Home > The Economy > Yes, there are ways to reduce unemployment and revive the economy

Yes, there are ways to reduce unemployment and revive the economy

from Mark Weisbrot

As President Obama begins the second half of his term with a campaign for “jobs and competitiveness,” we would do well to consider how he might achieve these worthy goals. It is jobs that matter most to the vast majority of Americans, and unemployment remains at 9.4 percent – about double its pre-recession level. This is a terrible punishment to inflict on millions of Americans who did nothing to deserve it. It will cause long-term and even permanent damage to many of the unemployed and their children. 

What can the government do to relieve this suffering? One relatively simple measure is to subsidize employers who are willing to reduce hours rather than lay people off. Germany has demonstrated the success of this approach in the last couple of years. Unemployment in Germany was 7.4 percent just before their recession began in the third quarter of 2008. Today it is 6.7 percent. And Germany had a much steeper decline in output than we did.

The idea is straightforward: employers who are faced with reduced demand can either lay off workers or reduce hours. If they reduce hours for any worker, the government in Germany puts up 60 percent of the lost pay for these reduced hours. The worker keeps her job, with reduced hours but the pay is not reduced nearly as much.

With all this talk now about Democrats and Republicans “reaching across the aisle” and working together, a program that is acceptable to a conservative German government ought to have bi-partisan appeal here. The government can use unemployment insurance funds to cover much of the cost, and seventeen states do offer such work-sharing programs. But they are under-funded and participation is small.

My colleague Dean Baker estimates that this program can create three million jobs at a cost of $68 billion. That is less than one-tenth of our bloated Pentagon budget. Imagine a national poll where voters were to choose between continuing to occupy Afghanistan versus creating three million jobs? (Actually about 4.6 million jobs if we really get out of there). A no-brainer.

Another proposal that would help boost the economy, and wouldn’t cost the taxpayers anything would be to allow homeowners who are underwater on their mortgages to become long-term renters. An independent appraiser would set the fair market rent for their home. Millions of homeowners who bought homes at bubble-inflated prices would see a sizeable reduction in their monthly payment. Others would find that their bank, not wanting to be a landlord, would negotiate a reduced mortgage payment. This program would free a lot of people from the prolonged stress and uncertainty of unpayable debt, and boost consumer demand.

Of course demand for goods and services is what is needed to achieve the growth that will boost the economy and provide jobs. Unfortunately, it is not enough for the President to kiss up to business by appointing their friends to high places, or slathering more tax breaks on them. Our corporations are already sitting on more than $2 trillion of cash; they are not expanding or hiring because there is not enough demand out there for what they can already produce. The bursting of the housing and commercial real estate bubbles will limit demand in those sectors for years to come.

That means that the federal government will have to pick up some of the slack. At the very least it should subsidize the state and local governments so they stop laying people off and raising taxes – thus shrinking the economy and employment further while making this a less educated country. It would be nice to see President Obama take some leadership on these issues, even if it means having to fight for what is right.

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  1. February 8, 2011 at 3:34 pm

    “One relatively simple measure is to subsidize employers who are willing to reduce hours rather than lay people off. Germany has demonstrated the success of this approach in the last couple of years.”

    So why is this “third ingredient of a cure” (Keynes) avoided like the plague, not only by policy elites but by unions? Because of a convention that has gelled in Anglo-American economics that the idea work sharing can create jobs is based on a “fallacy”. If people knew what the dubious source for this fallacy claim was, economists who repeat it would be laughed out of the classroom — if not tarred and feathered and ridden out of town on a rail.

  2. February 8, 2011 at 4:36 pm

    Yes, there are ways to reduce unemployment, and there are ways to revive the economy. The suggestion above would accomplish the first for awhile, but at the expense of real economic recovery.

    I think the mistake is conceptualizing the recession as a random fall in consumer demand, rather than a time to reallocate labor and capital toward more productive uses. Subsidizing “reduced hours” just gums up the market, by encouraging workers to stay in areas where their productivity (in terms of what consumers are actually demanding) is lower than it could be.

    Also, from an efficiency-wage standpoint, one would expect that workers who have their hours cut will also reduce the level of their effort. Companies don’t fire people just to be mean — there’s evidence that having more, lower-hour employees reduces diligence on the job, cutting productivity and profits. When the government subsidizes that option, it may cause America’s productivity to stagnate far into the future (as there’s nothing more permanent than a temporary government solution).

