When the Federal Reserve Board promised yesterday to keep interest rates near zero until the middle of 2013, it was a sign that its view of the economic recovery is as dire as the mood on Wall Street is dour. After days of seeing the stock market waver between low and very low, and months of seeing even the best jobs reports show that the labor market isn't adding enough jobs to keep up with population growth, its hard to imagine there's any way to steer us from doom. But President Barack Obama actually has tools at his disposal, and could work to stimulate the real economy; the one that puts money in people's pockets. Here, the Prospect has asked experts to weigh in with policy advice for the president. The discussion will continue through the week, so come back regularly for updates.
Click on the image below for the author's solution to our economic problems.
The Administration Must Step Up Its Job-creating Strategies
Franklin Delano Roosevelt said, "The country needs and, unless I mistake the temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something." In that spirit, President Barack Obama should propose a new round of job-creating ideas that explicitly build on the most cost-effective initiatives implemented since the economic crisis began, while reworking or discarding less successful policies. That agenda would include three components:
Direct Job Creation
The Congressional Budget Office's analysis of the impact of the American Recovery and Reinvestment Act found that the elements that delivered the most bang for the taxpayer's buck from the standpoint of employment and growth involved direct federal purchases of goods and services as well as transfers to states and localities for infrastructure. For example, the recovery act's investment in the Weatherization Assistance Program generated about 52 direct and 23 indirect jobs for every million dollars committed to the initiative, while upgrading more than 300,000 low-income homes in ways that saved more than $400 a year in individual heating and cooling bills. Although ramping up those kinds of public investments took longer than hoped, winding down the most successful job-generating initiatives over deficit concerns when the government can borrow at interest rates well below 3 percent is penny-wise and pound-foolish.
A Targeted Tax Rebate
The 2 percentage-point cut in the payroll tax that is due to expire at the end of this year provided only limited economic stimulus, because a significant share of the benefits flowed to relatively wealthy workers who saved rather than spent the money. Andrew Fieldhouse of the Economic Policy Institute and the Century Foundation has proposed an alternative: a targeted, partially refundable lump-sum tax rebate that would increase employment by 12 percent more than would a continuation of the payroll-tax cut without any additional cost to the government. A modified version of the tax rebate included in the 2008 Economic Stimulus Act signed by George W. Bush, the new break would provide $1,800 to a family with two children and a combined income of $41,000, compared to just $828 under the payroll-tax reduction.
Tackling the Foreclosure Crisis
About 23 percent of all U.S. homeowners owed more on their mortgages than their property was worth in the first quarter of this year. Many of those underwater borrowers are at significant risk of defaulting on their loans and facing foreclosure, which in turn negatively affects communities and further weakens local economies. Unfortunately, the federal Home Affordable Modification Program has largely failed to aid homeowners in trouble. The Obama administration should aggressively pursue strategies aimed at addressing the housing crisis, building on relatively effective state and local foreclosure-prevention programs. A report by the National Community Reinvestment Coalition highlights a number of such initiatives, which include refinancing and emergency-loan programs as well as assistance in negotiating with banks for loan modifications. Accelerating the process to help struggling homeowners regain control of their finances will bolster consumer demand, which has remained deflated since the housing bubble popped.
Work Sharing Is the Answer
The stock market's recent plunge has caused normally sane people to panic about the economy's prospects. It is important to recognize that the stock market has little direct impact on the economy. Few firms raise capital for investment by selling stock. The stock market primarily affects the economy through its impact on consumption. Most estimates of the stock-wealth effect put it in the neighborhood of 3 percent to 4 percent, which means that an additional dollar of stock wealth will add 3 cents to 4 cents to annual consumption.
This implies that the roughly $2 trillion in value that the market has lost in recent weeks can be expected to shave between $60 billion and $80 billion off annual consumption, or between 0.4 percent and 0.5 percent of gross domestic product. This drop in consumption is not helpful to the economy right now, but it is not devastating. Also, it will take a couple of years for the full effect of the lost stock wealth on consumption to be felt.
