Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties.
International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned.
And it is a crisis, despite the recent employment upsurge in much of the world. In Portugal, Ireland, Greece and Spain, high unemployment has continued, with anemic confidence indicators and planned-purchases data in Greece, for example, showing clear evidence that businesses and consumers are bracing for a protracted recession. In economies that are improving, outrageously high unemployment rates among important groups, particularly youths, signal the start of both a threat and a tragedy. Grave labor issues are scattered around the globe.
It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. Companies usually strive to keep staffing at a minimum — we’ve all heard the virtues of “lean and mean.” There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work .
In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them “employers of last resort” — a term coined by economist Hyman Minsky in the 1960s — when private sector demand wasn’t sufficient.
South Korea, for example, during the meltdown of 1997-’98, implemented a Master Plan for Tackling Unemployment that accounted for 10 percent of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath.
In 2005, France outlined a program in which the government paid laid-off workers their former salaries. It showed that this model could ultimately cost the nation a lower percentage of GDP than unemployment compensation or other traditional remedies.
Of course, these ideas came long after America’s Depression-era initiatives had already proved that government could successfully fulfill the role of employer without competing with the private sector. Programs such as the Public Works Administration and the Civilian Conservation Corps were followed by a “golden” era in American capitalism, and now, decades later, those policies are still providing rewards. The vogue to dismiss the 1940s recovery as entirely the result of World War II reflects political positioning, not economic data.
At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.
And, as in any good public policy, another key is rigorous, scientific monitoring and evaluation. South Africa, in response to a projected unemployment rate of 33 percent by 2014, has launched a $2.5-billion initiative to create 1 million “cumulative work opportunities” over five years. Analysis by Rania Antonopoulos of the Levy Institute found that care-provisioning jobs — such as home- based workers who care for the ill, the elderly or young children — had a significantly stronger impact as an employment multiplier than infrastructure-oriented or “green” opportunities. Not all jobs are created equal.
The benefits of direct job creation aren’t just transitory. It’s well documented that persistent unemployment results in a permanent loss of output and labor productivity. During a crisis, jobs combat these potential future effects. When the good times are rolling, they support those excluded from the prosperity while stimulating demand through feedback loops that increase the economy’s vibrancy.
This is the moment to expand the range of policy responses to unemployment.
There’s no evidence that work creation policies either hurt private business or break national treasuries. Incurring national debt to restore an economy through direct job creation isn’t frivolous. It is logical, practical, effective and humane.
Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and executive vice president of Bard. He wrote this for the Los Angeles Times.
Ben Bernanke’s zero-interest rate policy (ZIRP) and command-economy efforts to maintain mispricing of risk, debt and assets are destroying capital and capitalism. No wonder his policies
have failed so miserably.
To understand why Federal Reserve Chairman Ben Bernanke’s efforts to restart economic “growth”
have failed so completely and miserably, we need to compare the present with the end of the Great Depression. There is a wealth of irony in the Chairman’s supposed expertise on the Great Depression, as his policies have backfired on “fixing” the Great Recession.
Rather than “fix” the economic malaise by re-inflating the credit-boom bubble, he has only increased the systemic vulnerability to a much greater crash.
This is akin to an “expert” on World War I recommending a bigger, stronger more costly Maginot Line as the “solution” to military vulnerability.
In the Great Depression, excessive speculation built on systemic fraud and embezzlement led to the implosion of a vast credit bubble.
The “solution” touted then and now by saviors of the Status Quo was to “save” the financial sector and debtors by substituting Federal spending (with the money being borrowed via the full faith and credit of the U.S.A.) for collapsing private borrowing and spending.
This “solution” failed because it refused to address the real problem, which was
over-indebtedness in service of mal-investment. People lost faith in the system for good reason–it was fraudulent and opaque, and thus mispriced risk. If you can’t price risk or assets, then it’s insane to either borrow or invest.
The “solution” to the Great Depression was massive Federal debt and spending on World War II–but the “solution” had a key characteristic that is almost universally ignored.
Depression-era calls to bulldoze homes to be rebuilt and destroy grain so it could be regrown were rightly dismissed as mal-investment on a vast scale. But war is more or less an equivalent “consumer” via destruction. Hundreds of ships were built and then sunk, thousands of aircraft were built and then shot down or lost, and monumental mountains of provisions and supplies were manufactured and then either consumed or lost to enemy submarines, bad weather, rot and a host of other causes.
At the end of the war, most of the leftover goods manufactured–ships, tanks, aircraft, munitions, etc.–were mothballed or scrapped.
Despite this staggering waste, the war spending launched a long boom. How did it work this magic? One, it constructed new plants; unlike the Keynesian calls to bulldoze houses so they could be rebuilt, the war investment created factories that could then be converted to produce consumer goods.
More importantly, the war spending created a vast pool of private capital–what we call savings. As
resources were diverted to the war effort, rationing limited both the manufacture and availability of consumer goods. Meanwhile, tens of millions of people were put to work, either in the Armed Forces or in the war manufacturing sector, and most had few opportunities to spend money. Industrialists also piled up war profits.
Though extend-and-pretend policies did not write off the overhang of debt that had depressed the economy and destroyed the market’s ability to properly price risk and assets, this gargantuan pool of private capital simply overwhelmed the remaining debt overhang.
Third, trust in the system was restored: the Federal government had effectively “won the war” by printing money and drawing upon the nation’s vast surplus of energy and labor, and the manufacturing and financial sectors had been brought to heel by the extraordinary demands of the war and by legislation that had responded to financial fraud and over-reach.
Recall that the root of “capitalism” is capital.
