Answer: Probably not! Elections bring out all sorts of revelations and epiphanies. We have seen that in spades in the last few weeks as the two main parties, both rejected as viable governments by the electors have struggled to lure the all important casting vote from the independents who are not only identifiable for the first time (there are even cartoons about them now) but who have taken advantage of their day (or 3 years in the sun) to lever as much out of the parties as possible. So last night, with the government returned as a minority operation at the behest of the vote of three independents and a Green MP, we suddenly see a renewed interest in regional development, public education and parliamentary process. The US President has also found a path to Damascus or at least he is trying to convince voters that he has – even making speeches to industrial workers with his sleeves rolled up. The reality is likely to be different but at least the topic of unemployment is centre stage for a day or so. And dare I add – with some support from the IMF.
The following graph is taken from the US Bureau of Labor Statistics – Alternative measures of labor underutilization data and shows the scale of the disaster that the US is facing and why action is desperately needed to reduce the damage being incurred to the economy in general and to individuals and families in particular.
U3 is the total unemployed as a percent of the civilian labor force (official unemployment rate) and U6 is total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
On September 3, 2010, the US President (clearly with an eye to the upcoming mid-term elections) took a stroll out into the Rose Garden at the Whitehouse and the assemblage heard some Remarks by the President on Monthly Unemployment Numbers.
It was the first of two important statements the President made about the dire situation that the US labour market is in with no end in sight to the demise.
While I get the impression Americans see Labor Day as a passage of time (the last day of summer) it has deep roots in recognising the rights of working people. For non-Americans, it emerged as a national holiday out of a major strike in the late C19th when workers were murdered by their own government (military and marshalls). So the US Government doesn’t just murder foreigners!
But it is certainly a day where politics and workers rights are often merged and so with the unemployment disaster facing the nation, the President could hardly not say something.
As I’ve said from the start, there’s no quick fix to the worst recession we’ve experienced since the Great Depression. The hard truth is that it took years to create our current economic problems, and it will take more time than any of us would like to repair the damage. Millions of our neighbors are living with that painfully every day.
There is an instant remedy available to the US Government. They could announce immediately that they intend to employ anyone in a public service job at minimum pay who desires to work. This is the Job Guarantee.
It could be invoked immediately and the payrolls started even if it might take some time to organise the actual work. The impact on aggregate demand would be immediate as the workers who gain jobs under the plan would be likely to spend $1 in each dollar they receive in pay. It would also be preferred that the minimum wage was raised to represent something that is capable of providing a decent minimum living standard.
The US government could approve of that plan immediately.
Yes, it took years of neo-liberal nonsense to create the policy voids and the mentality in financial markets that led to the crisis. That will take some time to solve with the introduction of proper regulative frameworks and a vastly different approach to the financial sector including banks.
But to get the unemployed into a paid job can be immediate – as soon as the legislation was approved and if the US Congress really wanted to act in the best interests of its people it would pass such legislation immediately.
Obama then indicated that the latest labour force figures that showed some jobs growth emerging and said:
But one thing we also have to do right now –- one thing we have a responsibility to do right now –- is to lift up our small businesses, which accounted for over 60 percent of job losses in the final months of last year. That’s why once again, I’m calling on Congress to make passing a small business jobs bill its first order of business when it gets back into session later this month.
So it seems all his intent is in relying on the private sector to solve the problem via “loan enhancements” (to increase the amount small business can borrow) and to waive “capital gains taxes on key investments, so small business owners can buy new equipment and expand”.
Further, the US Government plans to “accelerate $55 billion in tax cuts for businesses, large and small, that make job-creating investments in the next 14 months”.
He then tried to make out how virtuous it was that a Democrat Government would continue to subsidise the business sector rather than putting purchasing power directly into the hands of the unemployed by giving them a job. His claim to virtuosity by saying:
And keep in mind, it is paid for. It will not add one dime to our deficit. So, put simply, this piece of legislation is good for workers; it’s good for small business people; it’s good for our economy.
At present the US economy is suffering a massive aggregate spending gap. What they need is to add to the deficit. Claiming virtuosity by running a regime that is deliberately keeping the brakes on fiscal capacity and therefore holding unemployment at these disastrous levels is a sham and his latest policy plans amount to on-going vandalism.
As an outsider to the US political culture, I find it amazing that the Democrats would be so pro-business and anti-worker.
Anyway, if that wasn’t enough, Obama then rolled up his sleeves and travelled West and spoke a few days later at the Laborfest rally in Milwaukee, Wisconsin organised by the Milwaukee Area Labor Council (September 6, 2010).
The speech is available HERE.