In short, people should not panic about the economy because of the plunge in the stock market. (The impact on your 401(k) is another matter.) However, this hardly means that everything is smooth sailing. Even before the market turmoil took over the news, the economy was largely dead in the water, expanding at a pace too slow to even keep up with the growth rate of the labor force, much less to make up for the 10 million jobs lost due to the downturn.
The best way to create jobs would be to boost demand with another round of stimulus. Any serious stimulus, though, seems to be off the table at this point. If it is not possible to increase demand enough to bring the economy back to full employment, we can go the opposite route of sharing the work that does exist.
The basic point is simple. If we encourage employers to deal with reduced demand by shortening work hours rather than laying people off, we can get back to full employment relatively quickly. Every month, firms lay off or fire roughly 2 million people. If this figure can be reduced by 10 percent through work sharing, it would be equivalent to creating 200,000 additional jobs a month.
A work-sharing policy uses the money that would otherwise go to unemployment benefits to compensate workers for part of their reduction in hours. For example, if workers have a 20 percent reduction in hours, under a work-sharing program, they might end up with an 8 percent to 10 percent reduction in take-home pay with the government making up the difference. Germany has used this policy with great success. Its unemployment rate has actually declined since the start of the downturn even though its growth has been only slightly better than ours.
Work sharing should not be an impossible leap politically. Twenty states already use work sharing as part of their unemployment-insurance system. However, the take-up rate is low because the programs are not well publicized and are overly bureaucratic. A bit of modernization and a relatively small amount of additional funding may go a long way.
This is something that could conceivably garner Republican support. Kevin Hassett, one of the top Republican economists, advocates work sharing. The German program is being pushed by a conservative government, although its origins were with a Social Democratic minister in the prior coalition government. German employers like the program because it means that they can keep skilled workers on the payroll. When demand does eventually pick up, they will only have to increase hours rather than find new workers.
From a progressive standpoint, work sharing can be an important step toward a more family-friendly work place. It may also lead to more environmentally friendly consumption patterns as people have more leisure and less income.
In short, there are lots of reasons to like work sharing. And when it comes to politically viable policies to create jobs, not much else is in the cupboard right now.
Obama Needs to Rebuild the Middle Class
So far, the Obama Administration has used only half-measures to deal with the economy. The original stimulus was watered down and trimmed to help it get through Congress. President Obama never really made the case to the American people for the deep injection the economy needed, instead he played an inside game of legislative negotiation.
Now, years later and with 14 million people still unemployed, a housing market still reeling, and small business lending still drier than the Arizona landscape, it's time for the Obama administration to go all in on policy and politics.
Our economy is broken. Fixing it is not just a matter of jumpstarting a recovery. Job creation is not only too slow, it's clustered in low-wage, dead-end occupations that don't provide workers with security and mobility. According to a study by the National Employment Law Center, 12 months after the official end of the recession, lower-wage industries -- like retail and food preparation -- accounted for almost half of the jobs gained over the last year. They were less than a quarter of the jobs lost during the recession. By contrast, higher-wage industries accounted for 40 percent of the jobs lost, but just 14 percent of the jobs gained. The economic problems exacerbated pre-recession trends. Productivity rose 5.2 percent from mid-2009 to the end of 2010, but wages increased by just 0.3 percent, meaning workers got just a paltry 6 percent of productivity gains while shareholders got record profits.
The Obama Administration needs to develop bold short-term measures and sell them to the American people. These should focus on getting people back to work--and quickly. The quickest and most beneficial way to do that is through a temporary direct public jobs program. The power of direct public jobs is that they put people back to work while also addressing critical public needs. They include neighborhood beautification, bridge and road repair, childcare, and elder care. Hiring could target the long-term unemployed and young people. There are already bills in Congress, including one Representative Jan Schakowsky of Illinois released today. Secondly, the federal government could provide direct aid to states so they can rehire teachers, nurses, police officers and firefighters, fields in which layoffs are eroding the very basic building blocks of a society. Finally, the short-term plan must include a proposal to address the continued housing slump and foreclosure crisis.
