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Wednesday, May 11, 2011

Why the Economy Must Have Public Jobs
or Suffer a Lengthy Slump

--------The Problem-----
One in four American children get their food by way of food stamps, and among the total population one in seven or over 44 million Americans. In fact, the use of food stamps has increased by over 30% since the official end of the recession in July 2009. The rate of children getting food from charity coupons is approaching one in three. Yet, on the other hand, our economy creates over $47,000 of value each year per person. We are a very wealthy nation. These two snapshots provide a concise picture of an economy with extreme inequality. This inequality threatens our core values of personal opportunity, and it threatens the overall prosperity of our country. We are all victims of this inequality, and the economy performs far below its potential.

As the economy shrunk since January 2008, so did government revenues from taxes. Some say the government services must shrink. “We have a spending problem, not a revenue problem,” is heard. “We don’t need new taxes, we need to cut our spending.” I disagree. The problem lies in the greater economy that is shrinking because of inequality. If we attack unemployment and inequality we can have an economy that self-expands and a government that expands in tandem. To simplify my position, “Create public jobs and raise wages.” We need a spending solution.

Today if the nation embraced public job creation and made the political choice to add between 8 to 18 million more public workers, the economy would create a self-sustaining expansion, which is one way of saying “Recovery.” The purchasing power of those additional workers would inspire private employers to add more non-supervisory workers, also known as employees. This is Robin Hood economics, we “steal” from the rich to create jobs for the poor, and the economy recovers its ability to self-sustain employment and expand. Those who insist that we have a spending problem, not a revenue problem, are wrong. We have a problem with the greater economy to self-sustain.

The perfect illustration is that ten years ago, in December, 2000, there were more private sector jobs than there are today. Between 1980 and 2000 38 million private sector jobs were added to the economy; between 2000 and 2010 7 million jobs were lost. The economy has shrunk in terms of private jobs since 2000 when there were 110 million private sector jobs; today we have less than 105 million private sector jobs. So we have a ditch out of which to dig. Maybe in five, ten, or twenty years the economy by its own power will self-motivate and resume hiring and restore former employment levels --- or we could jump start it with public jobs.

There is total confusion about government spending in Congress. The Speaker of the House, John Boehner, gives speeches about cutting trillions, not billions, from the budget. He erroneously states that the “wealthy” do not have enough money to balance the budget, so thoughts of raising their taxes are futile. Wrong. The top one percent of households, as he probably knows, own 35.6% of all private property, are worth about $20 trillion, much more than $1.4 trillion needed to close the budget shortfall. The wealth of the top 10% exceeds $38 trillion, 75% of the total. (The bottom 4/5ths of U.S. households own only 12% of the nation’s wealth.) Boehner and his allies threaten to close down the government by refusing to raise taxes or the debt ceiling. These are rhetorical flourishes that just add hysteria and confusion to the atmosphere.

In 1933 Franklin Roosevelt faced a nationwide “bank holiday” -- which is a euphemism for total financial system collapse -- in the first days of his administration, the economy was on the brink of freezing up. John Maynard Keynes published an open letter in the New York Times in which he advised the President to seek recovery before he sought reform. And the method to achieve recovery was by massive government spending to re-employ the unemployed. Keynes advised, “Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees...; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money... It is, therefore, only from the third factor that we can expect the initial major impulse.”

Roosevelt took this advice, he created the Civil Works Administration that lasted only five months but, creating 4 million jobs, is to date the largest government public employment project in our nation’s history. And then he created the Works Progress Administration (WPA) and the Public Works Administration (PWA).

This is how the nation recovered from the Great Depression. Marshall Auerback, writing in New Deal 2.0, claims (and he is seconded by Paul Davidson, prolific Keynesian scholar and author of The Keynes Solution, and by Jeff Madrick, editor of Challenge Magazine, writing in his deficit reduction report for Campaign for America’s Future, January 2011) that between 1933 and 1937 the unemployment rate decreased from 25% to 9.6%. Prematurely in 1938 Roosevelt drastically reduced government spending on jobs creation, and unemployment shot up to 13%, so he reapplied his previous policy. Again between 1939 to 1946 the federal government spent like a nation at war, creating public jobs, and unemployment dropped from 13% in 1938 to below 2% for three consecutive years during the war, 1943, 1944, and 1945. Afterwards the result was an economic expansion unheard of before. It worked. This is not socialist history, it is the history of the most productive period of economic growth in American history, bar none.
It’s a case study in a “spending solution” not a “cut spending solution.”

After hiring millions and reducing the rate of unemployment to below 2%, the national distribution of personal income held steady for about 40 years. Distribution for the years 1940 to 1980 restrained the amount received by the top 10% of households to under 35% of all personal income. Marginal tax rates in the highest brackets, that is taxes on income over and above a very high level, exceeded 90%. That lasted until 1980, when high bracket marginal tax rates dropped dramatically, and when the share of the top earning households grew and grew, and recently, 2007, the top 10% received 49.7% of all pre-tax income, in 2007 the top one percent received 23.5%, nearly 1 or every 4 dollars of income.

