Jobs are needed in the US but that would require leadership

There were two very different Op Ed pieces in the New York Times on July 31, 2010. On the one hand, the “strategic deficits” man, David Stockman is trying to ramp up a bit of advance publicity for his upcoming book on the financial crisis which I hope goes out to the remainder desks shortly after being published. He is advocating balanced budgets and “sound money” – which is neo-liberal speak for austerity and rising unemployment. On the other hand, Robert Shiller is advocating a “just do it” approach to recovery where the “do it” is defined in terms of public sector job creation. I find the latter argument compelling when you look at the data and what it is telling us about the American lives that are being destroyed by the policy vacuum. I am also sympathetic to Shiller’s line because sound macroeconomic theory points to that solution. Stockman displays an on-going ignorance of macroeconomics although some of this views resonate with me in a positive way.

Is it harder to get a job in the US than to lose one?

This question can be answered fairly clearly by examining the Gross labour flows that are available from the US Bureau of Labor Statistics. I updated my databases this morning to take us up to June 2010.

To fully understand the way gross flows are assembled and the transition probabilities calculated you might like to read these blogs – What can the gross flows tell us? and More calls for job creation – but then.

As a refresher, gross flows analysis allows us to trace flows of workers between different labour market states (employment; unemployment; and non-participation) between months. So we can see the size of the flows in and out of the labour force more easily and into the respective labour force states (employment and unemployment).

The various inflows and outflows between the labour force categories are expressed in terms of numbers of persons. But a useful alternative presentation is to compute transition probabilities, which are the probabilities that transitions (changes of state) occur. For example, what is the probability that a person who is unemployed now will enter employment next period.

So if a transition probability for the shift between employment to unemployment is 0.05, we say that a worker who is currently employed has a 5 per cent chance of becoming unemployed in the next month. If this probability fell to 0.01 then we would say that the labour market is improving (only a 1 per cent chance of making this transition).

The following table shows the schematic way in which gross flows data is arranged each month – sometimes called a Gross Flows Matrix. For example, the element EE tells you how many people who were in employment in the previous month remain in employment in the current month. Similarly the element EU tells you how many people who were in employment in the previous month are now unemployed in the current month. And so on. This allows you to trace all inflows and outflows from a given state during the month in question.

The transition probabilities are computed by dividing the flow element in the matrix by the initial state. For example, if you want the probability of a worker remaining unemployed between the two months you would divide the flow (U to U) by the initial stock of unemployment. If you wanted to compute the probability that a worker would make the transition from employment to unemployment you would divide the flow (EU) by the initial stock of employment. And so on. So for the 3 Labour Force states we can compute 9 transition probabilities reflecting the inflows and outflows from each of the combinations.


The first graph compares the US transition probabilities as at December 2007, June 2008, June 2009 and June 2010 (see the accompanying Table for values). The data is from the US Bureau of Labor Statistics.

The probability of getting a job if you are unemployed continues to fall in the US (now 16.4 per cent chance compared to 18.3 per cent in June 2009). The chances of remaining unemployed have falling but those making transitions out of unemployment are more likely to exit the labour force into activity. These transitions will surely contain a significant hidden unemployment component. The probability of retaining a job if you have one is virtually unaltered over the period shown. Further, new entrants to the labour market face a declining likelihood that they will enter employment. There

The next graph shows time series of the various probabilities since December 2007 to October 2009. We have already seen it is now harder to get a job in the US for the unemployed and new entrants.

The 4 time-series graphs tracks the downturn period. The top left-hand graph shows the same state transitions (EE, UU, NN) and while the EE and NN transitions are fairly steady, the UU (the probability of remaining unemployed) has risen substantially.

Further, the top right-hand graph shows the transitions between employment and unemployment. UE improved a little earlier in 2010 but has now started to decline again. There is some evidence that EU (probability of a loss of job into unemployment) is levelling-out.

The bottom graphs shows the transitions between Non-participation and the labour force states (employment and unemployment). They provide a broader picture of our previous conclusions based on the bar graph.

So it is clear that the likelihood of an unemployed worker getting a job in the US is falling even with the modest growth that has been evident. The slowdown in growth in the June quarter has reduced that probability even further.

