outgoings on the unemployed would drop in step with revenue. I appreciate that very different budgets are involved for outgoings on the unemployed in the USA, compared to Swales’s work for the UK and mine for Australia, but this is only an accounting and responsibility issue and there would be real GDP gains regardless (countries with limited, little or no general provision for the unemployed still face an externalised cost, in the form of “Vagrancy Costs” which show up in crime rates, the cost of policing and imprisonment, etc.).
On “…higher wages may actually be associated with lower unemployment…”, be careful how you read the direction of causality.
I think PML’s analysis is interesting but marginal. Essentially my point was that if there are infrastructure deficits that need addressing and that may produce greater long-run output in any case, what stops us just employing people and getting on with it? (That’s not a rhetorical question.)
As to his remark about causality, I’m not quite sure what he means. Phelps’ comment was ‘Such relatively low wages undermine the worker’s incentive to get a job or stay in the job or get a better one.’ The direction seems clear enough, although I confess to glossing over the ‘relative’ aspect, because it is really an argument about inequality.
If you mean marginal in a technical sense, well, yes, the effects I outlined operate at the margins, both changing marginal costs of employment to employers and affecting those at the margins of employability under the circumstances. But if you meant it loosely, in the sense that it would make little difference, then I have to disagree if only because even those who add low or zero value to employers’ activities would be worth putting on the payroll at pay levels at least as high as unemployment benefits rather than receiving those as unemployed – and the few remaining people are better described as disabled than unemployed, with all its implications for how best to handle their condition. (Although, of course, I can see various forms of “stickiness” slowing reaching the improved equilibrium – but with no funding or other obstacles during the transition.)
Also, I believe the externality favouring unemployment is a major, if not necessarily the only, thing that “stops us just employing people and getting on with it”. If nothing else, clearing that out of the way would not only be an improvement but would also make clearer what else is in the way, and at present I see no economic downside to doing it (I leave aside the politics and vested interests of it).
On the direction of causality, I meant it was important not to overlook the possibility of effects running the other way, e.g. (and I don’t mean i.e.) when unemployment is lower workers may have better negotiating positions for higher wages.