Capitalism requires two fundamentals–capital to invest and open markets for goods and services that openly price risk, assets, hedges and goods.
Note that debt is not listed. Debt is not essential to capitalism. Indeed, if we explore the roots of modern capitalism in the 14th and 15th centuries, we find that commercial credit and hedges were the key ingredients, not debt. Lacking sufficient coinage to handle the rising volume of trade, merchants settled accounts at the great trading fairs in Europe.
Long, risky trade voyages were hedged with the equivalent of options and limited stock companies that distributed risk for a price. Leverage was limited by the transparency and appetite for risk.
Compare that with Bernanke’s policies, all of which severely punish savers (i.e. the accumulation of
capital) and reward leverage and debt. By lowering interest rates to zero, Bernanke has imposed the opposite of the World War II experience of forced savings–he has made cash into trash and pushed everyone into risk assets.
By making credit dirt-cheap and backstopping financial-sector losses (i.e. institutionalizing moral hazard), Bernanke has destroyed the market’s ability to discipline mal-investment and openly price risk and assets.
World War II launched a boom precisely because private capital accumulation/savings were enforced; when the war ended, there was a vast pool of capital available for investment and consumption.
Bernanke’s policy is to punish capital accumulation and reward leveraged debt expansion. Rather
than enforce the market’s discipline and transparent pricing of risk, debt and assets, Bernanke has explicitly set out to re-inflate a destructive, massively unproductive credit bubble.
This is why Bernanke has failed so completely, and why he will continue to fail. He is not engaged in capitalism, he is engaged in the destruction of capital, investment discipline and the open pricing of risk, debt and assets. When the next “credit event” sweeps round the Fed’s Maginot Line of encouraging mal-investment and masking fraud and rolls up the entire financial sector’s defenses against mispriced risk and credit, Bernanke will be inside the over-run HQ, wondering how his “brilliant” policies could have failed so spectacularly.
Great post!
Good analysis and explanation of why the economy boomed during the late 40’s and 50’s. I learned a few new things and see it from a slightly new perspective. You filled in a couple of holes in my own analysis of that period. And you are spot on my own criticisms of present and recent policies.
Your analysis shows why just returning to government policies of either the 30’s or the 50’s, (policies pushed by many liberals including many on these blogs), will not work and will in fact have far reaching negative consequences.
There are almost no real capitalists left. You are astute in your observations about Bernanke and his preference for non-transparent risk. The ways that the US is actively involved in propping up the Euro speak directly to that point.
I have an MBA in finance and I am out of the equities market entirely. By 2007 I could see that the lack of transparency and general market inefficiency (some have more information to trade on than others) convinced me that the market is not appropriate for casual investors or those looking for a secure future. It is indeed a casino where the rules change every time a regulator is bought or another securitizing scheme is developed.
Real capitalism can be a great thing. It involves efficient markets, and good ideas and business models are rewarded with increased earnings and profits. Today, the big banks have usurped the free market and turned it into a protected racket. They accomplished this through deregulation and direct access to our congress and judges.
A return to the market as it existed in the 1960s and 1970s would benefit everyone from the innovative start up to the retiree. The whole future of this country economically depends upon getting the money out of politics and taking the reigns back from the overgrown bankers and their matching egos.
It’s difficult for one area of government to create jobs when another part of government is feeding, clothing, and housing potential workers with tax dollars.
Your comment has no basis in reality. Government can create jobs and has done so many, many times before. The only reason it is not creating them now is a lack of will to see jobs created by the GOP. If you simply page through the impacts of the many government jobs programs you will see that millions of jobs have been created. When corporations are hoarding their cash, they strangle the economy. Low tax rates actually make the hoarding more appealing than re-investing in their own companies.
The spender of last resort is government. Every dollar spent in infrastructure projects gets awarded to small, medium and large companies that hire and buy equipment to get the jobs done. These workers spend their checks and that creates more demand. The increased demand makes companies expand and hire to keep pace. Once this happens, the government no longer needs to act as the spender of last resort as the normal mechanisms are restored. This has been proven time and time again and never has it been disproven, despite the rants of radical conservatives.
Brazil has increased spending on infrastructure, raised wages and developed one of the most bullish economies in the world right now. They are growing at more than twice the rate we are and their people are enjoying upward mobility and higher living standards than ever before. Those are adjectives we haven’t been able to use here in the US in quite some time.
You totally missed my point.
It was; why work when Uncle will pay us to sit on our (_!_)s.
Brazil?
I suspect that our slums have a better living standard than 75% of their population.
You would suspect wrong. They have a thriving middle class and a growing new found wealth. They have made strides in education and manufacturing quality.
You apparently haven’t noticed that half of our population is on the edge of personal disaster.
It amazes me when people express the idea that we have the only civilized society. Over the last decade the world changed and we stood still. The most modern and affluent cities in the world are not where they used to be. Kuala Lumpur and Sao Paulo are thriving modern cities. the slums in your imagination are what we have on the rise here. Have you visited the rust belt recently?
Pure socialist propaganda. What crap – severely overpaid government jobs simply lead to more government waste and higher taxes (ex-gov employee of 18 years here). Besides, the government has already proven it can’t manage itself.
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Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College”. He needs to resign because he doesn’t know squat about the private sector and the ability of the private sector to create jobs, wealth, and growth. With the government out of the way, the private sector will return this nation to the top spot it deserves. Trouble is, as long as Obama and his Progressive minions are running things, it ain’t gonna’ happen.
Gvernment can create jobs, certainly, but they must be supported by non-government employment.
Dimitri B. Papadimitriou…..there’s a Greek name if I’ve ever seen one!