Long-term unemployment in the US

The following two graphs are taken from the latest US BLS data on the Duration of Unemployment by categories. The average duration of unemployment in the US is now 35 weeks (Source). The graphs show the duration categories as a proportion of total unemployment (top panel) and as a proportion of the Civilian labour force (bottom panel).

While the burden is disproportionately being borne by the Black or African American cohort the gap between the most disadvantaged and the white cohort has narrowed as the recesssion deepened and persisted (Source).

The conservatives spend their time quoting figures pertaining to the size of the public deficit or the associated build-up in public debt and draw all sorts of incorrect conclusions about the figures they quote (endlessly). But for me the scariest data is presented here. The disenfranchisement that this duration data is depicting – given I understand what unemployment means and how it arises – is frightening.

Moreover, the problem gets harder to solve the longer you leave it because then the unemployed inherit new issues beyond the loss of income and the plunge into poverty. They experience worsening physical and mental health, increased incidence of family breakdowns, and more. Their children who grow up in jobless households also learn the plight of disadvantage as well and the research shows they are worse off as adults as a result.

The long-term unemployed also lose their attachment with the labour market.

I have said it before but you can never say it enough – there is no greater waste than unemployment and rising and persistent long-term unemployment amplifies that outcome.

I see this data and say – another fiscal stimulus aimed at job creation is desperately needed in the US or else it will further slip into a state that will take years to retrieve.

Further, the problem is so large now – as a result of the policy neglect to date – that unintended social changes may occur which will further destabilise the continuity of American life. Crime rates and civil disorder will rise if the problem is not dealt with in such a way that the disenfranchised are provided with access to the income generation process again.


I last wrote about David Stockman in this blog – We have been here before ….

For non-Americans and Americans who cannot remember, the American Prospect Magazine article – “Strategic Deficit” Redux (published January 27, 2010) reminds us that:

President Ronald Reagan’s budget director David Stockman coined the phrase “strategic deficit” to describe the usefulness of creating long-term budgetary shortfalls to undercut political support for governmental spending … Moreover, strategic deficits can enable opponents of public investments to sound compassionate – “We can’t steal from our children to pay for our short-term desires.”

The logic that Stockman adopted and which was all the rage in the early 1980s was the so-called “supply-side” economics (famously represented by the Laffer curve). In a famous interview published in the Atlantic Monthly (December 1981) – The Education of David Stockman – we learn a lot about the conservative hypocrisy of this era:

The supply-side approach … assumed first of all, that dramatic action by the new President, especially the commitment to a three-year reduction of the income tax, coupled with tight monetary control, would signal investors that a new era was dawning, that the growth of government would be displaced by the robust growth of the private sector. If economic behavior in a climate of high inflation is primarily based on expectations about the future value of money, then swift and dramatic action by the President could reverse the gloomy assumptions in the disordered financial markets. As inflation abated, interest rates dropped, and productive employment grew, those marketplace developments would, in turn, help Stockman balance the federal budget.

Stockman admitted in that interview that “”The whole thing is premised on faith … On a belief about how the world works.” His predictions in that period were very wrong. Students of economic history will recall that none of the claims made for supply-side economics happened. The “faith” was misplaced.

In August, when enactment of the Reagan program was supposed to create a boom, instead, the financial markets sagged. Interest rates went still higher, squeezing the various sectors of the American economy. Real-estate sales were dead, and the housing industry was at a historic low point. The same was true for auto sales. Farmers complained about the exorbitant interest demanded for annual crop loans. Hundreds of savings-and-loan associations were at the edge of insolvency. The treasury secretary, perhaps also losing his original faith in the supply-side formulation, suggested that it was time for the Federal Reserve Board to loosen up on its tight monetary policy.

The US economy went into recession and the budget deficit rose. Stockman resigned from his role at the OMB less than 5 years into Reagan’s presidency. In that time, the gross federal debt level had nearly doubled. Unemployment had risen sharply, growth was slow in returning and all the predictions of the supply-siders were exposed for what they were misplaced faith statements.

In the Atlantic Monthly interview, Stockman admitted that his plan to dramatically cut the federal budget:

… boils down to a political question, not of budget policy or economic policy, but whether we can change the habits of the political system.