His speech was full of left solidaristic rhetoric the type that is not mirrored in the policy settings that his Administration has introduced. Far from supporting the working class, Obama has introduced policies that have pushed real income up the income ladder to the rich.
He reminded the audience of what his grandparents had taught him:
So my grandparents taught me early on that a job is about more than just a paycheck. A paycheck is important. But a job is about waking up every day with a sense of purpose, and going to bed each night feeling you’ve handled your responsibilities. (Applause.) It’s about meeting your responsibilities to yourself and to your family and to your community. And I carried that lesson with me all those years ago when I got my start fighting for men and women on the South Side of Chicago after their local steel plant shut down. And I carried that lesson with me through my time as a state senator and a U.S. senator, and I carry that lesson with me today. (Applause.)
Someone should remind the President that a job is a job. Any government that watches over an economy with at least 16.5 per cent of its willing labour idle in some way or another and at least 10 per cent of that labour stock without any job at all is not honouring the message that his grandparents provided.
The reality is that so far the fiscal stimulus in the US has been very “job-poor” unless we are talking about the jobs of the top-end-of-town in the financial markets.
Obama then chose to repeat his message that “(w)e all knew that it would take more time than any of us want to dig ourselves out of this hole created by this economic crisis” and told the audience that:
… the question is, how do we create the same kinds of middle-class opportunities for this generation as my grandparents’ generation came home to? How do we build our economy on that same strong, stable foundation for growth?
The answer according to the President was to spend $US50 billion over six years on “long-overdue investments in upgrading our outdated, our inefficient national infrastructure … roads … bridges … dams, levees … a smart electric grid … broadband Internet … high-speed rail lines …”
With 10 per cent official unemployment much higher broad labour underutilisation $US50 billion over six years is so penurious that it will not add many jobs at all.
As the UK Guardian said (September 7, 2010) in relation to the detail that Obama provided on the kilometres of rail and roads to be attended too that:
While those numbers are impressive, the size of the US means they are only a small fraction: 150,000 miles of roads is just 5% of all US paved roads, according to the Federal Highway Administration. And 4,000 miles of railroad is less than 2% of all track according to the Association of American Railroads.
Now, any public infrastructure that reduces costs for the private economy and adds public service capacity is welcome. But the scale of the initiative does not match the rhetoric of the President’s Labor Day rally speech.
And when you compare it with the $US200 billion in tax credits to the corporate sector which he will announce today you realise that he isn’t really focused on effective solutions to unemployment.
But then you read the reaction by the chairman of the Republican Study Committee in Congress, Tom Price and you wonder what went wrong with the US education system. Price said:
This is hardly the first time Democrats have promised to create jobs with ‘shovel ready’ stimulus spending … President Obama has spent the last six hundred days trying to borrow, tax, and spend away this recession … And what do we have to show for it? More unemployment and debt. Infrastructure is important, but borrowing another $50 billion is clearly not the answer we need.
The reality is that you have more unemployment because the US government didn’t spend enough. They never borrowed or taxed too spend. As a sovereign government they do not have to do that. But the reality is that they needed to net spend much more and to focus more on “job-rich” projects – like a Job Guarantee.
While the Republicans clearly would inflict damage on the US economy if they were in control right now, you also realise that Obama’s claim to fiscal authority is also based on the same ignorance about the way the monetary system operates. He claims his new plan:
This is a plan that will be fully paid for. It will not add to the deficit over time -– we’re going to work with Congress to see to that.
So there is no planned add to aggregate demand. Total employment growth is driven by spending growth which generates real output growth. Shifting spending from one part of the budget to another may or may not have real impacts – more than likely not!
But the point is that there is an aggregate demand deficiency overall in the US and to get enough jobs to make a significant dent in the disastrously wasteful unemployment will require much more from the US government than shuffling expenditure to keep all new initiatives budget neutral.
Moreover, the fact that they are not advocating for an increased deficit tells everyone who knows that the US government doesn’t understand why the country is in the mess it is.
So it is hard to support the President’s claim that the new proposals “will not only create jobs immediately, it’s also going to make our economy hum over the long haul”.
No – the plans will not achieve that.
While I don’t often recommend anyone take heed of what the IMF says I think the US government should listen to the message of the joint discussion paper put out by the IMF and the ILO this week.
The IMF and the ILO in cooperation with the Prime Minister of Norway are holding a conference in Oslo on September 13, 2010 and I will comment on it when more papers are available. The two organisations have released a discussion paper in advance of the meeting – The Challenges of Growth, Employment and Social Cohesion – which documents their concerns about the crisis.
