Home > Economy, unemployment > President Obama discovers how serious the recession is

President Obama discovers how serious the recession is

from Dean Baker

That’s what he told an audience in Chicago last week. To be fair, he was referring to revised data from the Commerce Department showing that the falloff in GDP was larger than originally reported. However, ridicule is appropriate. He and we knew all along how many people were out of work. The employment numbers told us the size of the hole and the desperate need for government action.

This sort of ridiculous comment, and President Obama’s weak response to the recession over the first two and a half years of his presidency, explains the tidal wave of skepticism facing President Obama’s widely hyped upcoming speech on jobs.  The list of remedies leaked ahead of time does little to inspire hope.

At the top of the list of job-creating measures is extending the 2 percentage point reduction in the Social Security payroll tax. This provides no boost to the economy, since it just keeps in place a tax cut that was already there, but if the cut is allowed to end at the start of 2012 it will be a drag on growth.

As it stands, the Social Security program is being fully reimbursed for the lost tax revenue, but there is always the possibility that Republicans will use this as a basis for attacking the program. Given President Obama’s willingness to support cuts to Social Security it is understandable that this part of his jobs agenda doesn’t generate much enthusiasm.

A second item frequently mentioned is an infrastructure bank. This would allow the government to treat long-lived infrastructure investment as capital expenditures depreciated over their expected lifetimes rather than expenditures to be paid for in full in the years the construction takes place. This is good policy and accounting (it is the same approach used by private businesses and state governments), but it is not going to create many jobs and certainly not in the next couple of years.

The other items on the list are less clear. On bad days we hear that President Obama is going to tout the trade agreements with Panama, South Korea and Colombia. These deals are all problematic at best, but even their supporters can’t claim with a straight face that they will generate any noticeable number of jobs.

There are also reports that President Obama may propose some sort of tax subsidy for job creation. Such a subsidy can be bad or not so bad. One of the proposals, temporarily eliminating the employer side of the payroll tax, is a great plan if your intention is to give still more money to business and undermine Social Security.

There is extensive research showing that increases in the minimum wage of 15-20 percent have no measurable impact on employment. If raising the cost of labor by 15-20 percent doesn’t reduce employment then we can’t think that reducing the cost of labor with by 6.2 percent as a result of temporarily eliminating the payroll tax will increase employment. (Logic can be cruel.) This means that we should expect few jobs will be created by this sort of subsidy; we will just be further supplementing the record profit share of national income.

We will also be raising further questions about Social Security. It is important to remember that if the point is simply to hand a specific sum to business or individuals, we can do this without ever mentioning “Social Security” at all. In other words, if the point is to give businesses a tax subsidy equal to 6.2 percent of their payroll, then we can just specify that they get a tax credit equal to 6.2 percent of their payroll. It is understandable why Republicans, who explicitly want to end Social Security as we know it, would insist on tying the subsidy to the Social Security tax. It is hard to understand why President Obama would adopt the same approach.

Of course we should not be defeatist about creating jobs. Anyone who cares knows how to do it.

At the top of the list should be a jobs program for young people that would be modeled on the Civilian Conservation Corps. There are many parts of the country where the unemployment rate for young people is 40-50 percent. These young people have no realistic prospect of getting jobs. Giving them work at or near the minimum wage cleaning up streets, parks and abandoned buildings in their neighborhood can make a big difference in their lives.

A more far-reaching policy would be to promote work-sharing as an alternative to layoffs. The money that is paid out in unemployment insurance could instead subsidize shortened work hours. If just 10 percent of the people who lose their jobs each month could be retained with this policy, it would be create another 2.4 million jobs a year. This policy has been so successful in Germany that its unemployment rate is now lower than before the downturn even though its growth has been almost the same as ours.

Finally getting the dollar down is the most important long-term job creation policy. If we managed to get back towards balanced trade it would lead to almost 6 million manufacturing jobs.

Unfortunately, President Obama seems unlikely to go for real job creation measures. Look forward to being disappointed.

See article on original website

  1. August 29, 2011 at 6:13 pm

    work sharing is a terrible idea — and only the Germans would value it.
    All that work sharing does is (hopefully, at least) produce the same amount of output by hiring more workers.

