Saturday, November 20, 2010

Unemployment is unnecessary

Imagine a world where unemployment is a dim and barbarous memory

Unemployment doesn't exist in primitive societies. Everyone has something to do, and at the same time, no one has a "job" or gets paid. Everyone helps to do what needs to be done, and gets a share of the results. Social tools as well as self-interest get everyone to pitch in, and in extremis, one who is not pulling his or her weight may be ostracized.

With the rise of money, capitalism, and technology, humanity gained huge productive powers, allowing each person to exchange his, (or now her), expertise for the infinitely various products of others. An ironic problem with this world, however, is that it is too productive. It is possible for the entire population to survive based on the work of only half, or less. Indeed, agriculture takes up only 3% of the workforce in the US. What are the rest of us to do? Ideally, most of us might lie back in leisure, with Mai Tais supplied by the employed workforce.

Unfortunately, deciding who should be among the slackers isn't an easy problem, and unless one is the beneficiary of unusual inherited wealth, each of us needs income, based on our contributions to the community, in order to get a share in return, not just of Mai Tais, but of absolute necessities. In short, one needs a job. Conversely, society at large does not need any specific person to have a job. It can get along fine either way.

In positive economic times, this is not a problem, as jobs can be made of all sorts of pursuits. Musicians, mimes, bankers, buskers .. whatever can attract a buck is a job (just not blogging!). But sometimes there aren't enough bucks to go around. The current crisis is a classic case of financial collapse, with plunging investment and rising savings, leading to contraction of economic demand ... which is less bucks being spent, and thus fewer jobs.

In the lala land of conservative economists, (Chicago and Austrian schools), the labor market is always perfect, and anyone out of work just doesn't want a job at the going rate. They are lazy slackers. But that ignores the vast assymmetry of the labor market, best indicated by the seeker-offer ratio, now officially at five job seekers per job on offer. And this is a conservative estimate, since the official unemployment rate of ~9.5% misses significant classes of workers who either are so discouraged that they are not even looking anymore, or who have part-time work and would like full time work. With these classes, the unemployment rate is more like 16% and the ratio more like eight to one. Clearly, these are impossible odds, taunting seven of those ex-workers, day after day, month after month. They will be doing unpaid work (laundry, dog-walking, thumb-twiddling) for some time to come.

Unemployment rates, with U6 including discouraged, and part-time wanting full time work.
So the money economy drives everyone to participate to get money, but at the same time does not necessarily supply enough jobs to all who want them. Underemployment can be a stable condition, since the unemployed do not create the economic demand that leads the private system to invest in more productive capacity that creates more jobs. Thus the classic Keynesian policy of government picking up the slack by spending the missing amount (fiscal spending) to create that demand when demand is short of aggregate economic capacity, which can be conveniently defined as the existence of unemployment.

The second classic Keynesian idea is to create "automatic stabilizers", such as unemployment insurance and other safety net programs, so that when the business cycle hits a pothole, the federal government automatically (no legislation needed- no hands!) spends more into the economy on assistance programs while it simultaneously takes in less revenue in taxes. These work well as counter-cyclical policy, (except when economically illiterate legislators enter a state of deficit hysteria at the bottom of a cycle), but in the US, they are relatively weak. Unemployment insurance amounts to ~$1200 per month, on average, and has a limited term which has been only grudgingly extended in the current downturn on an ad hoc basis.

Other countries, such as Germany and Australia, have stronger insurance and other programs which help their economies (and workers) weather economic storms with much less disruption. (pdf, and see here.)
But obviously, there are problems with paying people to not work. Even if one takes the liberal-left view that people on average want to work and contribute to the greater good, incentives are important. That is why the economists I have been reading of late promote the idea of putting the unemployed directly to work on public projects.