    It is indeed a fallacy to think that work-sharing can create jobs; it “creates” by having multiple people do labor that could have been done by one person. The goods those part-time workers could have produced working other jobs are lost to society. Yes, it could reduce the unemployment statistic, but so could a government mandate requiring all the unemployed to go dig holes and fill them in again for minimum wage. Both ideas operate on the same principle; one just has a little more finesse and better packaging.

    Businesses aren’t holding $2 trillion just for fun. I suspect the reason is that they’re afraid the government might take on some new program to “create jobs” or “protect homeowners” so money invested now could become worthless. The climate of uncertainty due to rampant policy activism is a huge barrier to recovery, and proposing more bright ideas for the government to experiment with is only going to exacerbate those fears.

    I think it’s ridiculous and contradictory to take issue with the amount of money being privately held, then propose an “independent appraiser would set the fair market rent” for homes (fair to whom, exactly?). Creating a mortgage-value czar to bully the banks will just contribute to the problem. Why would any bank consider lending their funds when they might need to cover huge losses after some bureaucrat comes along to force them into the rental industry?

    • Peter Radford
      February 9, 2011 at 4:39 am

      Good points, but still no answer.

      If the recession is not a fall in demand, what is it?

      The market, and particularly the banking system, just failed spectacularly as a capital allocation device by funneling trillions into a wasteful real estate bubble, so why do we rely on its ability to re-allocate capital and labor now?

      Your assertion that businesses are not holding cash for fun is correct. They are holding it because they see no need to expand in view of the lack of demand. This is more plausible than your “fear of government” argument, since profits are at all time highs right now – business is clearly flourishing despite so-called government intervention. Expectations are multi-facted and not simply government policy focused.

      And banks just blew the economy up … and we should not bully them, why?

      Your anti-government thrust is consistent and misguided. The market just failed. It needs help getting back on its feet.

      And your implication that a “real” economic recovery may preclude lower unemployment, or rather that the latter is more important than the former, indicates you have no conception of the relation between work, consumption, and economic growth.

      As I said: good points, but still no answer.

      • J
        February 10, 2011 at 4:44 pm

        Peter, you’re no economist if you think markets set prices.

        Markets don’t set prices. Markets are a mechanism in which the participants collectively set prices by their buying/selling decisions. Ex post humans, not markets collectively failed to allocate capital effectively.

        Sure you can ask why they should be trusted to do so better now given that they are prone to human error – but that absolutely doesn’t prove, as socialists pretend, that governments will do better:
        – Governments consist of humans who are also prone to human error
        – Those humans tend to be insulated from the effects of their actions, more so than employees of a failing bank
        – indeed, government officials tend to get hired more, paid more, and build their reputations more when there is political support for a bigger state. Conflict of interest anyone?

    • merijnknibbe
      February 9, 2011 at 11:11 am

      On this mortgage-value czar: some countries, like Germany, did not have a housing bubble. That’s not a random occurence. The housing and mortgage market market in Germany has a different structure than the USA one (and surely the post 2003 USA one). The structure of markets can make people behave more responsible. You don’t need a Czar to do this, just good rules. And we do need these rules, as thing have gone wrong in a horrible way:

      http://www.nakedcapitalism.com/2011/02/florida-foreclosure-mill-king-david-stern-shows-crime-sure-did-pay.html

      In my view better banking rules are absolutely urgent. Market economies are based upon clear definitions of property – this very basis is compromised by the behavior of banks. If you want the market economy to survive, the banks have to be re-regulated, without rules no markets (or, well, Mexican drug cartel ones, where armed companies set the rules of competition).

      On work sharing: the average working year has declined from about 3000 hours around 1900 to around 1600/1800 at the moment. It’s called the backward bending supply curve of labor. Why should 1400/1600 be wrong?

  3. February 8, 2011 at 5:04 pm

    The first step in fixing the unemployment problem is to re-regulate the financial system and make it very costly for speculators to play with the nation’s money in a casino economy.
    That seems to be the last thing the oligarchy wants to do and the Obama puppet has been informed about this, I’m sure.

  4. February 9, 2011 at 1:12 am

    It is indeed a fallacy to think that work-sharing can create jobs; it “creates” by having multiple people do labor that could have been done by one person.

