Toward a New New Deal

At approximately 3% of GDP, the President’s program $450bn seems ambitious.  But it’s bit misleading because it must offset nearly $170 billion in stimulus that would otherwise expire at the end of the year–some $112 billion in employee payroll tax cuts, $50 billion in unemployment insurance, and $5 billion or more in full expensing of investment.
There’s little doubt that extending unemployment benefits will help those who are struggling to find work.  But continuing the payments we’realready making doesn’t add a single dollar of new demand to the economy. Nor does extending the payroll tax cut, which simply allows workers to keep the extra 2 percent they’ve already been getting. In other words, there is at most $280 billion in new stimulus.  Thus, the program is as much about avoiding an additional fiscal drag on the economy that would result from the expiration of the payroll tax cut and unemployment benefits as it is about new support for growth.  Without the extension of the payroll tax cut and the unemployment benefits, the economy will experience a fiscal drag of more than 1 percent of GDP in 2012.

Similarly, aid-to-states to prevent teacher, police, and fire-fighter layoffs is more of a measure to put the brakes on job destruction than it is a measure to boost employment.  States and local governments have already cut nearly 150,000 education-related jobs in 2011.  Additional assistance to states may help avert future layoffs (the administration suggests 270,000) but it will not increase overall employment much, if any.3.  The administration’s proposals for extending payroll tax relief to employers, much like their proposed tax credits for business investment and for creating jobs for the long-term unemployed, are likely to have a modest effect at best on business investment and new hiring.  Businesses tend to make investment and hiring decisions on the basis of future demand not on the basis of tax benefits.  Studies tend to suggest that many of the businesses that do take advantage of these tax breaks would have made these hires or investments in any case.

So even if President Obama’s package is passed (a big IF), it will simply prevent things from getting worse, and won’t improve the employment picture dramatically.
This is unacceptable.  The job market is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

Whatever the president is able to deliver, it is certain to be too little, too late. Indeed, as Professor Eric Tymoigne has shown, by some measures job performance since the start of the “recovery” has been even worse than during the Great Depression. At the rate we’re going, it will take nine years to return to the pre-recession employment level; by contrast, in the 1930s the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and the CCC.

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans. He told a Labor Day crowd in Detroit that he wants to match the more than 1 million construction workers with an infrastructure-related rebuilding program to improve the nation’s roads and bridges. That is an improvement over his efforts to date, but it falls far short of the 20-plus million jobs we need.

For more than two years, we’ve listened to policy wonks weighing in on the supposed recovery, reading great importance into every tiny click of the unemployment rate, fluctuation of retail sales data, rise or fall of the Dow, and—especially—the latest measure of business confidence and expectations. Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring. All the nation needs is a bit of Prozac slipped into the martinis of the captains of industry to turn this ship around. And the Republicans warn of the depressing effects of Obamacare, Dodd-Frank regulations and EPA restrictions that damage the sentiments on Wall Street.

The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month to meet prospective sales.

The new jobs can only come from the federal government—the only economic entity that can afford to hire. Obama’s 1 million infrastructure jobs is a nice down payment, but it is only three month’s worth. New workers will create the sales that firms need to justify new hiring. Still, we must think bigger if we are to create 20 million jobs.

In his last State of the Union address, President Obama eloquently summed up the longer-term challenges we face. In many ways, they are similar to those that President Franklin D. Roosevelt’s America dealt with: a nation ill-prepared for the century in which it found itself, a nation that was “ill-fed, ill-clothed, ill-housed, and insecure.” Roosevelt’s was a nation with 19th century transportation, education and health care. The New Deal, World War II and President Johnson’s extremely successful Great Society programs transformed America. But America has fallen into disrepair, and again finds itself unprepared for the new century. A new New Deal is needed, with a comprehensive jobs program to again transform America.

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Funding for the job guarantee program must come from the federal government—and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. Registered not-for-profit organizations could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.

To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.

The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.

In truth, the $300 billion the president might propose Thursday is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensity competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. Further, Americans have never embraced welfare. For better or worse, our nation has always preferred a more libertarian path: self-help, personal responsibility, individual initiative. As a result, our welfare programs have always been stingy, temporary and purposely demeaning. They are not designed to reduce insecurity—while they relieve the worst of the suffering, those receiving handouts are supposed to quickly get back into the workforce, to pull themselves up by their own bootstraps. But they cannot do that when the nation is 20 million jobs short.

And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

A $450 billion “investment” in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

An earlier version of this piece ran on TruthDig.