If a government won’t create jobs, it must provide income support

You can sense the fear in people’s lives at present as the economic crisis seems to be worsening and various so-called opinion leaders are telling us we are in danger of lapsing into a depression like the 1930s unless there is drastic action taken by governments. For example, the IMF’s latest salvo. Then you hear them say that the action necessary is more fiscal austerity. And you know it will definitely get worse. My own superannuation fund sent us letters last week suggesting that they are in danger of being unable to meet their liabilities and benefits – current and future – will likely be cut. How much? Fear tells us a lot. Action: all those retiring will take lump-sums and invest in cash – eliminating the risk but solidifying the cuts and – further undermining the viability of the fund. That what is happening everywhere. A moment’s reflection tells us that this fear is being deliberately created by the elites who are elected by us to advance our best interests. These elites are using fear – and deliberately perpetuating falsehoods to keep us ignorant – in order to usurp democracy and take control of the wealth creation processes so they can tilt the field further in their favour. This crisis could be over in a few weeks or months with appropriate policy interventions. It has now dragged on for years. That is because it is taking the elites that long to organise their on-going coup.

Noam Chomsky provided a neat definition of a terrorist act – which just happened to come from the official US army manual:

… the calculated use of violence or threat of violence to attain goals that are political, religious, or ideological in nature. This is done through intimidation, coercion, or instilling fear.”

Unemployment is a violent act. It creates powerlessness among individuals who then are forcibly deprived of material access. Foreclosing on a bad mortgage and then sending bailiffs around to repossess property is a violent act.

Continually, proposing new bills to drip feed some more money to the unemployed when the whole government strategy is to deny the economy the spending needed to eliminate the joblessness is consistent with state terrorism.

That is why I refer to the austerity proponents as deficit terrorists. Readers might get the impression that I think that the elites are stupid and do not understand monetary systems. I think most of them do not understand monetary systems but they are not stupid. I consider their actions – however idiotic they look when evaluated from the basis of evidence – to be highly crafted plans to further erode the capacity of workers to share in real income. The major costs of this crisis are being borne by the workers and the elites will take as long as is necessary to further erode the benefits that workers have enjoyed in the past.

This crisis came about as a result of the neo-liberal agenda over-reaching itself but the elites, aided and abetted by my own profession and a compliant media, have been able to turn that over-reach into an alleged “sovereign debt” crisis which has allowed them to renew their attack on government activity.

The rising unemployment is now constructed as government failure and a necessary cost of restoring balance and consolidation. All those buzz words – balance and consolidation.

Of-course, none of this is remotely true. The crisis is a private debt problem. The European public debt problems are purely the result of a system that was designed to fail. The design reflected ideological rather than economic considerations. What is required is more spending – whether it be public or private. But with fear killing off any large-scale private spending recovery the only cab on the rank is the government sector.

Austerity is blocking that avenue for growth.

Meanwhile, the conservatives occupy themselves with ritualistic blaming of the victims. This is a well-worn path during recessions. First, blame the government (regulations, minimum wages, over-spending, debt explosions etc) for the recession. Second, when the obvious happens – unemployment rises and with it the increased demand for income support – the blame shifts to the individuals who somehow connive with governments to accept income support payments which somehow erode the effectiveness of their job search.

Never mind that there are very few jobs and unemployment to vacancy ratios have risen alarmingly.

On December 9, 2011 a bill (H.R. 3630) was introduced into the Congress by the Republican Dave Camp – with the admirable title – Middle Class Tax Relief and Job Creation Act of 2011 and the stated aim was “To provide incentives for the creation of jobs, and for other purposes”. It has more recently become known as the “Temporary Payroll Tax Cut Continuation Act of 2011″.

I guess some of those “other purposes” were related to drug control given the provision in the bill to conduct drug tests before providing an extension of unemployment benefits. Andrew Rosenthal wrote about this in his New York Times blog (December 12, 2011) – Want Unemployment Benefits? We’ll Need a Urine Sample.

I am not a lawyer, but apparently this sort of provision is not constitutional in the US – read about that HERE.

Here is the section in the proposed bill (page 39):

In fact, the “other purposes” include some “trade-offs” (read: blackmail provisions) to erode environmental regulation.

