In his Saturday radio address, President Obama acknowledged the White House is exploring "additional options to promote job creation.” It's about time. This is the worst job market in seventy years -- including the longest duration of steep job losses.
If anyone had any doubt that something far more dramatic must be done, listen to former Federal Reserve Chairman Alan Greenspan. He warned Sunday against further
stimulus because “we are in a recovery, and I think it would be a mistake to say the September numbers alter that significantly.” Greenspan has turned into an inverse soothsayer. After his cataclysmic error about where the
economy was headed before the meltdown, his views about the future should be carefully noted as being the exact opposite of what's likely to be in store.
The economy may be in a technical recovery but this is not a real recovery and the "green shoots" or "positive signs" that Wall Street cheerleaders love to shout about are phantoms of their ever-optimistic imaginations. The stimulus is working but it is far from adequate. Before the stimulus, we were losing more than 500,000
jobs a month. Now that 40 percent of the stimulus has been spent, we are losing more than 250,000 jobs a month.
What to do? With the debt ceiling approaching and the gravitational pull of the 2010
elections increasing, the White House can't go back to Congress with a formal bill to enlarge the
stimulus package. Four simpler moves would be to:
(1) Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP
bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens'
health, public health (we need
workers to administer
swine flu vaccine) and public
transportation. Instead of bailing out
banks and giant automakers, we should switch to bailing out public services that average people need.
(2) Propose a one-year payroll tax holiday on the first $20,000 of
income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of
Americans pay more in payroll
taxes than they do in income taxes.
(3) Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.
(4) Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.
The
politics of these four steps aren't difficult. It would be hard to get a new stimulus package through Congress, but no member who's up for reelection next year when
unemployment is likely to be in double digits wants to be accused by rivals of
voting against steps to help small businesses, public
schools, childrens' health, and average working people who need a tax cut.
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OPINION: Robert Reich's 4 Ways to Create New Jobs in this Economy
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Flawed
These are flawed since the problem is we need more aggregate demand and these initiatives will do zero for this, since we need to promote aggregate demand to improve employment prospects. To address each one:
1 - Firstly, the financial institutions needed to be "bailed out" to prevent a bank run and us spiraling into a Great Depression, so everyone should cut the "oh we bailed out the banks , this is terrible" garbage. Granted, the bail out plan was terrible, we should have put them into temporary receivership but anyway. The automakers are more up for debate since those collapsing in this economy would have made the recession substantially worse off, but it could have been done through a structured, US-government assisted bankruptcy without having an unbearable effect. Anyway, on to the key point. This wouldn't be bad, it just isn't something that would really repair the economy. It would do something, but those state programs haven't seen enough of a decline in funding and job loss that even if all were fully funded the economy wouldn't recover
2 - A reduction in taxes is fine, but it doesn't aid particular well in improving the economy. Tax cuts aren't very effective because in recessions the consumer tends to hold their money assets. Milton Friedman's "Permanent Income Hypothesis" tells us this because consumer spending is determined by long-term income expectations not short-term. And Keynesian multiplier theory clearly demonstrates spending the money on stimulus would be significantly more effective than a tax cut. What should be done is once the economy begins to see legitimate recovery in terms of unemployment falling, that's when you would do a tax reduction like this to spur along consumer spending once we are out of the liquidity trap. While in it, it doesn't accomplish much of anything.
3 - This presumes small businesses just give jobs for the fun of it. If the demand for their product exists in sufficient amounts to require more employees, they will hire them. A "new job tax credit" isn't going to prompt anyone to hire employees they don't need because it would cost more to them that the tax credit would reimburse and if they the demand (and thus revenue) exists enough to warrant a new hire, they will do it regardless of a "new job tax credit." In other words, this does nothing.
4 - We are in a liquidity trap and financial players are in worried about capital losses on their non-capital assets and are thus holding money instead. This explains perfectly why banks wouldn't extent credit to anyone but the most risk-free customers. Now, expanding SBA's lending programs is a decent idea; but the key problem still exists of promoting demand. If the consumer is not interested in going out to buy because they don't have a job. In initial stages, small businesses rarely higher a significant number of employees, especially in recessions, and so the job promotion from it wouldn't outweigh the effects of consumers holding their liquidity assets. It's a good idea once demand is increased, but only then.
Robert Reich's solutions are flawed because he doesn't understand the root cause of why we are seeing a "jobless recovery"
The reality is, you needed a significantly larger stimulus to create the demand needed, otherwise it's largely a wasted effort as we've seen (and you usually recover 60% of what you spent on a stimulus through economic growth anyway). If you sit around for years and wait for the economy to recover on its own the long-term damage is tremendous and the long-term GDP projections in growth drop tremendously for a variety of reasons that would take me paragraphs to explain (google it if you must, I believe it was the World Bank, either that or the IMF, that did the latest analysis on this).
- caelum
October 6, 2009 11:40AM
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