    It is indeed a fallacy? How much do you want to bet? $5,000? $10,000? For your information, the hoary fallacy claim originated in the testimony of a Manchester employer, Peter Ewart, to the 1833 Royal Commission on Employment of Children in Factories. The “fallacy” in question is what the employer supposed was the workers’ motive in supporting a ten hour limit on child labour in factories.

    As if canonizing the employers’ supposition about the workers’ motives wasn’t enough, the commission examiner, E.C. Tufnell, subsequently wrote an anti-union propaganda pamphlet, reputedly solicited and funded by the governing Whigs, that translated Ewart’s supposition about workers’ motives into a flat statement of the union’s “calculation”. The rest of the story is sheer plagiarism and calumny. That’s your “fallacy” — a cross between Piltdown Man and the Protocols of the Elders of Zion. Look it up, Mr. PhD student in economics.

    http://ecologicalheadstand.blogspot.com/2011/02/april-fools.html

  5. J
    February 10, 2011 at 5:19 pm

    These are not new solutions and they both have their pros and cons. Typically, so-called “Keynesians” will ignore the long-term cons which include
    – taking taxpayer cash to fossilise the use of labour and capital in what may be a sub-optimal status quo
    – insulating market participants from the consequences of their decisions, with moral hazard implied

    I have a vehement specific complaint about the original post: “Another proposal that would help boost the economy, and wouldn’t cost the taxpayers anything would be to allow homeowners who are underwater on their mortgages to become long-term renters. An independent appraiser would set the fair market rent for their home. ”
    – how on earth can an appraiser “set” the fair market rent? Only the market can set the fair market rent. You are talking about something quite different, which is a government-imposed allocation of private resources.
    – you assume, from nowhere, a “sizeable reduction in their monthly payment”. If that’s the case, do they still get to own their homes? In which case the bank’s shareholders take a massive hit. In what twisted world is that so unimportant that it doesn’t even get a mention? Or does the bank get forced to take ownership of the home and then start earning crappy rent from the existing occupants under regulator’s orders, instead of being able to evict them and sell as per existing arrangements?
    – having pointed out that the banks’ shareholders are likely to take a massive loss on such interference with their lending assets, I’ll add that the UK, Irish and Icelandic taxpayer remain massive shareholders in banks. So the shareholder IS the taxpayer, and the taxpayer will take the loss. And as a prudent saver/taxpayer who wants to buy a London house, ideally from some desperate over-leveraged moron who assumed that house prices would always go up, I don’t like your plan one bit.
    – Even if (and I don’t know about the US) the taxpayer doesn’t have direct bank shareholdings, it should be abundantly clear that the taxpayer is heavily exposed to bank losses as the “investor of last resort”. Remember “too-big-to-fail”? (Actually, too-interconnected-to-fail, but that doesn’t roll off the tongue). So if you start whacking bank shareholders in the balance sheet, damn right the taxpayer is ultimately on the hook.

    • ex-libertarian
      February 22, 2011 at 12:19 am

      Only the market can set the fair market rent.
      Mostly in the politically correct sense, since everyone with at least minimal contact with reality knows ‘there ain’t no such thing as a free market.’
      IOW, your statement being founded upon nonsense is non-sequitur.
      If you jettison the PC, you may be able to win some debates.
      there’s evidence that having more, lower-hour employees reduces diligence on the job, cutting productivity and profits.
      yet employers are infamous for restricting employees to under 32 hours per week (or whatever – probably dependent upon state law). there’s also evidence that productivity drops after the 8th hour of a work shift.

  6. merijnknibbe
    February 10, 2011 at 6:24 pm

    @J,

    ‘The market’ does not exist. Depending on the rules which rule the market and guide and restrict the behavior of people, prices can be totally different – very flexible markets might even threaten macro economic stability! A nice paper on this:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722195

    In USA states where forclosure is easy, prices of houses fell more and macro economic developments were worse than in USA states were borrowers have more rights. From the summary:

    ” we show that foreclosures have a large negative impact on house
    prices. Foreclosures also lead to a significant decline in residential investment and durable consumption. The magnitudes of the effects are large, suggesting that foreclosures have been an important factor in weak house price, residential investment, and durable consumption patterns during and after the Great Recession of 2007 to 2009.”