The proposed bill allows the payroll tax cuts to be extended which is good. It also allows for an extension of the unemployment benefits which should be good.

Except that in their “government budget constraint”-austerity mindset they think they have to cut social spending more than they had originally proposed to “pay” for extending the tax cuts and unemployment benefits.

Net impact on aggregate demand – negative.

Further, its proposals to extend the unemployment benefits come with a snag – they will become (in the words of the NYTs) “stingier”.

The latest US Bureau of Labor Statistics Employment Situation for November 2011 shows that the “number of unemployed persons” was “at 13.3 million” and:

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 5.7 million and accounted for 43.0 percent of the unemployed.

The US has never had long-term unemployment rates that high.

Thankfully, the fact that the politicians have been dithering about the fiscal cuts has meant the fiscal stimulus is still helping to support an emerging growth pattern in the US (as well as the near zero interest rates). I am not all that optimistic in 2012 though when the budget cutting will presumably begin.

The point is that a bill that proposes to further cut unemployment benefits and make it harder for the unemployed to access those benefits defies the evidence.

The New York Times editorial last week (December 12, 2011) – Targeting the Unemployed – which documents this latest attack on the unemployed said:

… Republican lawmakers would have you believe that the nation cannot afford jobless benefits and that many recipients are not so much needy, as lazy, disinclined to work as long as benefits are available. When was the last time any Republican lawmaker tried to live on $289 a week, the amount of the average benefit?

Under current policy, federal benefits kick in when state-provided benefits run out, typically after 26 weeks. The duration of the federal payouts depends on the level of unemployment in a given state. Currently, workers in 22 of the hardest-hit states — including California, New Jersey and Connecticut — qualify for up to 73 more weeks of aid. In five other states — including New York — up to 67 more weeks are available. In the remaining 23 states, maximum federal benefits range from 34 weeks to 60 weeks. The cost to continue the program for another year would be about $45 billion.

The Republican plan would cut $11 billion of that in 2012 by slashing up to 40 weeks from the program, reducing by more than half the maximum 73 weeks now available. Because of the way the program is structured, the biggest cuts would come in the states with the highest unemployment. Millions of jobless workers would be quickly left without subsistence, and the weak economy would be weakened further by the drop in consumer spending.

If you study the bill (see link above) you will also see (as the NYTs points out) that the “bill would also impose onerous — and gratuitous — requirements on people who apply for jobless benefits”. The drug testing is one such requirement.

The NYTs Editorial certainly understands what the constraints are:

Joblessness remains high, not because the unemployed are lazy or on drugs, but because there are too many applicants for too few jobs. Labor statistics show that if all the job openings in America were filled tomorrow, nearly 10 million people would still be unemployed. That works out to about four jobless workers for every opening. In a normal job market, the expected ratio would be about one to one.

I last considered the question of extending unemployment benefits in this blog from early 2010 – Extending unemployment benefits … an omen – that is how long the US conservatives have been creating fear about this issue.

The mainstream economic theory that the conservative politicians use to justify cutting benefits claims that the provision of benefits reduces search effectiveness by the unemployed – the benefits “subsidise” unemployment. It follows that if you cut them the workers will search harder and lower their requirements.

There have been many “research” articles published in the self-serving mainstream journals supposedly proving that unemployment support reduces employment by undermining the incentives of the jobless to search for work.

If you read this literature you will realise it proves nothing of the sort. The literature is replete with fudged datasets, spurious techniques and other niceties that the mainstream researchers use to cheat on their findings or mislead the reader as to what is actually being demonstrated.

The most sustainable argument that can be maintained however is quite different. It is summarised by this nice quite from Michael Piore (1979: 10):

Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment. (emphasis in original) [Unemployment and Inflation, Institutionalist and Structuralist Views, M.E. Sharpe, Inc., White Plains]

Please read my blog – The unemployed cannot find jobs that are not there! – for more discussion on this point.

Despite all the labour market and related supply-side reforms that have been introduced across the OECD countries over the last 18 or so years, the unemployment rate persists at high levels due to demand deficiency.

The conventional NAIRU approach tends to neglect the role of aggregate demand and focuses on the supply side. The empirical foundation of the NAIRU is without credibility – Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.

