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Three Paths to Full Employment


The jobs numbers released by the Labor Department last week were good news. The economy generated 288,000 jobs. This was the fifth consecutive month that job growth exceeded 200,000, the first time that has happened in since before the recession.

While this is better news than we have seen for a while, the economy still has a long way to go before the labor market gets back to its pre-recession level. The economy needs almost 7 million jobs to make up for the jobs lost in the downtown and the growth in the labor market in the last six and half years.

To keep pace with underlying population growth we need roughly 90,000 jobs a month. Even if the economy were to create jobs at the 270,000 rate of the last three months, which no expects, we would not get back to full employment until the middle of 2017. At a more realistic but still optimistic pace of 200,000 jobs a month, we wouldn’t get back to full employment until late 2019.

The prospect of waiting another five years to reach full employment is not acceptable. It means that millions of people are being needlessly denied the opportunity to earn a living. Also, since most workers are not able to see wage gains in a weak labor market, continued high unemployment means that most of the gains from economic growth will go to those at the top. Telling the public that the situation is better than the worst of the downturn is not an adequate response.

The absurdity is that we know how to get back to full employment. The basic problem is that there is inadequate demand in the economy. The housing bubble had been driving the economy before the recession, leading to huge amounts of construction and a consumption boom based on bubble generated housing wealth. When the bubble burst there was nothing to replace this lost demand.

There are three ways to deal with this shortfall in demand. The first is the simplest and most obvious: get the government to spend more money. That one doesn’t fly well with the balanced budget cult types who get scared by big numbers. But those grounded in reality know that in a badly depressed economy the government can boost output and employment by spending more money.

This was shown by FDR’s New Deal programs which had the economy growing at more than a 10 percent annual rate. The massive spending associated with World War II made the case even more dramatically. Those looking for more recent examples might focus on Japan. It has a debt burden almost three times as large relative to its economy as ours. Yet it adopted an aggressive stimulus program that pushed its unemployment rate below 4.0 percent and created the equivalent of more than 4 million jobs in a bit more than a year.

While there are many areas where government spending can usefully be directed, an obvious target for near-term stimulus is the reduction of greenhouse gas emissions. There is no excuse not to be paying workers to retrofit buildings, to install solar panels, and to construct windmills to generate energy. We can also pay for free bus service and the construction of special bus lanes to encourage people to use mass transit rather than drive.

But if the balance budget cultists won’t let us increase demand through more government spending we also have the route of trade. One of the main reasons who have inadequate demand in the economy is the trade deficit. We spend roughly $500 billion (@3 percent of GDP) a year more on imports than foreigners spend on our goods and services. This is money creating demand in other countries, not the United States. If we had balanced trade, we would get almost all of the way back to full employment.

There is a simple way to reduce the trade deficit, reduce the value of the dollar against foreign currencies. This makes our exports cheaper to other countries and makes imports more expensive relative to domestically produced goods. Theevidence on this point is rock solid; when the dollar rises in value the trade deficit goes up, when the dollar falls the trade deficit gets smaller.

We also know how to reduce the value of the dollar. There are many routes to a lower dollar, but the most obvious is to negotiate a reduction with our major trading partners. This was done successfully in the mid-1980s under President Reagan; it can be done again today. It’s worth mentioning here that trade deals like the Trans-Pacific Partnership have nothing to do with the trade deficit and everyone knows this.

Finally, if we can’t increase demand we can reduce supply. The way to do this is by encouraging firms to reduce work hours as an alternative to laying people off. Germany has successfully pursued this work-sharing path to bring its unemployment rate down to 5.1 percent even though its growth has been no better than ours.

The great aspect of this policy is that it can be done at the state level. Most states now have short work programs as part of their unemployment insurance system. These should be promoted. The federal government even picks up the tab at least through the rest of this year.

Other policies that can be pushed at the state and even local level include mandated family leave, sick days, and even vacation days. People in the United States work far more on average than workers in other wealthy countries; bringing our work habits more in line is both a way to create more jobs and create better lives for working people.

The disaster that hit our economy when the housing bubble collapsed in 2007-2008 was entirely predictable and preventable. Tens of millions of people have seen their lives uprooted from this preventable tragedy. There is no excuse not to do everything we to bring this needless suffering to an end.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

This column originally ran on Al Jazeera.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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