He also exposed the agenda of the Reagan tax cuts as being a “Trojan horse to bring down the top rate”. Trickle-down was a lie.

As an aside, Stockman left government and went to Wall Street and got involved with the Blackstone Group. This is the company that made Peter G. Peterson rich. The latter is one of the principal deficit terrorists in the US, using his considerable fortune to fill the minds of Americans with propaganda (ably supported by News Limited – Fox).

The Atlantic Monthly interview also exposed Stockman’s belief that the supply-side view of “expectations” was flawed:

Stockman … was beginning to leave the … (supply-side) … church. The theory of “expectations” wasn’t working. He could see that … Stockman began to disparage the grand theory as a kind of convenient illusion – new rhetoric to cover old Republican doctrine.

In the end, the initial premise that he used to justify the austerity cuts also collapsed:

Now, as the final balance was being struck, he was forced to concede in private that the claim of equity in shrinking the government was significantly compromised if not obliterated.

Like all these old rodents who have made fortunes being in or around Wall Street and policy making circles, Stockman still claims to be an authority. His latest Op-Ed contribution to the New York Times (July 31, 2010) – Four Deformations of the Apocalypse – is an example of this.

He is actually intent on conducting an internal war with the US Republican party. His bitterness from his years as a Reagan apparatchik when he could not persuade the government of the day to cut severely is still evident. They cut and caused a recession but Stockman wanted more.

I am not suggesting wise heads prevailed because the moderation of Stockman’s proposed savagery was more a case of special pleading and “let the cuts be elsewhere” than any common sense understanding that if you run austerity policies then you will cause a recession. But if Stockman was allowed to have his way things would have been much worse in the early 1980s. They were bad enough as it was.

Stockman initially says that:

If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt – if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 – will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

Clearly, from a Modern Monetary Theory (MMT) perspective this statement is littered with errors. The US government is sovereign in the US dollar and faces no solvency risk. The Greek government is not sovereign in euros (the currency it uses) and is at the risk of insolvency.

But I would add that I do not favour the extension of the tax cuts for the top income earners in the US at present. As Alan Greenspan noted in his interview on Meet the Press on Sunday (August 1, 2010) a disportionate benefit of the stimulus measures have been enjoyed by the top-end-of-town.

I also do not think tax cuts are a very good way to stimulate an economy with deficient aggregate demand. Some of the “stimulus” is lost to saving. Government spending is more direct and effective in this regard – a $ spent is a $ that stimulates production.

I know this comes down to your ideological persuasion. So my very good mate, Warren Mosler is more sympathetic to tax cuts to stimulate private activity. I prefer public spending to stimulate public goods production and to target job creation for the most disadvantaged. I prefer more public activity relative to private activity. But the essential MMT mechanics are no different – a fiscal stimulus is needed in one form or another to generate more demand and more employment.

Stockman then claims that the Republicans are no longer rooted in the “traditional financial philosophy” where:

Republicans used to believe that prosperity depended upon the regular balancing of accounts – in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance – vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

So the modern Republicans are making “a mockery of traditional party ideals” and has “led to the serial financial bubbles and Wall Street depredations that have crippled our economy”. Stockman expresses the new Republican approach as having caused “four great deformations of the national economy”.

First, he claims the move to a fiat currency in 1971 when Nixon abandoned the Bretton Woods fixed exchange rate-convertible currency system created a system where the US has “borrowed prosperity on an epic scale”. He is referring to the fact that current account deficits are now common in the US.

But from a MMT perspective, the current account deficits mean that the US citizens are enjoying the benefits of the imports (shipping less real resources abroad relative to those coming in) and financing the desire of foreigners to accumulate financial assets denominated in US dollars. It is a case of enjoy it while you can.

When the foreigners’ desire to accumulate financial assets denominated in US dollars wanes then the party will be over and the US access to foreign goods and services will not be as favourable.

It is hard to see this situation as a product of anything other than private market-based decisions being made on a voluntary basis. The sort of transactions that the free market lobby would delight in promoting.