This idea is typically called the "Job Guarantee" (JG) concept in the MMT literature. But to me that sounds like a political loser, so I will instead call it the Everyone Works concept (EW). The basic idea is that the Federal government funds, and local governments offer, jobs to anyone who wants one, at a basic civilized salary. For able-bodied workers, the government would no longer simply send money to those out of work, but would rather put them to work on local projects of a public nature, from litter collection to ESL instruction to road construction. Looking around, I see no shortage of public needs going unfilled, and it is really a crime to let the unemployed fester psychologically while not using their labor for beneficent ends.

Obviously the devil is in the details- how much are they paid, who hires them, who fires them, what do they do, and so on. The pay would be a living wage, which in my book would be 1.5 times the poverty level, or ~$30,000 per year / $2,500 per month, plus benefits. These jobs are on-going, depending on the mutual desires of the worker and employer. All EW workers would be paid the same, and naturally at this level, a strong incentive remains to find a private sector job at higher pay. This level would also set an effective minimum wage policy, obviating the need for continued legislation on that front. Youth might enter the workforce through this kind of program as a matter of course, resembling in some degree the national service ideas the come up in other contexts.

The EW program would have strongly competitive aspects, since the public need for work varies widely, from menial to artistic, technical, and beyond. Workers would apply & compete for jobs suiting their interests and talents. While local agencies would be obliged to hire each applicant for some kind of work, that may be as menial as litter removal or ecological restoration. Workers could likewise be fired from jobs if they didn't perform well, ultimately ending up on litter removal detail if otherwise unwilling to work at a higher level. If still not conforming to public needs, a worker could be completely fired and handed over to the deeper social safety net for psychological evaluation, counseling, etc. as needed. But this safety net would be much reduced, since the major pathologies of chronic unemployment would be a historical curiosity.

The WPA and CCC during the depression were inspiring examples of such programs, still paying dividends today in their physical and artistic achievements. Hoover Dam was built by an army of the unemployed in a public works project lasting only five years during the depths of the Great Depression. At a time when our infrastructure is crumbling, other public goods are rotting for lack of maintenance, and workers are going begging for jobs, a wide-ranging work program could usher in a new age of economic stability as well as improved public amenities.

A more modern example exists in Argentina, where an economic crisis prompted the government to start an EW-type program called Jefes de Hogar (Heads of Households), offering half-time community work and half-time schooling or training to all comers. This has been very successful in reducing poverty, stabilizing the economy, and enhancing development, especially in rural areas, at a cost of 1% of GDP. (See here and here for pdf reviews.) It has also pulled people out of the informal economy and employs many who had previously not sought employment at all.

Workers in this program would be trained as needed for new skills, and would also facilitate their search for private sector jobs by having their current work situations open to private employers, with job search components integrated, to a limited extent. Private poaching would be welcomed, and private employers would be assured of workers in better psychological condition, and often with extra skills, compared to those currently coming from the army of the unemployed sitting on couches and twiddling their thumbs.

Clearly, this kind of program would seem to be more geared towards low skill workers whose efforts are more easily fungible and usable for basic public service projects, whose private sector work tends to be more sporadic, and whose pay would be in the range of the EW wage. But I think all sorts of professional and skilled workers could find quite useful roles to play in a sufficiently open program, especially if they had a role in identifying and bidding for public needs. The program could use and enhance intellectual flexibility.

Who would pay for it? Under current conditions, the budget for 16% of the labor force of about 160 million in the US would be $770 billion dollars, roughly the proper scale of stimulus spending we need yearly till the economy gets back on its feet. If the US resumed a serious commitment to full employment, with unemployment rates of 2-3%, as existed fifty years ago, the needed funds would decline to $120 billion per year, easily affordable on an ongoing basis in view of the widely positive effects. For comparison, unemployment insurance, welfare, foodstamps, and EIC currently make up, very roughly, $200 billion in average years like 2006.

Can we afford it? The cost of EW hardly exceeds the sort of non-work programs which it would largely replace. So yes, we can afford it. During recessions, extra spending channelled through EW  would have positive effects on aggregate demand and the revival of the private economy, on the health of the labor market, and on the morale of workers involved, not to mention local public amenities, infrastructure & services. As the private economy revived, EW jobs would evaporate and localities would return to lower levels of federal support. One of the most pernicious aspects of the current downturn is that state and local governments have had to cut disastrously at exactly the time when needs are greatest. An EW program would allow the power of federal counter-cyclical spending to reach down to these lower levels in a stronger and systematic way.