The other point is that policy should be based on evidence. That is, policy changes should be directly informed and linked to relevant developments in the area the policy targets.

Even the conservative, Boston-based National Bureau of Economic Research (NBER) recently published a research paper [Rothstein, J. (2011) 'Unemployment Insurance and Job Search in the Great Recession', July] which said that any negative impacts on motivation of extending unemployment benefits (page 39) are:

… quite small, too small to outweigh the benefits on transfers to people who have been out of work for over a year in conditions where job finding prospects are bleak.

There are many similar studies that have found little or no evidence that the unemployed choose to remain jobless when there are available work just to continue receiving income support.

A report (October 11, 2011) – Hanging On By a Thread – from the National Employment Law Project (NELP) provides further research evidence that rejects the mainstream argument that unemployment benefits erode search effectiveness.

They write:

State agencies in Connecticut and Washington surveyed the conditions of workers who have reached the end of their state and federal jobless benefits. If, as the argument goes, unemployment benefits were motivating these workers to stay unemployed, it stands to reason that these workers would be looking harder and finding work just before their benefits run out, or shortly thereafter. But that is simply not the case, according to the results reported by these selected states.

Unemployment benefits are a way to sustain income when there are no jobs available. As the NYTs editorial says:

[workers in the US] … need job creation, like the spending and infrastructure programs in President Obama’s jobs bills, which Republicans scoffed at. Lawmakers could also take smaller steps to help the long-term jobless, like outlawing discrimination in hiring against unemployed job-seekers.

In the meantime, the only humane and economically sensible choice is to renew unemployment benefits at a level that is up to the scale of the crisis. The Republican plan is way too small for a very big problem.

Or in my words, if the government isn’t willing to provide jobs for the unemployed, which is the best option when private demand collapses, then the only moral thing to do is provide indefinite income support at a level sufficient for the unemployment worker to avoid falling into poverty.

The business lobby should be screaming out for better benefits for the unemployed.

This MSNBC News Report (December 19, 2011) – States brace for loss of extended jobless program – documents the spatial impact of the lost aggregate demand if the unemployment benefits expire (or are cut).

It reported that the proposed bill (noted above) is “in limbo” after Senate-approval because “House Speaker John Boehner” is “facing a revolt from conservative members” and “walked away”.

The Report says that:

Failure to renew the program would hurt millions of families struggling to get by, cut consumer spending and take a bite out of economic growth nationwide. But the pain would be felt most sharply in a handful of states where benefits payments have had the biggest impact on local spending, including Nevada, New Jersey, Oregon, North Carolina, Rhode Island, Pennsylvania, Michigan, Washington, California and Connecticut.

A related report that goes into more detail is – States where the most unemployed could lose benefits.

The macroeconomic system doesn’t discriminate as to where spending comes from. It is a machine that requires dollars to be flowing through cash registers every day to ratify the decisions taken by firms some time prior as to how much to offer for sale.

A dollar spent by an unemployed person is identical to a dollar spent by the richest person in America. If the spending declines then output and national income declines.

Unemployment is already a highly deflationary force – especially when it is so high and long-term. It is also likely that the unemployed spent 100 per cent of every dollar received. The long-term unemployed are likely to have exhausted any previous savings (I am looking into that question at present) and so live from week to week.

Cutting the total benefits or denying them altogether would introduce a significant negative aggregate demand shock into the US economy at a time that it is showing some signs of recovery.

It will worsen unemployment and increase the deflationary dynamic. That is, in addition to the damage it would cause children of jobless households and family structures etc.

NELP say:

The federal program of extended unemployment insurance, which runs out December 31st, is the lifeline that sustains these workers and the local businesses hit hardest by the severe economic downturn.

There is no logic to cutting or denying benefits to the unemployed. The US government can clearly “afford” to pay the benefits. The Republicans think the deficit is the important target but will be taught the hard way that the budget deficit will rise faster than their efforts to cut it.

The MSNBC report quotes an economist who said:

Although the job market improved slightly, it seems the proportion of people finding jobs compared with the number of claimants exhausting benefits is relatively low.

Indeed, the probability of an unemployed person finding a job is rising as the economy shows signs of growth but is still desperately low. It is an empirical question.