The fact is that the move to a fiat monetary system provided the US government with a greater freedom to advance public purpose and made it easier to maintain aggregate demand and strong employment growth. The reality is that the US government has not used this freedom very effectively. But that is not the fault of the monetary system but the persons who gain power.

Stockman correctly impugns Milton Friedman:

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

Milton Friedman was continually wrong. How he enjoys celebrity still is beyond me. Please read my blog – The old line back to free market ideology still intact – for more discussion on this point.

MMT never would suggest that a floating exchange rate will lead to net exports being zero. The point is that with floating exchange rates macroeconomic policy is freed to concentrate on domestic issues – advancing domestic well-being. Under fixed exchange rates, monetary and fiscal policy was held hostage to the need to defend the parity and nations that ran current account deficits always faced damaging and wasteful domestic deflation (and high unemployment).

Once you understand that current account deficits don’t matter much then a rational policy maker will delight in the freedom that floating exchange rates provides.

Stockman wants to correct the “chronic current-account deficits” because it means a nation is :spending more than it earns” by “stringent domestic belt-tightening”. Where is his cost-benefit analysis? The US citizens would lose their superior access to the world’s goods and services that are freely supplied in return for financial claims in US dollars. But even more disturbing more of them would become unemployed and impoverished.

It makes no sense at all.

Stockman also wants to go back to fixed exchange rates where politicians will have to be more disciplined.

This is one of those timeless myths. Under a flexible exchange rate, politicians also have to be “disciplined”. They cannot expand net public spending beyond the capacity of the real productive sector unless they want inflation to be the outcome. But using the unemployed to fight a non-issue like the current-account position is not only the height of inefficiency (comparing costs and benefits) but is also to my value system an immoral act.

So you keep your parity a bit higher and imported luxury cars and overseas (ski) holidays cheaper. But the costs of the unemployment dwarf anything else.

Second, Stockman says:

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

Please refer back above to Stockman’s record on public debt. Pot calling the kettle black! Further, while he subsequently renounced the tax-cut-improves-deficits ideology that was the hallmark of the supply-side economics, Stockman was content to play along with that rhetoric when he was in the OMB.

But the more important issue is that all we can conclude from the numbers he quotes is that the wealth of the public debt holders has risen by that much. There is no major problem facing the US economy as a consequence of the debt build-up other than in recent years the expansion has been driven by the collapse of aggregate demand.

The problem in that last instance is not the rising debt but the lost real GDP and rising unemployment.

Further, the real problem has been the rise in private indebtedness which, in part, has been the result of mis-placed attempts at fiscal conservatism of the sort Stockman is now advocating.

I would also once again note that the tax-cut brigade has been a hallmark of the conservative “market-oriented” politics and is not my preferred way to provide fiscal stimulus.

Third, Stockman says:

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector.

That expansion has been very beneficial to Stockman himself and I didn’t see him writing about the growing tentacles of Wall Street when he was working there. But I agree with him that the financial sector are parasites and mostly unproductive. But the sort of policies that Stockman is claiming are virtuous contributed to the rise in finance!

Please read my blogs – Why pander to the financial markets? and Financial markets are mostly unproductive – for more discussion on this point.

Fourth, Stockman says:

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans – paid mainly from the Wall Street casino – received two-thirds of the gain in national income, while the bottom 90 percent – mainly dependent on Main Street’s shrinking economy – got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

For every job sent abroad there is another worker than can be redeployed domestically to advance public purpose or fulfill some private function. Nations shift employment bases as they develop and the only way the US became rich was by taking employment from Europe. The shifting industrial bases is a complex argument and I still plan to write a blog about manufacturing etc.

The part of Stockman’s claim I agree with relates to the increased casualisation of the workforce and the real GDP grab by the top-end-of-town. That has been a major outcome of the neo-liberal years and has been engineered by deregulation, privatisation (not so much in the US) and by legislative attacks on welfare and working conditions.

Norway, for example, has seen the decline of its manufacturing sector and the rise of a service sector like all advanced nations. Their trick was to ensure that the public sector maintained a strong presence in service job creation which allowed these jobs to be well-paid, secure and delivering high productivity. They also didn’t waste their youth. Please read my blog – Norway … colder than us but … – for more discussion on this point.

