Navigating the Job Crisis: Macro-economics and 10.2% Unemployment

Thursday, 11/19/2009 - 1:55 pm by Bo Cutter | 5 Comments

In the wake of the highest unemployment rate in 25 years, the Roosevelt Institute asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. Bo Cutter argues for reprograming the existing stimulus money to put a million people to work.

I don’t particularly like the word, but I’m willing to call it a crisis. What I’d like to do is sort out terms; discuss the Obama economic strategy; and offer some thoughts about how to proceed. I start from the premise that both the reality and the politics of 10.2% unemployment require a policy response; something has to be done beyond holding a jobs summit meeting.

Let’s start with the standard perspective offered in far too many op-ed pieces that views a “jobless” recovery with astonishment and wonders how we can talk about “recovery” with this employment rate. This is self-indulgent faux outrage. There does seem to be the beginnings of a recovery: GDP growth in the third quarter was positive; and it looks as though it will be positive again in the fourth quarter of this year. The forecasts I see all predict continuing growth.

So why is unemployment not falling, and has, in fact, increased? The answer is that employers see employees as assets: they hate firing employees, because they are losing all of the embedded investment an employee represents; and they hesitate to hire, because after any recession, but particularly one this deep, they are uncertain about the reality of a recovery. The pattern of every recession of the post-World War II era has been that unemployment does not start to rise until well after the start of a recession. Employers do not carry out anticipatory layoffs, and unemployment does not start to fall until well after the end of a recession. Therefore, in what passes for economic journalism in America, every recession is accompanied at the start by stories announcing that something new has happened and this time around employers are not laying off; and then at the end of a recession we get the standard stories about jobless recoveries.

We are not going to have a jobless recovery. If GDP growth is sustained, then unemployment will fall. The real issue is how fast? And there lies a much bigger problem. All of the forecasts I see predict a slow recovery. (I think the odds are higher than the forecasts suggest for faster growth but that is another blog.) The forecasts converge around a rough agreement that unemployment will remain as high as 8% even by the end of 2011 - even assuming the continued effect of the stimulus program. This suggests unemployment will be around 9% in November of 2010, to pick a date at random. I would not want to be a democratic congressperson, holding a district where my majority was 5% or less, in November of next year.

This is why I want to discuss economic policy and presidential strategy. I’ve disagreed with aspects of the strategy and policy for a year; but more to the point, I do not understand it.

First, the announced forecast for 2009 (made in January of 2009) was far too optimistic, and everyone knew it at the time (I know why administrations do this, I have never agreed with it).

Second, the stimulus package was poorly designed (This isn’t a surprise; this also was outsourced to the Congress). The package was too small (Was this because the economic forecast was too optimistic, did the economic team drink its own cool-aid?). The package was not designed purposely to be spent quickly (this began as Larry Summer’s central principle but it disappeared as a principle as soon as the pols and Congress got their hands on $780 billion). And it was “Christmas treed” grotesquely as it went through the Congress. President Obama was absolutely correct. A large stimulus was completely necessary; and this one has had a crucially positive effect. But it was not even close to being designed to maximize its effect on jobs.

Third, the decision by the Obama White House to do everything at the same time meant, inevitably, that they could not keep a single minded focus on economic performance and jobs. Everyone will, of course, deny this; but you cannot push for everything, manage two wars, have the president spend weeks personally deciding an Afghanistan policy, take over much of the financial and auto sector of the United States, and decide on a completely new system of financial regulation and - simultaneously - keep rigorously focused on the economy and jobs. The straightforward proof of this is the absence right now of a well-prepared next step jobs policy. Development of that kind of major policy, when the President needs it, is exactly what the NEC is supposed to do.

So what do you do, now? My friend Alan Blinder, argued in the Wall Street Journal last weekend that some form of public jobs program, plus a well designed wage subsidy program for private sector job creation is the direction to take. Most of the op-ed pieces argue for a public jobs program. I doubt whether any of this would be feasible or effective in time.

First, I think the Administration has lost the political window — exactly as Paul Krugman feared — for a second stimulus or new major jobs program. I doubt whether one is politically possible on any terms. But I am even more certain that if one were remotely possible, actually making it a reality would require the full focus of President Obama and some very clear tradeoffs. (Read defer health care reform.) Remember it has to be big to make a difference, I would guess roughly $50 billion annually per million jobs created.

Second, a very long period of time would be required to design a jobs program, whether it involved public sector jobs or a wage subsidy, or anything else. Several months to a year as design time seems realistic to me, which is time the NEC had during 2009, but doesn’t any longer. The executive departments do not have these kinds of programs somewhere on the shelf in any form that would be useful in a hurry.

So the blunt reality is we need a jobs program, it has to be fairly big, we do not have one available now, and the Administration probably could not get new funding for a big one anyway.

But there is something big we could do and I think we should begin almost immediately. Let’s reallocate the existing stimulus money. My guess is that about 40% of the package has not yet been spent. If we took $100 billion from the stimulus program now, and put it into areas where spending will be much faster, we could move the unemployment rate down significantly from the 9% it is most likely to be a year from now if we do not act. Forget the politics, doing something like this would put close to a million people into jobs they would otherwise not have.

Where would you put the money? The answer is obvious: into immediate tax cuts or tax credit increases of a targeted kind. I can hear the howls but I do not have in mind the Republican version of this kind of effort, i.e. to cut my taxes. Rather, I have in mind three sorts of actions: (1) cut federal payroll taxes - a move that directly reduces the cost of employment and gets money into the economy; (2) raise the earned income tax credit; and (3) transfer money to the states to cut their taxes. We can cut taxes temporarily in a way that targets low and middle income Americans, and gets the money out of the door in a hurry.

Where would the money come from? From a lot of programs we like - such as longer spending infrastructure, green technology programs, energy research and development. But government is about choices. A progressive Administration and its progressive supporters have to decide whether they care more about a set of admirable federal programs, or upwards of a million of their unemployed fellow citizens.

Is this possible? It would be hard. Every member of Congress and every interest group in America got a little piece of the stimulus package - that is what being “Christmas-treed” means. And since most of the advocates for these programs are employed, they are likely to value their programs more highly than the interests of the 10% of the work-force who is unemployed.

But the approach has a number of political merits. It would not increase the long run deficit - because the numbers are already in the budget. Centrist democrats and maybe even a couple of centrist republicans - if there are any - would like the approach because it relies mostly on tax cuts. And the approach would help how the President was perceived by independents - of whom there are roughly as many as democrats or republicans - because he would not be adding yet another federal program or role.

And what a good fight for President Obama! I can imagine nothing better for him than a full-throated commitment to a fight to increase jobs, now, on a large scale, and in the right way. It is the right fight right now - 10% unemployment in a nation and economy where jobs are the launching platform for everything else is a tragedy. And it enables President Obama to refocus his presidency where, frankly, he should have been from the beginning.

Roosevelt Institute Braintruster Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.