The discussion paper is in two parts: the first written by the IMF documenting the The Human Costs of Recessions and the second written by the ILO which seeks to outline a way of Building an Employment-oriented Framework for Strong, Sustainable and Balanced Growth.
in the Overview, the paper says:
Over 210 million people across the globe are estimated to be unemployed at the moment, an increase of more than 30 million since 2007. Three-quarters of the increase in the number of unemployed people has occurred in the “advanced” economies and the remainder among emerging market economies. Within the advanced countries, the problem is particularly severe in the United States – the epicentre of the Great Recession and the country with the highest increase in the number of unemployed: an increase of 7.5 million unemployed people since 2007 …
The scars of this distress in labour markets could last for a very long time – in the case of young workers unable to get their first job, a lifetime
In the daily grind about financial ratios and austerity you rarely read about the actual problem – the persistently high and rising unemployment problem.
The point about youth unemployment is often lost. The neo-liberals who are obsessed with fiscal cuts which they somehow think will make more real resources available for future health and aged care needs forget that the generation that will be producing the real output in the future are being left idle now as a result of their policies.
The youth who are denied the opportunity to accumulate labour force skills and experience by the faulty policies that the neo-liberals advocate are typically disadvantaged for life. The policy urgency to ensure that the youth are in formal education, trade training or another paid employment opportunity accumulating on-the-job skills and experience.
There is never a justification for forcing the 15-24 year olds into destructive idleness.
In this context, I found the section from the IMF to be a demonstration of the schizoid nature that appears to be emerging from that organisation at present. The crisis has rocked them I think because it exposed the Washington Consensus model of neo-liberalism with the IMF at the centre to be intellectually and empirically bereft.
The crisis has demonstrated that the mainstream macroeconomics paradigm is not capable of explaining the way our economies operate much less how we might get out of the disastrous crisis that their models failed to predict or understand.
So while the neo-liberal arrogance remains (read the blog – The IMF continue to demonstrate their failings) – there are also papers emerging seeking to analyse the obvious – that the recession has been destructive and markets do not self-regulate.
It is also a curious chapter written by an organisation that has imposed harsh policy regimes on poor nations which has worsened unemployment and poverty. Since when has the IMF worried about the “human costs of unemployment”. They have demonstrated that they are prepared to use unemployment to get the financial ratios they are obsessed with into some magic parity.
In general, the IMF and the ILO are still urging fiscal support for the ailing world economy. They initially reflect on why the two organisations were founded – as part of the early Post Second World War consensus that economic policy had to create conditions for full employment (with decent jobs) and poverty reduction.
In this context they say:
As the creators of the post-1945 architecture for global governance envisaged, achieving full employment and poverty-eradicating development requires policy coherence across the responsibilities of different ministries and international organizations. Yet the history of much of the period since then is one of increasing policy specialization and even contradiction. Taking off these blinkers is likely to play a big part in finding a better way to shape a fairer globalization.
The IMF and to some extent the ILO have certainly lost their way in the last 30 years. The IMF particularly has failed to provide policy frameworks and assistance which would “contribute … to the promotion and maintenance of high levels of employment and real income and
to the development of the productive resources of all members as primary objectives of economic policy” which was their initial mission statement.
The IMF chapter notes that the human costs of unemployment include:
- Lower lifetime earnings – even 15–20 years after a job loss in a recession, the earnings loss amounts, on average, to 20 per cent. The adverse effects on lifetime earnings are most pronounced for unemployment spells experienced in youth, especially upon college graduation.
- Cost to health … the mortality rate of laid-off workers is higher than that of comparable workers who kept their jobs.
- Cost to children: Job loss can reduce the schooling achievement of the children of the unemployed: one study finds that parental job loss increases the probability that a child repeats a grade in school by nearly 15 per cent. In the long term … children whose fathers
had lost their jobs were estimated to have annual earnings nearly 10 per cent lower than similar children whose fathers did not lose their jobs.
Please read my blog – The daily losses from unemployment – for more discussion on this point.
In terms of policy options the IMF says this:
A recovery in aggregate demand is the single best cure for unemployment …
So when you are talking about wage cuts, tax credits, welfare cuts, unemployment benefit cuts … repeat that statement – governments have to introduce policies that support a recovery in aggregate demand.
In this context, the IMF adds this further advice:
As a general strategy, most advanced economies should not tighten their fiscal policies before 2011, because tightening sooner could undermine recovery. The consolidation plans that these countries have for 2011 imply an average change in the structural balance of 1¼ percentage points of GDP. A more severe consolidation would stifle domestic demand that is still weak.
So a categorical rejection of austerity although the schizoid nature of the IMF comes out in this section when they claim that some nations do not have the fiscal capacity to expand.