Stockman predictably concludes:

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing – as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach – balanced budgets, sound money and financial discipline – is needed more than ever.

I have seen very little “Keynesian” policy in the US over the last 35 years. But if the US government does try to implement austerity policies designed to balance the budget then they will make their deficits grow. This will be the result of a worsening growth rate and the automatic stabilisers.

The US government should run larger deficits at present to allow the private sector to continue to reduce their indebtedness but also more importantly to stimulate aggregate demand and address the very significant unemployment problem.

I agree that major financial regulation is required which would significantly reduce the relative size of the financial sector. Please read my blogs – Asset bubbles and the conduct of banks and Operational design arising from modern monetary theory – for more discussion on this point.

Overall, Stockman is one of those hacks who performed badly when he had his hands on the policy steering wheel and now thinks he has something important to say. He hasn’t and he should be disregarded.


If you juxtapose that view of the world with the proposals presented by Robert J. Schiller in his New York Times article (July 31, 2010) – What Would Roosevelt Do? – you see that there are some US commentators who can think beyond the hysterical limits that the neo-liberal ideology imposes on the public debate.

Shiller notes that:

ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.

Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less – but we need to focus much more on actually putting people to work.

Interestingly, Shiller notes that the public works programs under the aegis of the “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” are mostly capital intensive – which means very few jobs per dollar outlaid.

I encountered this problem when I did some work in South Africa evaluating their Public Works program and helping them improve the second five year plan. The engineers in the Public Works Department were educated to use best practice methods in road building etc but failed to appreciate that the goal was to generate jobs not to make roads with the least people. There is a real struggle between those who want to create work and the engineers. I have become friends with an enlightened civil engineer who has done a lot of work throughout Africa who can demonstrate that labour intensive road building delivers a first-class outcome and employs thousands more workers for a given outlay.

Shiller understands this too. He says in relation to capital intensive projects:

Like many such stimulus projects, … [they] … could be justified if you accept the idea that gross domestic product, not jobs, is central – a misconception rooted in economic theory, or at least in the way that Keynesian economic theory has evolved.

That misconception relates to how we define a recession. The standard (technical) definition is two consecutive quarters of negative real GDP growth. But unemployment (and long-term unemployment) is “lagging indicator” and stimulating GDP growth does not necessarily lead to rapid falls in unemployment.

Indeed, in the early stages of a recovery, unemployment typically rises as participation rates start to rise again (the hidden unemployed re-entering the labour force).

Shiller correctly notes that unless the US government takes “new measures”, the US faces “the prospect of protracted unemployment”. He outlines the following proposal:

Why not use government policy to directly create jobs – labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?

Why not indeed?

Moreover, Shiller asks whether this would “be an effective use of resources?” He says:

From the standpoint of economic theory, government expenditures in such areas often provide benefits that are not being produced by the market economy. Take New York subway stations, for example. Cleaning and painting them in a period of severe austerity can easily be neglected. Yet the long-term benefit to businesses from an appealing mass transit system is enormous. (This is an example of an “externality,” which the market economy, left to its own devices, will neglect.)

Such benefits are hard to measure precisely because there is no current market price for them. Cost-benefit analysts tend to be in endless debate about such programs, and so the social impetus for them often becomes blurred. Keep this in mind, though: Whatever the merits of specific programs, the cutoff that we choose for classifying a project as “good” or “bad” should be adjusted downward in periods of widespread unemployment.

So while the opportunity costs of using the unemployed in a Job Guarantee program are not zero they are fairly low. There is zero bid for their services from the private sector – that is, no market demand by definition.

An appropriately structured Job Guarantee program could make it relatively easy for the private sector to bid the workers back out of the JG buffer stock. A payment of a wage above the minimum JG wage would be sufficient in most cases.

It is quite clear that there is massive unmet community and environmental care needs in all advanced countries that the private sector will never meet. This is the point Shiller makes about the gap between private and social benefit.

Please read this lengthy report we published a few years ago – Creating effective local labour markets: a new framework for regional employment policy– which documents a three year study into operationalising the Job Guarantee. It is about Australia but the principles extend broadly.

