Saturday, August 13, 2011

Government spending and jobs.

A friend of mine on facebook asked me the following question:

Can you help me to understand if FDR initiatives like the WPA would help to get America back on it's feet in these times? Congress is focused on only taxes and the budget and I just feel like America needs employment opportunities to turn this economic situation (recession, depression or whatever it is) around.

So let's answer it here. To begin with, let me agree with Republicans at least in principle about something. Republicans insist that to raise taxes in a recession is bad (though if they get their way and cut taxes to spur growth in hard times, they never suggest raising them back again in times of prosperity and surplus, instead advocating more tax cuts to 'give people their excess money back.') Their reasoning is that if you raise taxes then people have less to spend (because it's going to the government) and if we assume that government spending does not grow, there will be less money put into the economy to spend on goods and services, so demand will drop. When demand drops then there is excess supply, which causes prices to drop and the companies that produce things, facing a glut in supply and low prices, will lay people off; then those who are laid off will (even if they get unemployment benefits) get less money and therefore spend less, which will reduce demand some more and keep things cycling downward.

There is a seed of truth to the theory behind this argument, especially if (as just noted) you assume that spending by the government remains constant.

In practice however, keeping taxes at their lowest in decades has not spurred the economy at all, partly because companies (and individuals at this point) are hording money (most large companies have record amounts of cash in the bank) and partly because when they do invest the money they are not paying in taxes to grow their businesses, the lion's share of at least what large corporations have spent is being invested outside the U.S.; I'm not against a good economy in China or India, but I do question a policy by which U.S. taxpayers pay to develop it. In particular, following the passage of the Bush tax cuts in 2001, over 2.5 million jobs were outsourced over the next three years as the beneficiaries of those tax cuts spent them to build factories and call centers in Asia, and then shut down factories and call centers in the United States.

There is another alternative when depending on the private sector to carry the economy isn't working, and that's what we will talk about here. Government spending to take up the slack, as spelled out by the late economist John Maynard Keynes. Remember that the above argument assumed that spending by the government remains constant. But what if it increases? If it does, then Governments (federal, state and local) will hire people and purchase goods and services. An office computer, a car, or a bag of cement will bring in the same profit to the vendor whether it is purchased by a company or by a government agency. Therefore government spending, if it increases the level of demand, has the same effect on the economy as if the same amount of money is spent by private businesses (though government spending also offers the advantage of certainty and budgeting while whether private businesses spend money depends on factors often subject to uncertainty and fluctuation.) Beyond that, if government hires people (as in the Roosevelt New Deal programs) then they get paid a salary. Because they are the same people who otherwise would be unemployed, they get paid a salary in exchange for doing work which must be done (and I promise, if you go to any mayor in America you could be provided with a list of projects that the city or town in question needs to have done, but there is not enough funding to hire the people to do it.) And most of what people earning a working wage earn, they spend at local businesses to maintain their household-- again, no differently than if they were working for a private company.

The Roosevelt era New Deal programs are a great example of precisely this kind of government spending to replace money that was not being put into the economy by private industry. Millions of people who previously were not part of the economy (other than being a drag on it by consuming whatever they could get their hands on but not producing anything because nobody was giving them the opportunity to produce anything) were instead hired and began building all kinds of infrastructure (much of which is in use today.) I still remember walking down a sidewalk in Socorro in the 1980's and seeing stamped in the corner of the cement, "WPA 1936." The New Deal programs did a lot more than just build sidewalks in Socorro, of course. They created great works of infrastructure including hydroelectric dams, highways and flood levees. My wife's grandfather was in the Conservation Corps as a young man and helped build many of the roads and trails into our National Parks. Much of this infrastructure is still in use today, partly because it was well built but also partly because honestly we haven't made the investment to maintain and where necessary replace it. The Minneapolis bridge collapse a couple of years ago should serve as a wakeup call as to what can happen when we let things decay for lack of funding.

More importantly, the Roosevelt programs (many later continued under Truman, Eisenhower and other future Presidents) stopped the deepening of the Great Depression when they were first implemented in 1933 and began the slow climb out of it. Yes, there were those who bemoaned the cost, but let's not forget that Roosevelt listened to them in 1937, cut spending, and got slapped with a return to recession in an economy not yet ready to stand on its own. Luckily he learned his lesson quickly and resolved never to listen to that kind of thinking again. THE MAIN POINT TO MAKE IS THAT INCREASING GOVERNMENT SPENDING INCREASES DEMAND FOR GOODS AND SERVICES, and this increased demand spurs growth in the economy. This is exactly the same argument Republicans make about tax cuts. The only difference of course is that giving the money to poor people generally means that all or most of it will be spent in America, while if it is given to multi-national corporations then you can only hope they spend it in America because most of them haven't in the past.

So what about the Stimulus two years ago? Republicans will tell you that it didn't work, proving that a big government spending program won't rescue us from the recession.