As a nation we can now sadly boast of having the worst, most unequal distribution of income among advanced nations. And to match that achievement, we do the worst job of transferring income to those who are in need. Chuck Marr at the Center for Budget and Policy Priorities recently reported that an OECD report “shows that the disparity in income [inequality] in the United States is more pronounced than any other country (squeaking past Poland). At the same time, U.S. tax and spending policy [social transfers] (i.e., the whole budget) does less to diminish this inequality than the policies in any other country in the OECD except South Korea.” We have the most inequality, we do the least to reduce it. Quite a record! Robin Hood had a good idea. In France, before social transfers, their childhood poverty is approximately the same as the U.S. rate, 27%. After transfers they reduce childhood poverty to 7%, we reduce it to 20%, which is about double the average in Europe.

The value of our economy, the GDP, divided equally among children, adults, and retired elders, is over $47,000 a year per person. A family of four could have an income of $186,000. Divided equally among all workers it comes to $100,000 a year. Yet more than half of U.S. workers earn less than $29,775 a year, according to the U.S.Census. The bottom 40% of households own a mere 0.03% of all private savings.

The Republicans argue that the wealthy need more money (tax cuts) to create more jobs. It didn’t work out that way 2000 to 2007, despite the enormous tax cuts to the wealthy afforded by the Bush administration and the Republican dominated Congress. Those years were called the “jobless recovery.” The top one percent, according to U.C. Berkeley economics professor Emmanuel Saez, took in two-thirds of the economic gain of that period.

Marriner Eccles, the Chairman of the Federal Reserve during the Great Depression described in 1951 the causes of the Depression in these words:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. . . . Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy.

President Kennedy described the economy in nautical terms, “A rising tide lifts all boats.” That was when we had a balanced income distribution. This apt description was to be replaced in the 1980s with “When there is more for me, there is less for you.” The top one percent of households now earns more pre-tax income than the combined income of the bottom sixty percent. Soon it will be the case that Scrooge McDuck, or Daddy Warbucks, or whoever, will own everything once and for all, and we’ll be living in feudal times again, the Dark Ages will have returned. (I have my own hysterical flourishes too, if you don’t mind.)


-----The Solution-----
Unfortunately, we as a society do not believe in public job creation for the purpose of balancing income distribution and repairing the economy.

Demos, a left-leaning political advocacy group, published recently a proposal “Back to Work, A Pubic Jobs Proposal for Economic Recovery” by Rutgers University professor Philip Harvey. For a net cost of $162 billion a year this plan would create 8 million new jobs, at a cost of $20,226 per new job.

Compare that cost with the cost of the Great Recession. After the financial system collapsed $11 trillion, or 17% of the nation’s private wealth evaporated, the typical or median household savings dropped from $109,000 to $65,000, a 40% drop to levels below the 1983 level.

Compare the cost of Harvey’s program with other big ticket costs to tax payers.
Economists Mark Zandi and Alan Blinder state the entire cost to the public of just the financial system bailout will be approximately $1.6 trillion, ten times the yearly cost of the Harvey proposal. Other government expenses:
--$2.5 trillion over ten years for the Bush tax cuts benefiting the wealthy
--$700 billion to bailout the too-big-to-fail banks
--$152 billion for the Bush stimulus of 2008
--$787 billion for the Obama stimulus in 2009
--$800 billion for the tax compromise of December 2010
--$150 billion to bailout AGI insurance company
---$70 billion, the replacement cost of the trident missile submarine fleet
--$664 billion, the yearly military budget costs
-- $1.2 trillion, the actual but unofficial cost of the military

Additional social costs are not included in the cost of the debacle: the cost of 10 million (or 22% of all) home mortgage foreclosures over a six year period, resulting in family and community disruption, the cost in terms of severe unemployment in the private sector, the costs to local and state government resulting in government employee (police, fire, education) unemployment --- none are included in the $1.6 trillion estimate of just bailing out the banks and other financial corporations who after self-destructing still managed to make enormous profits.

We should ask, where’s the money for workers? The bailout left 17% of the workforce in the lurch --- unemployed. If we spent $162 billion on public jobs each year, a minute fraction of the cost and damage caused by the financial system collapse, 8 million new workers would contribute to the economy, pay taxes, enjoy a steady income with security and predictability. And most importantly the private sector could regain its usual hiring practices and achieve a self-sustaining expansion. Then the misery would begin to end.

There are other proposals fully developed and painstakingly thought out to create public jobs. These jobs could be targeted to create a solar/wind renewable-energy based system for the nation’s electricity grid and transportation system -- both enormous projects; and this would reduce our foreign oil dependency, improve our trade deficit and improve our national security resulting in lower military expenses. Public workers could insulate the nation’s homes and government buildings, renew our decrepit infrastructure, and improve and enhance our childcare services, and enlarge the number of home health-care providers for the elderly.

We suffer from a failure to analyze and execute. It’s time to lift a page from our historical past. “Happy Days” would be here again if we could break through the barrier that prohibits direct government created jobs as an economic remedy when the private sector is not up to the task.

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