Shiller also understands how low the opportunity costs are for the unemployed. He notes:

In a period of severe joblessness like this one, however, someone who is sitting unemployed who would rather be working at a modest salary as a teacher’s aide should be given a chance, at least until the economy improves. In other words, the unemployment rate itself should be a major factor in evaluating such programs.

In 1936, John Maynard Keynes made much the same point: “Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.”

Shiller also makes a point I have made often in the past. That public sector job creation programs can leave extremely valuable legacies in the form of infrastructure that the private sector can leverage profit off or which communities can enjoy enduring benefits. Please read my blog – Boondoggling and leaf-raking … – for more discussion on this point.

He says:

It seems that the New Deal was also more successful at inspiring the American public. Consider one of the most applauded of Roosevelt’s programs, the Civilian Conservation Corps, from 1933 to 1942. The program was open to young men, initially those 18 to 25, a group that was quite vulnerable economically. The C.C.C. emphasized labor-intensive projects like planting trees.

The public appreciated the tree planting because the projects addressed big problems that had been ignored. Major dust storms in and around Oklahoma raged from 1930 to 1936, denuding whole regions of agricultural land. The storms were vivid evidence of an externality that environmentalists had warned about for years, to little avail. Unregulated farming and lumbering had allowed pervasive soil erosion.

Aside from the environmental benefits, the C.C.C. encouraged a sense of camaraderie, taught young men new skills and gave its workers a sense of participation in something historic.

He considers the scale of the problem facing the US requires:

Big new programs to create jobs need not be expensive. Suppose the cost of hiring a single employee were as high as $30,000 a year, several times typical AmeriCorps living allowances. Hiring a million people would cost $30 billion a year. That’s only 4 percent of the entire federal stimulus program, and 0.2 percent of the national debt.

Why don’t we just do it?


But it might require some leadership. I don’t detect too much of that among the US polity.

They will be sorry!

To see why the fiscal stimulus has been less effective than it otherwise might have been the following graph uses US Bureau of Economic Analysis National Accounts data and shows the contributions to the percent change in Real GDP from March 2007 to the June quarter 2010. For further discussion of this data release see my blog – The old line back to free market ideology still intact.

The graph shows that the fiscal crisis at the state/local level in the US has forced governments to severely cut back on spending and to raise taxes which has substracted from real GDP growth and in crucial quarters undermined the federal stimulus measures.

A far better solution would be for the federal government in the US to provide a suitably calibrated per capita payment to all states to ease their fiscal constraints. The federal government is sovereign and would face no financial constraint in achieving this transfer. Further payments to the local government level could faciliate the introduction of a Job Guarantee – funded federally, organised and put into operation locally.


That is enough for today!

This Post Has 10 Comments

  1. Flipping through the NYT I’m wondering on what planet Timothy Geitner is living? His Op-Ed is titled “Welcome to the Recovery”. In the business section an article about long-term unemployment “99 Weeks Later, Jobless Have Only Desperation” states that a record number of 1.4 million people are out of work for 99 weeks or more. These people are denied UI benefits and their only income is either savings or foodstamps.

  2. Bill,
    Enjoyed the post, as usual. I do look forward to your long promised post on manufacturing. For countries with a colonial past, Canada and Australia I expect, this is a challenge. Much of Canada’s prosperity is dependent on exporting resources. While in theory it would be possible to redeploy workers to other jobs, there is a regional element that makes this difficult in practice. Millions of people live in communities almost entirely dependent on forestry, mining and oil and tar extraction. And that is pretty much all there is in terms of well paying employment in those places. While highly skilled workers from these communities can easily find jobs elsewhere most cannot. Additionally communities can be devastated when the active workforce leaves and only the old remain.

    FYI in Canada the financial crisis caused a recession due to lower exports to the US, however it has been relatively mild. Government deficits have partly offset deficient demand and the banking system has not experienced serious difficulties so capital has remained available throughout the recession to credit-worthy borrowers, household and business. Of course this could be seen as an argument to lessen reliance on exports, resources in particular. Over the decades there have been feeble attempts to do this but to no avail. Our current federal government firmly views Canada as a supplier of resources to the US. In any event while Canada is home to the Blackberry we do not produce most electonic gadgets or capital equipment or many other things so we do need exports to pay for them.