    What does it do to the income of worker swhose hours are reduced?? It either lowers their income per week — or if employers are required to pay the same amount for say 30 hours work as they did pay when the original workers worked 40 hours a week( plus hirie workers for the extra 10 hours of work otherwise lost), then it increases the cost of labor by approximately 25% for the same output. Great!! we can now get a 25% increase in the CPI!!! Won’t the Central Bankers love that — then they can show they still have policies that work — AND INCREASE THE INTEREST RATE SO AS TO THROW MORE WORKERS OUT OF WORk!!

    Unless you believe that all consurmers, business firms, and governments are already satiated with goods and services and we need not increase GDP, then work sharing is ridiculous!!

    It is as if we required housepainters to paint walls with the same size brush that portrait ainters used to paint portraits -thereby driving up the costs of painted walls in order to give more housepainters employment..

    Come on lets use our heads — with 50 per cent of bridges fallinng down, with community water supply facilities in bad shape, with the need (desire) for more light rail commuter facilities to releave congestion on highways, etc. not to mention the many people living in poverty who would want more goods and services — share the work is foolishness which will only feed into the consevative propoganda that liberals Stimulus policies only cause inflation and not output growth.

    If we think output growth is desireable, i.e., the marginal utility of extra output exceeds the marginal utility of extra labor employed, then work shainge is ———- (you fill in the blank)?

    And if we, as a society, do not want any more output per population, then why grow at all?

    Paul Davidosn

  2. Keith Wilde
    August 30, 2011 at 11:48 am

    Ideology trumps practicality any day, eh, Paul?

  3. Jeff Z.
    August 30, 2011 at 1:59 pm

    Even if income is reduced, when hours worked are reduced, it is better to have almost everyone employed at say, $40,000 a year, then losing their entire salary of $50,000 and going on the dole.

    It is similar to the idea of apprenticeship. The master still had a SOCIAL obligation to feed and clothe his apprentices and journeymen, even if the work volume did not at the time justify the number of workers. I remember Ed Nell discussing this in one of his writings oh so many years ago while I was in grad school. In what way is the institutional structure of the U.S. fulfilling this SOCIAL commitment? If it is not, then why not try a new idea? Every crisis is also an opportunity.

    And while it is true that there are many aspects of the infrastructure in the U.S. that are in dire need of repair, we might also stop to reconsider what the good life really means. There are some economists that have questioned the validity of using GDP and GDP growth as a proxy for a prosperous life. What do we really want and need?

  4. August 30, 2011 at 3:01 pm

    to Keith Wilde:

    Next thing you will be telling us is that slavery in the South before the civil war was a good thing because the slave masters assumed the SOCIAL RESPONSIBILITY to feed and house the slaves — while a free market for labor is a bad thing because those who are unemployed can starve to death (at least if the Republicans have their way and do not extend unemployment benefits). So lets make arr workers slaves!! Correct?

    How about a free market for labor where government takes on the responsibility to assure FULL EMPLOYMENT as well as clean and safe working conditions, the illegality of child labor, etc, etc?

    Paul Davidosn

  5. August 30, 2011 at 3:31 pm

    SORRY BUT MY LAST COMMENT WAS RESPONSE JEFF Z. NOT KEITH.

    PAUL DAVIDOSN

    • Jeff Z.
      August 30, 2011 at 6:32 pm

      Paul,

      There is a difference between the existence of a social obligation and how well it is carried out. Both your slavery example and your example of the government acting to ensure full employment demonstrate this. But they also show that the same social obligation takes on different forms in different times and places. I would also question how strong the social obligation was to slaves in the U.S. In all fairness,the idea of work sharing might be more effective as a preventive measure in the future, rather than a current inducement to hiring the unemployed.

      The government acting to ensure full employment is one way of fulfilling a similar social obligation – that of citizens’ responsibility to other citizens. What form this would take is debated. Isn’t there more than one way to skin a cat?

      Some want to end welfare. I don’t. Some want to end or gut social Security in the U.S. I don’t. Some deny the government has any social obligation at all beyond contract enforcement and the maintenance of private property.