One can provide the evidential basis for policy design through research rather than mouthing mindless conservative ideologies.

I examined the US labour market in some detail in September in this blog – The US labour market is looking grim. In that blog I used gross flows analysis which allows us to assess how much easier it is for an unemployed worker to gain employment now compared to some past periods and whether new entrants into the labour market are more likely to gain employment now than in the past. It also allows us to estimate the probability that a worker who is employed will lose their job now.

The data for the gross labour flows analysis is available from the US Bureau of Labor Statistics. I updated my databases today to include the latest BLS data – to November 2011.

To fully understand the way gross flows are assembled and the transition probabilities calculated you might like to read these blogs – What can the gross flows tell us? and More calls for job creation – but then. For earlier US analysis see this blog – Jobs are needed in the US but that would require leadership

By way of summary, gross flows analysis allows us to trace flows of workers between different labour market states (employment; unemployment; and non-participation) between months. So we can see the size of the flows in and out of the labour force more easily and into the respective labour force states (employment and unemployment).

The various inflows and outflows between the labour force categories are expressed in terms of numbers of persons. But a useful alternative presentation is to compute transition probabilities, which are the probabilities that transitions (changes of state) occur. For example, what is the probability that a person who is unemployed now will enter employment next period.

So if a transition probability for the shift between employment to unemployment is 0.05, we say that a worker who is currently employed has a 5 per cent chance of becoming unemployed in the next month. If this probability fell to 0.01 then we would say that the labour market is improving (only a 1 per cent chance of making this transition).

The following table shows the schematic way in which gross flows data is arranged each month – sometimes called a Gross Flows Matrix. For example, the element EE tells you how many people who were in employment in the previous month remain in employment in the current month. Similarly the element EU tells you how many people who were in employment in the previous month are now unemployed in the current month. And so on. This allows you to trace all inflows and outflows from a given state during the month in question.

The transition probabilities are computed by dividing the flow element in the matrix by the initial state. For example, if you want the probability of a worker remaining unemployed between the two months you would divide the flow (U to U) by the initial stock of unemployment. If you wanted to compute the probability that a worker would make the transition from employment to unemployment you would divide the flow (EU) by the initial stock of employment. And so on.

For the 3 Labour Force states we can compute 9 transition probabilities reflecting the inflows and outflows from each of the combinations.

9_element_GF_matrix

So it is becoming easier for an unemployed worker to find a job – so much easier that the elimination of income support would be inconsequential in its impact on aggregate spending and family welfare?

The answers are: slightly easier; still dire.

The following graph shows the history of UE (blue) and UN (red) transition probabilities since March 1990 to provide some perspective. The current recession is notable because it is the first time in the history of this data series that it is more likely a person who is unemployed will exit the labour force (UN) than to gain employment.

The UN probability continues to rise which means that the broader BLS measures of labour underutilisation (which encompass hidden unemployment etc) will probably be rising over time.

The UE probability is more or less stable. In December 2007, just as the crisis began UE = 0.27. In October 2011 it was 0.175 and with the slight improvement in the labour market in November it has risen to 0.182, a far cry from the recent peak. So while conditions have eased in the last month, it is still very difficult for an unemployment person to gain a job.

And note this analysis is aggregate in nature and ignores the spatial distribution of opportunity. In Nevada (highest unemployment rate) and California (second highest) and then, in some areas of those states, as an example, these transition probabilities will be almost zero.

There is nothing in the data that tells me that the prospects for the unemployed are improving significantly as yet. There is thus a major disconnect between the policy debate and the actual opportunity set that Americans down in the street are facing.

The next graph shows the EU-UE probabilities since the onset of the crisis in December 2007 (to November 2011).

The probability of an American (in general) losing their job if employed (blue line) rose throughout 2008 and then slowly evened out and is stuck at around 1.5 per cent (after reaching a high of 1.9 per cent in May 2009).

The chance of an unemployed American worker gaining employment – UE – fell over the same period and has scudded along at around 17 per cent since early 2009 but in recent months the UE transition probability has improved marginally (but still well below its December 2007 value) and the EU probability is stabilising.