In fact, they are wrong on three counts.

1.The stimulus did work and stopped the slide into another Depression.
2. The stimulus was too small, not too big.
3. The economy can't be rescued instead by cutting government spending to reign in the deficit; attempting to do so actually makes things worse instead of better.

Remember that when Obama took office, the economy was hemhoraging over 600,000 jobs per month and was headed straight down with a rocket. The stimulus clearly did work, beginning the month it was passed, February 2009.

It is hard to see that this worked without the visual, because most of the early turnaround represents jobs which were on track to be lost but which were instead saved. Most of the money went in lump payments to states who then used the money to avoid even deeper cuts to schools, police and other government agencies. In many cases the Governors of those states quietly took the money but did not want to be caught thanking the President for Stimulus money (cautionary tale: see what happened to former Florida Governor Charlie Crist, who was run out of the GOP after he did.) But just imagine: Two years ago Arizona implemented a series of deep cuts in order to appease a $3 billion budget deficit. After Jan Brewer got a billion dollars in stimulus money, the hole was only $2 billion. So translate the $1 billion difference into jobs that were saved, and it's quite a few. But to go back and point out now that all those people were preserved in their jobs by the Stimulus bill is largely self-defeating. The GOP won on how to frame that debate. Telling someone that without the Stimulus, "you would probably would have been laid off two years ago" is not likely to get many listeners, even if it's true.

It is also true that one reason why is a self-inflicted wound by the Obama administration. In trying to sell the Stimulus to Congress, an administration official made the now infamous statement that without the Stimulus, unemployment would top out at (a then-bad sounding) 8%. This was a very rosy projection, and clearly wrong. That goes to one of the most infuriating things about the Obama administration, to be honest. He took over during a crisis he didn't even have anything to do with starting and yet almost immediately started trying to talk up the economy (remember 'greenshoots?') I don't know why Presidents think that being a pitchman for the economy is part of their job. It's not. I think people would appreciate a President who would level with them a bit more. If the economy sucks right now, then say the economy sucks, and do it on television. Then, if things start to improve they will believe you when you say so. Roosevelt, in his 'fireside chats,' never claimed that things were getting better unless they were. He did not feel he had to 'sell' his programs-- he did win the election, after all. Had Obama proposed even twice the size of a stimulus he did and called it a 'jobs' program (because that's what it was, and 'stimulus' sounds like one of those Washingtonese words that Republicans could tee off on) then would they have dared to filibuster it back when we were seeing unemployment skyrocket? I don't think the President had to put a number on it at all, but if he did have to try and project where unemployment was headed without a jobs bill, something closer to 20% might have been more realistic.

This goes to the second argument. The stimulus was originally proposed at about $950 billion. Obviously this was part of a political attempt to be able to attempt crossing the 'trillion dollar' barrier. In exchange for this semantic concession we got a bill (which Republicans negotiated down to $797 billion after seizing the initiative within days after the President took office by threatening a Senate filibuster) that (as was pointed out at the time) was inadequate. The size of the Stimulus compared to what was needed to fully prevent a second Great Depression was like trying to haul a load in a trailer that weighs many tons up a hill using a compact car. Underpowered and therefore underperforming. Besides being too small, the Stimulus was loaded with 43% in both individual and corporate tax cuts (all to get the votes of three Republicans.) We know by now that the whole argument that tax cuts boost the economy is faulty; over the past decade we've had massive tax cuts in place, to where Americans are now taxed at the lowest rate in fifty years, so if low taxes produced a good economy then today our economy should be booming. Further, one price of getting the votes of the three GOP Senators who did vote for it, was to take out funding for school construction and repair projects (which is something that is clearly needed a lot more than more tax cuts, but it was taken out to appease Sen. Susan Collins, (R-Maine.) So by last year, it was plain that while the Stimulus had stopped the economic freefall, it was not enough to actually turn the economy all the way around and most economists said we needed a second, larger Stimulus. Though they were correct about the economics of the situation, this was clearly impossible in last year's "Tea Party" driven political environment. In addition to this, the Stimulus was only written to last for two years. The recession may be technically over but government support is still needed and is being withdrawn prematurely. To cite the most obvious example, state and local governments are now having to lay many people off because their tax revenues have not recovered to the level they were before the recession. What recovery they have had has not even been fast enough to compensate for the withdrawl of the stimulus funds. During the Lame Duck session last December, a de facto second stimulus was on the table with the new budget and had reached an agreement, when seven Senate Republicans walked away at the last minute and instead signed off on a much smaller budget package that preserved only 43% of the Stimulus-- you guessed it, the tax cuts.

