the US jobs crisis

Harvard economist Martin Feldstein thinks that the crisis the US faces is a shortage of jobs, not the national debt.

The US unemployment rate reached 9.2 per cent in June, … double the 4.6 per cent rate in 2007 just before the recession began. ….

Labour market conditions are even worse than the unemployment rate implies. … [A]bout 3m Americans who would like to work but cannot find jobs are not officially counted as unemployed because they have not looked for work in the past month. And there are another 9m employees who would like to work full-time but are only able to get part-time work. Add together all of this and we find 29m Americans who cannot find the full-time work they want, a number equal to almost 20 per cent of the labour force.

The high unemployment reflects the lack of demand rather than any fundamental problems with the US labour market. ….

Since the central bank had not caused the downturn by raising interest rates, it could not cure the downturn by lowering rates. It focused successfully on fixing the credit markets but that was not enough to turn the economy around.

The policies of the Obama administration did not reverse the large initial fall in demand …. Although the “stimulus” package enacted in 2009 was too badly designed to add much to national spending, it did add more than $800bn to budget deficits, causing households and businesses to worry about the consequences of the exploding national debt.

Martin Feldstein, “Forget the debt: its jobs that will define Obama’s future“, The A-List, Financial Times, 26 July 2011.

I share Professor Feldstein’s view that strong fiscal stimulus is needed, and that the 2009 package failed because it was too small and poorly designed. Forty percent of the package was in the form of tax cuts. Tax cuts have limited effect on consumer demand because taxpayers save much of their increased disposable incomes, or use the money to repay debts. Much of the stimulus went also as block grants to state governments. States tended to use this grant money to balance their budgets, not to create jobs with increased spending.

Feldstein’s essay is noteworthy, not for its content, but for its authorship. It is remarkable – and praiseworthy – that such a statement was written by a conservative who was chief economic advisor to President Ronald Reagan.

Feldstein states clearly that “reducing the unemployment rate requires increased spending by households and businesses”, but gives no advice on how to accomplish this. Berkeley professor Robert Reich, who was labour secretary in the cabinet of Bill Clinton, spells out what is needed.

The only way out of the vicious economic cycle [jobs crisis] is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.

Robert Reich, “Vicious Cycles: Why Washington is About to Make the Jobs Crisis Worse“, 25 July 2011.

Unfortunately, Washington policymakers are focusing their attention on reducing the deficit, not on stimulating demand.

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