Full Employment Possible; Cost is $300 Billion

September 11th, 2011
in Op Ed

by L. Randall Wray and Stephanie Kelton, New Economic Perspectives

lunch-box-worker On Thursday night President Barack Obama delivered his highly anticipated jobs speech. The $447 billion jobs package, which was larger than expected by many, included more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Basically less than 1/3 of the proposed package includes things that actually would directly produce jobs.

Follow up:

However, the proposals were better than what was considered likely as recently as 24 hours before the speech. He did more than just propose an extension of the (2%) payroll tax cut. He proposed cutting it from 4.2 % to 3.1% (for individuals) and from 6.2 to 3.1% for employers. That was bolder than what we were told to expect, and it will help add a bit to aggregate demand while reducing pressure on workers (who can pay down some debt) and firms (might save a few jobs) through the additional payroll tax reduction. It would have been better if the president had gone whole hog and had a full payroll tax holiday, with payroll taxes phased back in when unemployment rate targets were reached. Possibly the full phase in might not be implemented until the official unemployment rate reaches a low level such as 3%, for example.

There’s little doubt that extending unemployment benefits will help those who are struggling to find work. But continuing the payments we’re already making doesn’t add a single dollar of new demand to the economy. For a price tag of only $300 billion, the president could have done something truly different—he could eliminate unemployment altogether.

The job market is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

In spite of the hesitant steps in the right direction, the proposed jobs action is too little, too late.  Indeed, as Eric Tymoigne has shown, by some measures job performance since the start of the “recovery” has been even worse than during the Great Depression. At the rate we’re going, it will take nine years to return to the pre-recession employment level; by contrast, in the 1930s the jobs lost in the aftermath of the Great Crash had been fully restored within seven years.   The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and the CCC.

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty.  Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist.  Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans. He told a Labor Day crowd in Detroit that he wants to match the more than 1 million construction workers with an infrastructure-related rebuilding program to improve the nation’s roads and bridges. That is an improvement over his efforts to date, but it falls far short of the 20-plus million jobs we need.

For more than two years, we’ve listened to policy wonks weighing in on the supposed recovery, reading great importance into every tiny click of the unemployment rate, fluctuation of retail sales data, rise or fall of the Dow, and—especially—the latest measure of business confidence and expectations. Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring.  All the nation needs is a bit of Prozac slipped into the martinis of the captains of industry to turn this ship around. And the Republicans warn of the depressing effects of Obamacare, Dodd-Frank regulations and EPA restrictions that damage the sentiments on Wall Street.

The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month.  But the private sector doesn’t need 300,000 new workers per month to meet prospective sales.

The new jobs can only come from the federal government—the only economic entity that can afford to hire. Obama’s 1 million infrastructure jobs is a nice down payment, but it is only three month’s worth. New workers will create the sales that firms need to justify new hiring. Still, we must think bigger if we are to create 20 million jobs.

In his last State of the Union address, President Obama eloquently summed up the longer-term challenges we face. In many ways, they are similar to those that President Franklin D. Roosevelt’s America dealt with: a nation ill-prepared for the century in which it found itself, a nation that was “ill-fed, ill-clothed, ill-housed, and insecure.”  Roosevelt’s was a nation with 19th century transportation, education and health care.  The New Deal, World War II and President Johnson’s extremely successful Great Society programs transformed America.

But America has fallen into disrepair, and again finds itself unprepared for the new century.  A new New Deal is needed, with a comprehensive jobs program to again transform America.

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Funding for the job guarantee program must come from the federal government — and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. Registered not-for-profit organizations could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.

To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.

The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.

In truth, the $300 billion the president could have proposed is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensity competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. Further, Americans have never embraced welfare. For better or worse, our nation has always preferred a more libertarian path: self-help, personal responsibility, individual initiative. As a result, our welfare programs have always been stingy, temporary and purposely demeaning. They are not designed to reduce insecurity — while they relieve the worst of the suffering, those receiving handouts are supposed to quickly get back into the workforce, to pull themselves up by their own bootstraps. But they cannot do that when the nation is 20 million jobs short.

And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

The $300 billion investment in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

About the Authors

L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. Stephanie Kelton is an associate professor at the University of Missouri-Kansas City and a research scholar at the Levy Economics Institute in New York.

Follow them on Twitter @deficitowl

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  1. Dan Flemming Email says :

    I like the overall Thrust in this article. I like the fit to our problem of unemployment with no employers, and low demand for goods with no reason for employers to hire. Minimum wage workers hired by the Federal Government is the only way I can see to lift demand and conficence that we need.

    I would question that this program brought us out of depression. I don't beleive that this is clear to all economists.

    Very good/Excellent Article by L. Randall Wray and Stephanie Kelton.

  2. Frank Li says :

    What a simple math! $20K/person * 15M person = $300B. Besides, $20K/person is much less than $275K/job resulted in the previous stimulus package. I am for the math, except the whole premise is wrong for 2 reasons: (1) America's #1 problem is not jobs (which is politicians #1 problem). It's bankruptcy-bound out of control spending! (2) It's not government's job to create (fake) jobs. The government should be of the business, by the business, and for the business, because business creates real jobs and is the only source of taxes, corporate and personal! There is no solution to America's unemployment, other than time. Meanwhile, the more fake jobs the government creates, the worse we, as a country, become! For details, wait for my articles on 9/23 and 9/30.

  3. BlueJacket says :

    Frank I agree with you.

    Randall's approach would be another step toward socialism.

    I can't believe his statement;
    "President Johnson’s extremely successful Great Society programs transformed America".