That won't be enough, however. He also must devise a long-term plan to rebuild the middle class. This should include the creation of a national infrastructure bank to leverage private and public dollars to bring our nation's decrepit infrastructure back to world-class standards. In addition, any long-term plan for sustained economic recovery must include new investments in our social infrastructure. For too long, the United States has lagged behind other advanced nations in early child education. We desperately need to transition from an industrial era K-12 public education system to a Zero-14 system that would ensure all children get the developmental start they need to succeed. We also need a compulsory secondary education program that includes the equivalent of 2-years post-secondary work--whether its vocational or liberal arts. Finally, we need a serious commitment to an industrial policy in this country. Americans want to see things made in America again, and our economy desperately needs diversification.
These are the government programs that fueled the major middle-class expansion of the last century. Our research at Demos strongly suggests that people understand that deliberate and proactive choices by the government, from establishing the Federal Deposit Insurance Corporation to low-cost state universities, helped create wealth for generations past. The Great Recession and the sustained fragile aftermath isn't a temporary problem. It's an enduring result of three decades of public disinvestment and an over-emphasis on financial markets in our economy. To truly recover we need to rebuild the engine of American prosperity. We need to rebuild the middle class.
Not Just Jobs -- Better Jobs
The prescription for America's economic doldrums is straightforward: We need more jobs. We need better jobs. Until robust growth resumes, we must maintain the safety net for those for whom recovery comes more slowly. Here are some of the things we should do to accomplish those goals.
Fix It First
From the Chamber of Commerce to the AFL-CIO, from The Wall Street Journal to The New York Times, there is agreement that America's critical infrastructure is crumbling. Few multimillion-dollar highway or runway projects, however, are truly shovel ready. Doing them responsibly requires acquisition, planning, and requests for proposals. But money that buys real estate or funds studies cannot simultaneously go into jobs. To jump-start job growth, we must prioritize maintenance work on existing assets that can enhance safety, support business, and improve living standards while providing jobs across multiple skill levels. Focusing on repaving, striping, and dedicating bus lanes means funding projects with a quick start-up where the majority of money goes to wages. Shifting existing funds into public transit and recycling leads to a net increase in mid-wage jobs. Putting money into long-deferred maintenance and repair of schools creates hundreds of thousands of local jobs, a safer learning environment, and a net savings in increased energy efficiency.
Create Jobs Today for a Stronger Tomorrow
Economists, business leaders, and law-enforcement officers observe that the most important action we can take for our economic future is implementing universal early education. At the same time, with millions of aging baby boomers, we need to prepare for future demands for quality long-term care. Estimates for the return on investment in these areas are high: One study estimates that social-care spending creates 1.5 times the number of jobs as does spending on physical assets, and economic-development researchers say that the multiplier effect of child-care dollars is equivalent to that of tourism or retail in a community. Money spent on creating these jobs is smart money that will be returned to the economy many times over.
Improve Job Quality
The fastest-growing U.S. jobs are low-wage. To boost consumer spending, hard work must be fairly compensated. First, the federal minimum wage needs to be increased. At the current hourly rate of $7.25, workers are making significantly less than the poverty level and far less in real dollars than were workers in the late 1960s. If the minimum-wage increased to just $9.50, we would inject $60 billion in new consumer spending into the economy. Second, increase the enforcement capacity of agencies that protect workers from unscrupulous employers who cheat them of wages or violate overtime laws. Workers cannot spend wages they don't get. Finally, even with budget cuts, the federal government remains the largest consumer of goods and services in many communities. Policies that prioritize decent wages and benefits in the federal procurement process and encourage states to do the same with their federal funds, such as the Supplemental Nutrition Assistance Program and Medicaid, will set an important precedent about the value of work and put more discretionary dollars in workers' pockets.
Do No Harm
With 14 million unemployed workers searching for jobs and over 7 million depending on unemployment benefits, unemployment insurance is vital to keeping families and communities afloat. If federal unemployment-insurance programs are not renewed this year, millions of workers will exhaust financial support in 2012. Unemployment benefits are the most effective economic stimulus, and cutting them will harm local economies and impoverish millions who seek to rejoin the ranks of taxpaying workers.