    This is not an argument against markets. It an argument in favor of wise rules. That leaves the question: how to spot a wise rule? Easy, just figure out which rules have to be abolished, according to the big banks. Or, more serious, compare different countries, or states. And never, never believe that asset price increases make a country richer (remember, the Keynesian fallacy of composition).

    • J
      February 11, 2011 at 2:52 pm

      Peter (#3 above) points out that 2004-7 brought what we now see as “funneling trillions into a wasteful real estate bubble”.

      So if foreclosures lead to “a significant decline in residential investment” – that would seem to be a good thing? The same applies to consumption.

      Let’s see how your state-by-state comparison racks up in competitiveness and inward investment in 20 years’ time. I’d bet that the states with plentiful affordable housing may just get somewhere. Also (correct me if I’m wrong, I’m a Brit) don’t banks operate across state boundaries? In which case the kind treatment of defaulters in some states imposes a cost, eventually, on those that have to be more harshly dealt with in other states in a credit-constrained world. No such thing as a free lunch.

      We’ve been eating and drinking too much, now’s the time to cut down. The cold turkey will hurt, but we’ll be better off for it.

  7. Peter Radford
    February 10, 2011 at 9:06 pm

    @ J: I love defenders of markets when they say that markets don’t set prices only humans do. That’s right of course. Which is why markets don’t exist in the way you seem to imply. Only groups of people exist. Each group governed by its own rules, institutions, cultures, geography, social power relationships, technological depth, and networks. If any deeper mechanism could be abstracted from that melange of factors it would always be overwhelmed by them. So it makes no sense to speak of a singular market mechanism, as if it were a consistent force of nature, without putting it in its appropriate, and human, setting. Price is an emergent property of the interactions of people within that setting. So speaking about the abstract market mechanism is meaningless. A market is a label applied to a set of relationships. It is not a mechanism.

    Also: all economic structures are subject to human error. I do not expect government to be more or less effective than a market or a business firm. They are all limited. They all operate within great uncertainty. They are all subject to computational constraints. They are all useful in different circumstances. Agency problems exist across the entire spectrum. This is why I reject all economic arguments based upon extreme views of humanity, both socialist and capitalist. They are inevitably unreal. And I prefer to deal with the real world. After all that’s where we all live.

    It seems to me that people who persistently distrust government, and make claims for the consistent superiority of markets, are simply making plain their political preference. It is not a scientific claim, but an ideological one. That’s fine. Just don’t argue it’s science.

    Thus, of course, ex-post it was human failure to allocate capital properly. There isn’t anything else doing the allocation. When I say “the market failed” I mean that particular group who claim the right and competence to do such allocation. That particular set of humans exposed a great flaw. They cannot be trusted, and need to be constrained in future. Just as they were in the past before deregulation.

    • J
      February 11, 2011 at 2:41 pm

      Thanks Peter.

      Para 1. You say “set of relationships” I say “mechanism”. Potato, potarto. We seem to agree that the errors are human. There will be errors again and, in an uncertain world, we can’t avoid that fact.

      Para 2. You don’t expect government to be more effective than a market or firm. Indeed, government and regulators stood on the sidelines cheering during the credit boom – their track record is just as poor as the banks. So why would you reckon that they are better placed than banks, or other market participants, to re-allocate resources now, as is the suggestion in the original post?

      Para 4. “That particular set of humans exposed a great flaw. They cannot be trusted, and need to be constrained in future”. But governments have human flaws. Governments can’t be trusted. In order to prefer more intervention, you have to have a reason to back the judgement of whoever / whatever will intervene. I don’t see that reason.

      The only “constraints” that government should impose should be e.g., to correct, in future, the ability of market participants to inflict their losses on non-participants. Now the employees whose jobs Mark Weisbrot wants to preserve are participants in the labour market. They and their employers have, sadly, lost. Taxpayers are (for the purposes of this discussion) non-participants. Taxpayers should only pick up the tab for the proposed subsidy to the extent that there is net benefit to them from doing so. There may well be a short-term benefit – but labour market economics should tell you that there is also long-term benefit from people being unemployed and therefore being strongly incentivised to engage in productive job-search.

      Banks and homeowners? Now those homeowners are DEFINITELY property market participants who have lost. The proposed solution inflicts their losses on the poor old taxpayer.

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