    If increasing the welfare state and state dependency of millions is a success, I'll take failure. I've appreciated Mr. Wray's MMT work - this is a prime example of abusing MMT and regressing from our capitalistic principles of free enterprise.

    We're in trouble of Mr. Wray's (increased)hand-outs are adopted.

    Very simply - look at the H2-B program - we pay locals unempoyment insurance while we have to import labor to get work accomplished. Increased welfare will only create more dependent on the state.

  4. Admin (Member) Email says :

    Comment by John Lounsbury

    I had a thought that differs from what Frank and BlueJacket emphasized in their comments. I envisioned the proposed program to be a replacement for unemployment insurance. If someone loses their job and is eligible for unemployment insurance benefits they would be ended after one month and further payment requires work. Randy and Stephanie propose that the work be determined by local governments with state and federal oversight.

    This would be similar to the welfare-to-work programs which broke the back of the welfare dependency cycle that built during the 60's and early 70's.

    I think that someone who has to work 40 hours a week for his (her) $400 (or less) will be highly motivated to find more remunerative work. For some the pressure to find work is less if they get the money for just sitting at home.

    I personally know six people who received welfare help during the 60's and 70's, one for 4 years - but the others were less than 1 1/2 years and one was for six months. The reason I know them is that they were able to leave welfare for self-supporting employment and ended up in social circles that I was in. All of these people are in my age group and all had welfare support between 1962 and 1967.

    I never personally knew the people who did not escape the chains of welfare. That trap kept those ensnared in a different social group than where I have kept company over the years.

    The point is that some people benefit from social safety net programs and others fall into a dependency trap. Having to perform work to receive unemployment benefits is a way to treat those with the "addiction".

    Finally, there is benefit to every community to have work done that would otherwise be deferred due to lack of local tax revenues. There is also benefit to the unemployed because they can have a sense of community, a sense that they are earning the benefit, possibly learning some addition skills, allbeit fairly basic, and maintaining a work discipline and schedule.

    And, one other thing, it might be possible to have the unemployment benefit pay for private sector internships that could lead some into permanent positions.

    I do not want to dismiss the proposal as quickly as Frank and BlueJacket do. If we were to spend $300 billion a year this way for 2-3 years until there is a stronger recovery, I would feel that was much better use of federal funds than the trillion $ or so that has been spent each of the past three years to keep zombie banks afloat and bank executives personally raking in many millions of dollars a year each.

    PS: Why do I say a trillion $ or so? There are about $1.2 trillion MBS on the Fed's balance sheet, the better part of $1 trillion transferred from the banks to the Treasury (actually to Fannie and Freddie, which is now the same as the Treasury) and three years of trillion $ plus federal deficits, part of which is indirectly tied to the benefit of the financial sector. Looking at those numbers leads me to say the financial sector is getting rescued by government support of the order of a trillion dollars a year.

  5. Frank Li says :

    John, I like your idea and will support it on 1 condition: Term-limits for the politicians, especially 1-term (6 years) for the president, on top of age 55+ plus raising the statutory requirements. Or there will be just too much fooling around, in the name of serving (vs. self profiting).

  6. Admin (Member) Email says :

    Frank - - -

    You're too easy to debate. I will concede your condition. Of course, I already supported term limits.

    You should have asked for something that would be would have hurt, like my next born child.

    Oh, wait a minute. At my age that is giving up nothing as well.

    John Lounsbury

  7. Patrick says :

    The underlying premise is flawed. We dont need job creation, we need WEALTH creation, that comes through the productive (mainly private sector) economy.

    Paying people to do 'something', say dig a hole and fill it back in, creates a 'job'. But since it doesnt create WEALTH, it doesnt add to the productive economy.

    Such jobs end up being part of the 'vampire economy', the economy that parasitically sucks the energy out of the productive economy, since the productive economy is burdened with paying for the costs of the vampire economy.

    Yes, we do need 20 million jobs. Under Reagan, 20 million jobs were created - most in the private sector. As such, they added to the productive economy, an economy that grew by one-third from 1980 to 1988.

    After 8 years of the New Deal and various experiements in 'job creation', FDR's own Treasury secretary declared the effort a failure, noting that unemployment in 1939 remained in double-digits.

    What Reagan had which was different was an economic GROWTH policy, not a 'jobs' policy.

    Growth in the economy will create the jobs needed. As we know, jobs are a lagging indicator, the real engine is growth. The engine of growth in turn is business investment. The supposition that consumer spending limits growth is misleading. All recessions end through a rebuilding of business investment. It's this 'supply side' activity that drives the economy, which THEN creates the products to supply the demand.

    So the right answer to the question "How do we create jobs?" is "Through long-term economic growth, which comes through healthy business investment."

    This is why the Republican 'obsession' with avoiding tax increases on income is healthy. Obama and the Democrats now want to slaughter the goose that lays the golden eggs, to fee their program of 'job creation'. They will destroy economic incentives, jobs and growth in the process. Terrible idea.

    It's interesting that the authors know the weakness of their make-work idea to admit: "To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program."

    ... we could replace those with (e) - Make sure the job is a private sector job, so its market value is known.

    A simple one-year "amnesty" repatriating the $2 trillion in corporate capital that is locked out of the USA, due to corporations not wanting to pay 35% corporate income tax, would be a great replacement for the expensive payroll tax cut. And instead of increasing taxes permanently, a permanent tax rate cut - paid for with loophole closures - would help. lastly, free up capital by having a regulatory moratorium.

    That would crate more real jobs than the above flawed proposal.

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