Despite what economists say, average Americans are still waiting for an economic recovery they can benefit from. Combining commonsense priorities with visionary investments in our future, demonstrating that hard work still pays, and supporting those who have suffered the most from the recession is a good place to start.
America, You Are Being Told to Tough it Out
The stock market wildly swings from day to day. S & P downgrades U.S. bonds. Confidence in our political system understandably falters after the manufactured debt ceiling debacle. What are we to make of all this.
On cue, the deficit hawks see this as further evidence of the need to ratchet up efforts to address our long-term deficits. The Committee for a Responsible Federal Budget, for instance, claims "Policymakers need to heed this warning and enact more aggressive deficit reduction that results in stabilizing the debt."
This is exceedingly misguided. The issue at hand is the need for stronger growth, both here and in Europe. The only plausible economic reason to take action about deficits that are five, ten, fifteen or twenty years away is if it gave us more room in the next few years to have greater government spending to fuel job growth while having higher deficits. That's not what CRFB or others have in mind and we should resist any efforts to reduce deficits in the near-term which will only serve to slow growth and raise unemployment further.
As many economists have pointed out what we are observing is clearly not fear of U.S. indebtedness or an inability to pay our debts. If that were the case we would see stocks fall and the price of U.S. bonds fall (and interest rates rise to persuade investors to hold the bonds!). In fact, interest rates on ten year bonds have fallen each day from last Friday's 2.56% rate, to 2.32 to 2.25 and closing at 2.11 on Wednesday. Interest rates have not been this low since the OMG moments in late 2008!
Rather, we're seeing concern that growth was miserably low in the first six months, that the debt ceiling deal will cut growth further and any response to the S & P downgrade may accentuate spending cuts. Plus, European growth prospects are worsening.
Unfortunately, doing anything to fuel growth and jobs in the near term does not seem to be a priority for either party. The GOP has no political interest in having more growth prior to the 2012 election and what they are proposing--deep and immediate spending cuts--will actually produce the double dip that is now gripping the media world. There is no evidence that deficit reduction, when we have more than 9% unemployment, will do anything to create jobs and much experience to show that it will weaken growth and raise unemployment. Great Britain anyone? U.S in 1937? The GOP diagnosis that job growth isn't occurring because of anxiety of Obama regulations is also unfounded. It certainly does not match what firms are actually doing. Businesses have been investing in equipment and software to a greater extent than would be expected given the decline of the economy and the faltering demand for goods and service. Private sector employment has grown faster in this recovery than the one under George W. Bush. If firms were concerned about hiring new people they could certainly use their existing employees more, which they are not doing since weekly work hours are still significantly below pre-recession levels. No, job growth has been limited by the fact that the demand for goods and services per person is still substantially below what it was in 2007. Plus, if you look what small businesses say in the NFIB survey it is that poor sales are their biggest problems. They also complain of taxes and regulations, which is hardly breaking news. More interesting is that their stated worries about regulation and taxes is lower under Obama than under any other president since Carter.
Which brings us to the administration. My metric for being serious about jobs is whether a program will significantly lower expected unemployment, which the Blue Chip consensus now says will be 8.5% at the end of 2012. Others, such as Goldman Sachs (who has been more accurate) expect 9.3% unemployment then. The President expresses concerns about jobs but his approach will not move the dial at all. First, all this talk about removing 'red tape', patent reform and new trade treaties should be dismissed since they either will not help on the jobs front (i.e. trade) or they will not possibly help in the next year and a half. Second, the President wants to continue the payroll tax holiday and the emergency unemployment benefits program. This is important to do, and should have been done by now. However, we already have these supports in place so they will not really improve our prospects even though losing them will hurt. The infrastructure bank is a great idea but even more important would be to pass the transportation bill before Congress at much higher levels of spending. Last, it is hard to square the President's concerns about jobs with the debt ceiling deal which essentially prohibits anything worth doing. On the one hand the amount of debt allowed is so tight that further deficit spending is not possible, and anything that's paid for will necessarily be weak tea. On the other hand the discretionary spending caps prohibit, well, new spending!
So, America, we have to break out of this policy box or we will be locked into persistent high unemployment as far as the eye can see.