The next graph shows a series of snapshots of the suite of probabilities to give you an impression of what has been happening over the last few years in comparison to just before the 2001 recession.

The probability of getting a job if you are unemployed (UE) is now (November 2011) 18.2 per cent and has improved a little recently after being “stuck” aroudn 16.5 to 17 per cent for some months.

The chances of remaining unemployed has also fallen slightly (61.3 per cent in November 2011 compared to the highest point in the cycle – May 2009 = 65.5 per cent).

An unemployed person is more likely to exit the labour force altogether (20.5 per cent in November 2011) than to enter employment (18.2 per cent in November 2011). These transitions (UN) will surely contain a significant hidden unemployment component.

Further, new entrants to the labour market face a declining likelihood that they will enter employment (4.2 per cent in November 2011 compared to 5 per cent in January 2008).

Conclusion

My view is simple. If a government won’t create jobs, it must provide income support. I can make that case based on so-called “bleeding heart” grounds (worry about the children and families etc). I can also make it on pure technical grounds.

Spending equals income equals output which drives employment, profits and material prosperity. Businesses love spending because they prosper. The conservatives are very poor representatives for business.

I prefer governments to create jobs directly when there is insufficient employment created in the private sector. But if they refuse to do that then the only other option is to provide unemployment benefits. That should be done on an unconditional basis. If you don’t have a job you get the benefit.

The current debate in the US about extending benefits is mind-boggling really. Just the sheer anti-intellectual nature of it is staggering. The research evidence and regular data releases negate the principle propositions used by the conservatives to justify their austerity push.

That is enough for today!

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    4 Responses to If a government won’t create jobs, it must provide income support

    1. GLH says:

      I believe that the majority of the commentary I see on CNBC is against government intervention and for a balanced budget, but when listening to those commentators I constantly have to remind myself that the majority of them are from the banking and hedge fund industries. Is there a disconnect between the gamblers – no I mean financial sector and the leaders of productive enterprises?

    2. billie says:

      And here was I feeling paranoid that the stock markets were being manipulated to suck the wealth out of the newly created group of self managed and pension fund superannuants.
      As I travel around Melbourne I am shocked by the number of graduates working in call centres or doing lowly admin or cleaning because there is no work in their field or there is no recognition for experience gained outside the city. Female engineers are not employable in Australia so women move into another field, there are a tiny number of exceptions

    3. Luigi says:

      off topic.

      And finally Victor Constacio, Vice President of the ECB in

      http://www.bis.org/review/r111215b.pdf

      “Central bank reserves are held by banks and are not part of money held by the non-financial
      sector, hence not, per se, an inflationary type of liquidity. There is no acceptable theory
      linking in a necessary way the monetary base created by central banks to inflation.
      Nevertheless, it is argued by some that financial institutions would be free to instantly
      transform their loans from the central bank into credit to the non-financial sector. This fits into
      the old theoretical view about the credit multiplier according to which the sequence of money
      creation goes from the primary liquidity created by central banks to total money supply
      created by banks via their credit decisions. In reality the sequence works more in the
      opposite direction with banks taking first their credit decisions and then looking for the
      necessary funding and reserves of central bank money. As Claudio Borio and Disyatat from
      the BIS put it: “In fact, the level of reserves hardly figures in banks’ lending decisions. The
      amount of credit outstanding is determined by banks’ willingness to supply loans, based on
      perceived risk-return trade-offs and by the demand for those loans.”7 In modern banking
      sectors, credit decisions precede the availability of reserves in the central bank. As Charles
      Goodhart pointedly argued, it would be more appropriate talking about a “Credit divisor” than
      about a “Credit multiplier”.”

    4. John Armour says:

      As if on cue to emphasise your message Bill, Peter Costello has an op-ed in today’s SMH (which I won’t dignify with a link).

      It’s a rambling conga line of straw men, ostensibly dealing with the Euro crisis but
      covering all the pet ideologies of the former Treasurer: labour market deregulation, supply-side solutions to unemployment, obsession with fiscal rectitude etc.

      To Costello, it’s very simple: unemployment in Europe is entirely the result of over-regulation of the labour market and the disincentive to seek work that comes with comes with toying with “social democracy”.

      He prefers the Chinese model these days. Oh, the irony !

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