Dean Baker, September 10, 2010

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Andy Stern has put forward a serious proposal for getting the economy moving forward and putting people back to work. We should demand that our politicians take up the Stern challenge to “call or raise me.”

So, how does my scorecard look? I’ll take my top two items from Stern, then throw in $100 billion a year for infrastructure spending, and $15 billion a year for home retrofits.

Job Sharing $ 54 billion 2.4 million jobs
Youth Employment $ 46.5 billion 3.1 million jobs
Infrastructure $ 100 billion 1.6 million jobs
Energy Retrofits $15 billion 0.5 million jobs
Fed Inflation Target 1.4 million jobs

Total $215.5 billion 9.0 million jobs

It was not a natural disaster like a hurricane or an earthquake that led to 25 million people being unemployed or underemployed. This disaster was an entirely preventable result of incredibly inept economic management. In other words, there is mass suffering across the country because the people who were charged with running the economy did not have a clue as to what they were doing.

This apparently continues to be the case. The proposals that Stern has put forward are entirely reasonable routes for creating jobs and boosting the economy. My favorite is work sharing just because it is so simple, obvious and quick.

As Stern points out, this really should not be a big partisan issue. Both Republicans and Democrats recognize the need for unemployment insurance in a downturn. What is wrong with having the government partially offset the loss of pay from a 20 percent reduction in work hours rather than demanding that someone be 100 percent unemployed before they can collect unemployment benefits?

This keeps people on the job so that they remain part of the workforce and will continually upgrade their skills as needed. This avoids the often devastating effects of long-term unemployment. Work sharing has been pursued aggressively by the conservative government in Germany. Its unemployment rate is now lower than it was at the start of the downturn even though its economy suffered a sharper drop in GDP than the United States.

The jobs program suggested by Stern is also just plain commonsense. There are places like Detroit, where the youth unemployment rate is well over 50 percent. Public sector jobs, like those created in the New Deal, can give these kids a chance in life that they would not otherwise have.

The reason that politicians have shied away from this route is that they are worried that Fox will find two kids drinking beer in the park while they are on the payroll, and the video will go viral on the Internet. We have to tell the politicians that they will just have to live with the bad PR if it means giving millions of young people a chance in life. A little spine can go a long way.

I like Stern’s infrastructure plan, but I’m not sure that we can do as much as quickly as he, and I, would like. The country has huge infrastructure needs. We have to modernize our transportation system, our electric grid, and our water and sanitation system. The Obama Administration began some of this with the stimulus package last year, but much more needs to be done.

Modernizing our infrastructure could easily take $2 trillion over the next decade. However, we probably could not usefully boost spending by more than $100 billion over the next year.

Another area where we can surely do more is retrofitting homes to make them more energy efficient. Here also the Obama Administration has gotten the ball rolling with its stimulus, but we need to ramp up the scale by at least an order of magnitude. Suppose we weatherized 10 million homes a year for two years at an average cost of $3,000 each. If the government picked up half of the expense, this comes to $15 billion a year.

There is one other item that should be on everyone’s list, the Fed has to take more aggressive action to combat the downturn. After all, the law requires the Fed to pursue full employment and 9.6 percent unemployment is a long way from anyone’s idea of full employment.

The best course of action here is a policy endorsed by Federal Reserve Chairman Ben Bernanke for Japan back when he was still a professor at Princeton. He suggested that Japan deliberately target a higher rate of inflation. He proposed an inflation target in the 3-4 percent range.

This should encourage firms to invest since they will know that the items their investment generates will be selling at prices that are considerably higher in the near future. Moderate inflation will also alleviate the debt burden of households as their wages rise more or less in step with inflation, while mortgages and other debt remain fixed in value.

More aggressive action by the Fed can also ensure that the stimulus does not increase the country’s future interest burden. The reason is simple. If the Fed holds the bonds used to finance a stimulus, then the interest on these bonds is paid to the Fed, which in turns refunds it to the Treasury. In normal times this could lead to inflation, but instead of being feared, a higher rate of inflation would actually boost the economy right now.

The last one is an especially rough calculation. It assumes that the higher inflation rate will increase employment by 1 percent.

Of course there is considerable guess work in all these numbers, but the certainty of high unemployment is far worse than the risks of action. Those in charge of economic policy gave us a horrible disaster because of their failure to combat the housing bubble before it grew large enough to wreck the economy. The public must insist that they not now allow the economy to remain locked in this near depression for the indefinite future simply because they are afraid to take any actions. We should make them at least as afraid not to take action.