Shouldn't unemployed people go the entrepreneurial route, making small businesses and creating jobs? In an ideal world, unemployed people would pull themselves up by their bootstraps, start bakeries, manicure shops, delivery services... anything that could bring in a piece of that economic pie. But even if the initiative and skills were there, it still wouldn't work from a macroeconomic perspective, since the pie just shrank. Just as there are fewer jobs than applicants, there is less spending (aggregate demand) than people who need that spending, whether through large or small businesses. So here again, someone (the government) needs to step in to the breach with counter-cyclical spending.

Would EW public work programs be boondoggles and make-work? Localities would have substantial incentives to make good use of this labor, it being at their disposal for projects of their choice, for their constituents. One could imagine a worker-initiated proposal system for projects, reviewed by local experts or elected officials. Localities may also wish to compete for workers from other places, based on quality of work offered, though the primary focus would be on local labor that is temporarily unemployed.

Of more worry, perhaps, is the possibility of EW workers displacing regular government or contract workers with competing skill sets, since people from all sorts of professions would participate. The local government would have an interest in keeping its permanent skill sets and loyal workers. But at the same time, the public employment sphere has become remarkably bloated and could perhaps use some novel competition of this kind, from talented people temporarily out of private work.

If this competition is too much for local governments to bear, despite their professed dedication to the public's welfare, they could contract with NGOs and philanthropies for projects that fulfill a public goods mandate, well away from the duties of regular civil servants. Remember that even if the work is of no significance whatsoever, half of the program goals are still achieved, which are macroeconomic stabilization and civilized income support for the unemployed. As Keynes said, paying people to bury fiscal dollars and then unleash others to dig them up again would be rational policy in recession conditions. Creating public goods is a highly desirable goal, but not the only one.

When all is said and done, this kind of program is a way to improve the standing of labor in the US, forming a more useful and helpful safety net with positive macroeconomic and cultural benefits. A typical countervailing argument, presented in one of the above-linked analyses of the Argentine program, is that such programs "reduce job search intensity", while increasing the quality of private sector jobs the workers ultimately take. In short, they make labor less desperate. Personally, I would regard that as a good thing. It is time for employers to do a little work in the labor market!

  • Kristoff compares the US with Argentina.
  • A fellow blogger covers unemployment trends.
  • The unemployed are pariahs, to pampered employers who have jobs.
  • In the black community, the unemployment fire is out of control.
  • Predatory loans and business corruption- at the root of the financial crisis.
  • The contest of wills goes on in Afghanistan.
  • Our bodies, our religions.
  • GOP congressman: gimme my free healthcare now!
  • Occasional Republican appalled at colleague's climate change corruption.
  • Bill Mitchell quote of the week, courtesy of Chicago-school ├╝ber-economist Robert Lucas in 2003, saying that the business cycle is dead:
"My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and to save, not from better fine tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management."
At this late date, Ben Bernanke, who comes from the same perspective and is also critiqued in Bill's post, is trying desperately to perform monetary miracles without calling for more fiscal spending, which to his school (the supply-side, give money to the rich and wait for it to trickle down, school), is anathema. So interest rates are beaten down to zero at all terms, banks are given vast liquidity, and we wait for their animal spirits to revive. But it is spending that creates demand that calls forth investment, hiring, and further economic activity. Bernanke is gingerly and reluctantly stepping in that direction, having the decency to say that current unemployment is "unacceptable". To congressional Republicans, it seems to be quite acceptable, even desirable, if it weakens Obama.

1 comment:

  1. Right on. I like EW! It makes so much sense.

    When people say that we can't afford to hire people right now, I think it is like saying we can't afford to plant crops this year.

    Too man think money is the master rather than the servant.