To address the third point, you have to have blind faith that if the deficit went away that businesses would just open their wallets and start spending money, and further that when they do, they will begin hiring a lot of workers (because anything less than 300,000 per month won't bring the unemployment rate down at a significant rate.) At the same time cutting away at government at a time when we should be spending more to help the economy is a gamble. I'm not the only person who sees the economic policies of austerity and deficit reduction we are focusing on today as parallel to the disaster that similar policies caused in 1937.

Further, there is no evidence that the Federal budget deficit is what's preventing large scale hiring, and in fact it is instead misguided attempts to cut government that are having the opposite effect. What's happening in private industry is a little like a bunch of people standing on the beach after a shark has been spotted nearby. Even if the 'all clear' has been sounded, somebody has to go in first, and with the shock of the recession still recent and economic reports which seem to conflict each other weekly (but seem to point to a long, slow recovery with a significant possibility of a 'double dip' recession) employers are skittish to be the first ones in, spend a lot of money to expand, train and hire people and then get their heads cut off if there is a double dip. In fact, as far as there has been any growth in the economy a lot of businesses have figured out how to expand their businesses without hiring at all via productivity gains. Even in Congress we've seen this happen recently with the announcement of the end of the House page program (with the ability to now just send out a bill that's thousands of pages long instantly to every member of Congress, not to mention email and twitter accounts, there is no longer any need for high school students to walk around the halls of Congress carrying documents and bills with them from office to office.)

What is more, cuts in federal, local and state governments especially (since they are being pinched by the premature end of the stimulus) are undermining even what meager recovery there is in the private sector. This is exemplified by the July jobs report. In July, 117,000 nonfarming jobs were added (farming jobs are excluded from the jobs report because of the large monthly swings caused by different needs in farming.) However, this is a net of 117,000 jobs. Private sector jobs actually rose by 154,000 jobs. But jobs being lost in various levels of government ate up about a quarter of that as governments eliminated 37,000 jobs. In June, the initial report said that private sector employment was up by 53,000 jobs but government cut 39,000 jobs for a net gain of only 18,000 (later revised to upward to a net gain of 46,000 as more data became available.) So far from helping the employment situation, attempts to reduce government in the middle of the recession are actually slowing down the recovery and negating the effect of whatever private sector jobs are being created.

Common sense follows that this is true as well. If a man who has been unemployed in construction finds a job in a retail industry (perhaps for less money but he is at least employed) but his wife loses her job as a teacher due to state budget cuts, then it follows that there has been no net change in employment, and more importantly, no net change in demand for goods or services. This family is a microcosm of the recovery we are seeing: a few people are finding work in the private sector (though almost always in worse jobs with less pay and fewer benefits than the jobs they had before the recession) but because government is now dumping more people into the unemployment pool instead of taking them out, misplaced 'austerity' is actually dragging out and damping down the recovery.

Finally, let's consider the unemployed. If we do not hire them, then they either drop out of the labor market (whether through homelessness or finding someone else to become dependent on) or collect unemployment benefits. While unemployment benefits are generally meager, so were the wages for New Deal jobs. But returning to my wife's grandfather (which is where I will conclude,) his time in the Conservation Corps gave him more than the ability to put food on the table. Being involved in the construction of great works gave him a sense of pride in his accomplishments and self-worth that he had all the way until when I knew him before his death about a decade ago. It also gave him an education; after he returned from World War II he was able to use the skills he gained from the Conservation Corps to make a career as a heavy equipment operator. I'd say the government got a pretty good return on their investment in him of 25 cents per hour.


Mack Farmer said...

There is also the real possibility that when people who have certain skills drop out of the job market for long periods, those skills erode and they become much less effective and therefor not particularly good candidates.

My father talked at length about his time in the CCC camps, and he learned a lot of valuable skills.

I'm just concerned that the lowest level jobs will go unfilled even with a massive infrastructure stimulus. I'm not against it, but the processes and practices of Govt contracting need to be completely over-hauled. There must be money spent on oversight, and contracts need to be audited to prevent or at least minimize fraud and waste.

The trick will be to do it in a manner that doesn't create inertia due to an abundance of red tape.

Good thoughts, Eli.

Eli Blake said...

Of course in the original New Deal programs, there were no private contractors. Everyone you talked to, from the person who handed you a clipboard to sign up to the person who made the decision whether to hire you or not, worked for the government. That was one of the things I enjoyed last year about the census work. It was all done in house, and it actually meant far fewer headaches and less red tape.

Eli Blake said...

Though I will say that the complaints about bureaucracy do have foundation. At one point I fixed a set of worthless maps and wrote in all the corrections (these maps were so worthless that I ended up getting a county-issued map that had all the streets in the right places) and the next person who worked that area (who is someone I know so we were able to discuss it) got handed the same set of worthless maps.

Emily Carson said...

The way to create jobs is to elect someone who understands that government can't create jobs, then get out of the way and let business do it.

Oh, and repeal Obamacare so they can spend the money they have in the bank instead of being afraid it will all go to pay health insurance premiums on their employees.