Please read my blog – The IMF continue to demonstrate their failings – for more discussion on this point.
I also found it interesting that the IMF are finally tracing the source of the crisis to the rising inequality between wages and profits. They said:
In the wake of the current crisis there is an emerging view about the importance of growing inequality as one of the causes of global crises past and present. The rise in recent decades of inequality and its relationship to growth performance within countries has been widely remarked and studied … In some countries, and particularly in the United States, increasing inequality may have led to increased indebtedness of the household sector and thus an important factor in explaining the subprime mortgage crisis. Consumption was propped up by periodically very low interest rates, and financial products that encouraged high indebtedness.
It is clear that there has to be a rebalancing of the relationship between real wages growth and labour productivity growth if households are to maintain adequate consumption levels without resorting to increasing indebtedness. One of the major failures of the neo-libereal era has been to destabilise economies by “forcing” growth to be dependent on increasing private sector indebtedness.
However, in the current policy debate I only see initiatives that will worsen the inequality rather than achieve the necessary rebalancing. There has to be a major shift in the distribution of income back to the wage share. That will require significant pro-union and pro-worker legislation. I don’t think the governments we have in place are up to that and so the pre-conditions for the next crisis are being created as we try to recover from the present crisis.
The IMF seem to agree with this:
Declining wage shares, rising inequality and weak growth in formal employment thus contribute to national and international imbalances … It may be time to consider policies focused on labour markets and income distribution to supplement fiscal and monetary policies.
It is not a case of “may be time” – this sort of reconsideration has to happen.
Please read my blog – The origins of the economic crisis – for more discussion on this point.
I also liked the discussion on public employment creation. The IMF said:
Public employment or public works programmes targeting depressed communities and vulnerable groups can be effective and socially and economically justified. These often combine elements of basic income support with infrastructure investment and, in some countries, they have been expanded to include work in the social sector, environmental services and multisectoral, community-driven programmes. These programmes are also helping to create employment opportunities for women.
All the unemployed are vulnerable and so a broad-based Job Guarantee is the only way to ensure that there are sufficient paid work opportunities for all. Employment guarantess offer inclusive policy structures.
Please read my blogs that are found with this search string to exp[l.
The IMF also have moderated their position on unemployment benefits. They say:
There are of course also costs associated with UI benefits provision, and the one most commonly mentioned is the potential disincentive effect on the worker to search and accept a job while being eligible to receive UI benefits
This is the standard mainstream argument against the provision of income support and I have covered it in several blogs – most recently – The structural mismatch propaganda is spreading … again!.
The IMF note that the evidence supporting the mainstream contention is weak. They say that where some impacts are found that might support the mainstream view the effects are small and the impacts are not driven primarily by the provision of unemployment benefits per se.
They say that in “severe recession, any remaining negative effect of UI benefits provision on employment is likely to be small”.
The final point I will note in this blog (as I am running out of time) relates to the reasons for the increase in public debt. The IMF analysed the increase in the debt-to-GDP ratio for G-20 advanced economies from 2008 projected out to 2015.
Referring to Figure 11 in the paper (reproduced below) they say that:
… two-thirds of that increase is attributable to revenue loss and the adverse impact of the fall in GDP on the interest rate-growth differential during 2008-09. The fiscal stimulus (based on plans as of May 2010) makes a much more modest contribution to the projected increase in the debt-to-GDP ratios and is of the same order of magnitude as the support that governments provided to their financial sectors.
So the poor growth is the major factor – that is, the automatic stabilisers.
The analysis shows that discretionary government policy is responsible for only 4.5 per cent of the increase.
They also say that countries like the UK and the UK probably have the capacity to expand fiscal policy by an extra 50 per cent of current GDP. I reject the notion that a sovereign government is financially constrained but what the IMF is saying is that there is such an output gap remaining in the US that there is scope to expand net public spending.
The pie chart should also give the deficit terrorists something to think about. Growth will reduce most of what they see as the problem (which is really a non-problem) whereas advocating policies that will surely reduce growth will worsen the financial ratios.
However, I would advocate growth because it is the only way you will reduce the unemployment disaster. The quickest way to get job growth is to pursue public sector job creation.
So when assessing the latest foray into policy by the US Administration you should think about the facts. While infrastructure spending plans are welcome, budget neutral policy changes will not add to aggregate demand (if at all) anywhere near enough to significantly reduce their disastrous unemployment situation.
The Obama government is now fully responsible for the mess their economy is in. Saying that the solutions will take a long time to work is relinquishing responsibility.
The US government could reduce unemployment to frictional levels virtually immediately if it had the political will.
That is enough for today!