      The Biblical injunction that you are your brother’s (and sister’s) keeper can be interpreted as a reminder to behave ethically and decently toward other people; a reminder of the social impact of our actions. Greed often gets in the way of fulfilling this injunction. I am sure it was ignored under the institution of apprenticeship. That it was ignored under the institution of slavery in the U.S. seems obvious to me. It is also ignored under the institutions of modern financial capitalism. I could be in favor of the government as an employer of last resort, but I would need to know what alternatives there are before making a final judgment. Alas, governments are not perfect, so no proposal is perfect.

      Apprenticeship is not slavery. The apprentices of the past and the employees of the present still have rights as human beings where slaves in the U.S. prior to the U.S. Civil War did not. In practice, the appearance could be pretty close, but so does working for crap wages in crap jobs to buy cheap plastic crap.

      Thus, what do we really want and need?

      • August 30, 2011 at 6:47 pm

        Jerry Z.

        Several decades ago, some well known economic historians wrote that slaves in the South before the civil war were treated better than wage labor in the North because slaves were part of the capital investment of plantation owners. And we all know that profit maximizing entrepreneurs take good care of their capital equipment as long as it is productive.

        I did not mean that government was to be the employer of last resort. I only meant that government in alliance with private enterprise should increase market demand for goods and services that domestic entrepreneurs can produce and that domestic citizens want.

        I did not

  6. August 30, 2011 at 5:45 pm

    Stimulus policies are the best solution. But they need to be combined with the collection of all land rent. I won’t repeat the argument again because all economists should already know it.

  7. Jeff Z.
    August 30, 2011 at 7:57 pm

    Paul,

    I am aware of the Foley and Engermann(?) book. “TIme on the Cross” was the title, if I recall correctly. Didn’t Stampp also write about it in “The Peculiar Institution?”

    The idea that government could increase aggregate demand and reduce unemployment is a very good idea in some respects. Government as employer of last resort and work sharing are possible alternatives.

    I am struck again by the ethical dilemma that we can observe real suffering now, and can take effective steps to reduce it (government stimulus among them) and that we have an obligation to do so. Yet at the same time, such actions preserve a system where that kind of suffering will recur, so I begin to questions the merits of the system as such. I ask myself what alternative systems there might be, and that the transition to those systems involves considerable costs, with no guarantee that the suffering from material deprivation and unemployment will be reduced, other that other types of suffering might actually increase.

    I worry about the environmental impact of economic growth, simply because we will not be the ones to see the costs in the future of our actions today. Actions and costs today are real in ways that benefits and costs of tomorrow are not.

    • August 30, 2011 at 8:08 pm

      Jeff Z:

      Churchill once said “No one pretends that democracy is perfect or all wise. Indeed it has been said that democracy is the worst form of government except for all others forms that have been tried from time to time. ”

      in a similar vein the Keynes-Post Keynesian analysis is of an imperfect entrepreneurial economic system that we call capitalism. Despite its imperfections, I believe that capitalism is the best system humans have devised to achieve a civilized economic society. But like Keynes I believe there are two major faults with the system namely, its failure to provide persistent full employment and its arbitrary and inequitable distribution of income and wealth. These faults however can be corrected by a proper government policy. — Not like socialism or communism — but under democracy.

      Paul Davidson

  8. August 30, 2011 at 9:16 pm

    “I believe that capitalism is the best system humans have devised to achieve a civilized economic society.”

    What’s wrong with the concept that the ownership of land and capital should reside with those who need them? And that warm-blooded labour is the only factor which can earn its return?

  9. Garrett Connelly
    August 31, 2011 at 2:52 am

    Carol, you’re closing in on an actual solution because you are willing to look at something very different than patching a failed system which is dragging the environment into collapse along with it. Work sharing points in the direction of social cooperation which, along with justice and equity, is key to a prosperous future that does not kill the planet.

    Start at ground zero. If everyone on earth worked forty hours a week using the economic systems we now have, everything alive would be killed sooner than it will be at the current depressed rate of economic activity. Witness the environmental disasters of China, India and Brazil to see what would happen if the entire world were booming.

