Boosting U.S. Employment J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER January 25, 2010 There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services and best to boost production of goods and services—and then have the level of employment pulled up as businesses hire people to make the goods and services to meet the demand. The second path is not to worry about production of goods and services but rather to try to boost employment directly. The first is better: not only do you get more jobs, you got more useful stuff too. The problem with the first path is that it does not act particularly quickly—it is, as Milton Friedman liked to say, subject to what he called “long and variable lags.” Thus policies to boost employment by the end of, say, this calendar year needed to be put in place about a year ago to have time to have reached their full effect. Some countries—China—put such policies into place a year ago. Others—the United States—did not. This is not to say that the Obama administration did not try. A year ago there were five policy initiatives set in motion: • •
Additional deficit spending. Recapitalization of banks that appeared very vulnerable.
• • •
Asset purchases by the Treasury and other executive branch entities to reduce the quantity of risky assets that the battered and risk-intolerant private sector needed to help. Continued monetary ease via very low Federal Funds rates. Expanded extraordinary policy interventions by the Federal Reserve.
The stress tests suggested that the banking sector had reattained sufficient capital. And the Federal Reserve has continued its low interest conventional monetary ease. But additional deficit spending was capped at $600 billion over three years by the dysfunctional U.S. Senate, and fell far short of the $1.2 trillion that was the technocratic goal. The Federal Reserve shied at the jump and did not continue to grow its balance sheet beyond $2 trillion. And U.S. Treasury-funded and –guided large-scale interventions in the market never came to pass on a large scale. Figure two and a half out of five policy initiatives came to fruition. And in the face of a recessionary crisis that turned out to be roughly twice as large as was forecast at the end of 2008, that was not enough to keep the U.S. unemployment rate below 10% or even set it on a downward trajectory. Thus we reached the present moment, where unemployment is unacceptably high and is not falling. There is thus right now a very strong case to turn the focus of the U.S. economy from measures to raise demand (and then have the level of employment pulled up as businesses hire people to make the goods and services to meet the demand) to measures to boost employment directly (without worrying much about whether the employment-boosting measures are efficient in the sense of substantially raising the quantity of goods and services produced). There is a very strong case that it is time to resort to the second path: either have the government hire people and put them to work, or induce businesses to hire more people. We are talking direct government employment programs, or we are talking large tax credits for businesses that raise the number of workers they employ.
There is still time for a substantial shift in federal spending toward highemployment (but in all likelihood low-value) projects to create a better economy from an employment standpoint before the end of 2010â€”if congress acts quickly. And there is still time for a substantial temporary and incremental new-hire tax credit for businesses to boost employment before the end of 2010. But will the U.S. congress act quickly? There is no sign of it. Only if fifty Democratic senators are willing to use the Reconciliation process, and are wiling to accelerate the Reconciliation process and complete it within a month, will it happen.
January 25, 2010: 675 words