  3. “That misconception relates to how we define a recession. The standard (technical) definition is two consecutive quarters of negative real GDP growth.”

    This may be a “standard” definition with respect to popular usage, but it is not the “technical” definition. Sorry to nit pick but your writing is usually so precise that I thought I should mention it. From the NBER, the accepted authority for dating recessions in the US (their own procedure for dating recessions is detailed via the first link on this page):

    Q: Why doesn’t the committee accept the two-quarter definition?

    A: The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity. Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in 2007 and 2008.

  4. I have to agree with Warren. Job creation from spending is not working too well because most of the money goes directly to corporate profits. At least with a payroll tax cut, the money will have to go through the pockets of working people before it ends up as corporate profits.

  5. markg,
    My understanding of the Job Guarantee is that most of the money starts off in the hands of those employed by the scheme. Though I get your point, that some of the costs of arranging work assignments may well go corporate profits where it is private companies doing this work – but if the state is arranging assignments instead (and therefore on a not-for-profit basis), then this affect would be minimised perhaps.

    In addition, the extra benefits of ‘externalities’ – doing work the private sector normally ignores, brings huge benefits. Further, bringing more people back to a state where they are capable of work, would increase potential GDP, and therefore increase the private sector’s potential ability to save – tax cuts would not have nearly such a large effect I suspect.

    As an aside to your comment, I thought of the following idea: Employing out-of-work musicians for minimum wage to entertain people in shopping malls would improve sales. (Shopping malls do employ entertainers / musicians sometimes, but only very rarely in the UK.)

    Kind Regards

  6. CharlesJ,
    At $30,000 per worker, 1 million jobs would cost $30 billion (as stated above). The US has lost 8 million jobs. The stimulus is about $780 billion. That amount of money could (should) have put those workers back to work for 3 years. But unemployment has remained the same. Where did the money go if it did not hire workers who lost their jobs? Govt spending is not creating jobs, it’s creating corporate profits. A JG is great for a long term stabilyzer. But to fix the current mess American workers need more money (to pay down debt, save, and spend).

  7. Dear Bill,

    I have one disagreement with your otherwise Job Guarantee Program. The emphasis should not be on temporary and countercyclical public employment with transitions from public low paying to private high paying jobs but community/environmental service employment that is long term and promoting common purpose. These jobs should be payed as a social stipent in grace for the community service donated by this employment, breaking the work/reward paradigm practiced by private markets. It is time to rebalance the social composition between the private/public domain as expressed by market traded and community shared products and sevices.

  8. Panayotis:
    My understanding of the Job Guaranatee (JG) is it acts as an economic buffer during times of high unemployment. When there is an absence of jobs in the economy the JG offers as many as required to employ those willing to work. As a recovery takes effect employment increases and the number of JG jobs decreases as you would expect of a buffer. In the absence of the JG there is no jobs buffer and the brunt of the economic downturn is borne by the unemployed, a bad thing in many ways.

    The issue of the overall mix of private versus public service jobs in the economy is another issue. I suppose if the temporary work performed under the JG was perceived to be socially valuable it could be a way to politically justify shifting to an increase in the proportion of public ”community\environmental” services.

  9. Keith Newman,

    I understand the concept of buffer stocks and the control role they perform.
    The emphasis on this role for public jobs, however, misses the points I am trying to make. If we assume that demand shortfall is more pronounced in private market activities motivated by variable profit expectations and traded shelf interests than in public community activities motivated by stable common purpose and shared civic responsibilities, then a public jobs program with more permanent features helps achieve a more stable full employment economy. Furthermore, notice that the dynamics of feedback in the public domain/community oriented transactions are expressed by a donation/grace process without a net leverage or excessive behavior that requires control, while in the private domain/market oriented transactions the dynamics of feedback are expressed by work/reward that brings net leverage and excessive behavior that induces instability/nonlinearity and needs control such as buffer stocks. In summary, a shifted composition towards mote public/community activities promoting common purpose and attributes/rights is more stable and sustainable economic state than one that is more intensive in private/market activities.

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