    Real democracy that focuses human intelligence in all the public realms will exhibit a democratized economy where externalized profits that build civilization requires far less work to reap greater prosperity through living well in a balanced relationship with Mother Earth.

  10. Dave Taylor
    September 2, 2011 at 7:27 am

    Good discussion, this. Garrett, I agree Carol is getting near the solution; necessary corollaries to needers owning land and property are that we should be trading SURPLUS produce, not necessities, and that international traders should be legally required to maintain their own balance of trade, not off-loading the responsibility for that onto government.

    It seems to me Paul is conflating real marginal utility with financial market utility, where repairing one’s own bridges in a way which shares out better the available wealth, is always going to be hard work compared with importing oil and trash at the cost of devaluing the currency.

    I agree with Jeff that apprenticeships are a good (in fact a necessary) thing, but that is difficult when the machinery in one’s factories has been exported and agricultural labour and know-how have been largely eliminated by mechanised agri-Big Business. My solution would be to require traders to act responsibly, governments to take back responsibility for issuing and rationing credit (which doesn’t have to be by Keynesian taxation of they issue it themselves), and to aim at sharing not only the productive work but also the maintenance and development work, which is where apprentices are most likely to learn something of satisfying interest.

    • Alice
      September 2, 2011 at 9:40 am

      Dave – my solution is a lot simpler. Remove the worhsip of free trade and globalistion. Or risk living with a slavery based production empire again because that is where globalisation takes us all. There is always cheaper labour where people are starving and where there are people who are starving, jobs will be lost from nations where people are not starving but close to it.
      Globalisation does restore wealth in some countries but how much does it impoverish others? No-one near avoidance of near starvation wages can afford the prices some of these companies want to sell for. Its a lose / lose. A race to the bottom.

      What good are apprenticeships if there are not enough jobs?

      • Dave Taylor
        September 2, 2011 at 3:22 pm

        Alice – I’m actually agreeing with the need to remove the worship of free trade and globalisation, but as I see it, that is the aim. The problem is how to, where the answer is to give them something better to think about. The Jewish philosopher Erich Fromm pointed out that the First Commandment (“I am the Lord thy God, who brought thee out of the land of Egypt” etc, spelled out in the context of the freed Israelites worshipping “the Golden Calf”), is also the First Commandment of logic: “Thou shalt not mistake the image for the reality”. I’m trying to direct attention away from the image of international free trade to the Law of Least Action and logical ways of of meeting the real need of people for a more satisfying way of life: apprenticeships and development work motivating them to take the trouble to do jobs that need doing, and due credit allowing them to earn their keep by doing it without need of an employer. Doubtless you will feel negative about that, but think about it anyway.

  11. September 2, 2011 at 10:43 am

    @Garrett

    I began my real economic education with learning about the philosophy of Henry George but, to my mind, it is not a full solution. This is because George believed that the owners of capital earn their return (which we call profit but Georgists call interest). He only saw exploitation by landowners and could not see that the owners of capital were also expropriating surplus labour. That capital wears out and needs replacing (and land does not) does not detract from the fact that under capitalism accumulation can occur without effort: money making money.

    Extracting all land rent for public benefit would undoubtedly have massive beneficial effects and would give a boost to capitalism.

    • Dave Taylor
      September 2, 2011 at 4:51 pm

      Carol – good points, given your narrow understanding of ‘capital’. I also want to appreciate Dean Baker’s article, where floors do need sweeping even though I learned that myself through an apprenticeship and development work.

      Logically, your problem with profiteering goes away once it is accepted that money is an authorisation of real credit, given (by nature, workers and suppliers alike) in the form of resources, goods and services. Where employees, employers and business needs are so provided for, the prime task of business becomes repaying the debt by replacing or making good the real credit so used, whereon the credit can be written off and ongoing profits put into a prize fund (rather than owners’ or managers’ pockets) so good work can be motivated at all levels. That way there can be finite diversity but not indefinite accumulation.

      • September 2, 2011 at 7:44 pm

        Profiteering goes away when workers own the capital (goods) they need. Banks (which could also be worker-owned co-operatives) can mediate personal savings and personal and business loans and legitimately charge for the service

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