For Fiscal Expansion

Ezra Klein interviewed Larry Mishel, labor economist and president of Economic Policy Institute. Mishel is not that confident in the illusion of growth the US has been seeing in the last few months.

If you believe as I do that a good economy is one where people see broad-based income growth, you have to look at a couple of things. Median family income in 2010 will be lower than in 2009. Unemployment rate increased in that year, and we’re at historically low wage growth. And I wouldn’t even bet on 2011 being better.

Mishel primarily blames this on productivity growth despite lower employment and fewer work hours; businesses are doing more with less and are going to be slow to increase work hours, let alone bring old or new employees back.

Forecasters assume productivity growth will come back down rather than remain high. But if it’s just 1 percent faster than normal, that’s a million-and-a-half jobs we won’t get. Secondly, there’s a huge issue with the missing labor force. There was a giant decline starting last May, and the fact is that as we create jobs, it’s unknown how many of them will return and start looking for work. That means there’s no easy translation between job growth and unemployment. And third, we know there’s been a dramatic erosion of work hours, and it’s not clear to me that the models account for the fact that employers might first increase work hours before they increase jobs.

He even points to projections that unemployment will peak next year. I can see how this would be the case. States are going to be strapped for cash this and next year. Obama’s stimulus from last year kept the states from having to cut as many public sector jobs as they would have. In essence, the stimulus acted as a backstop to further unemployment and a deeper recession.

Mishel complains that congress is slow to move in the proper direction, especially when it comes to unemployment insurance. There is this idea that unemployment insurance is a problem—that people are slow to go back to work because they’d rather be unemployed and getting a check every week for doing nothing. There is a historical basis to this idea but the problem with this argument is that may be the case when there is job growth but there isn’t any right now. The job growth that exists is dismal.

PittsburghUnemploymentHazards

The data in the above graph is from Pittsburgh in the early 1980s. David Youngberg explains:

The red line indicates the first week after unemployment benefits have been exhausted.  The job hazard line shows the fraction of still unemployed workers who find jobs by the end of each given week.   The recall hazard shows the fraction of still unemployed workers who are recalled to their old jobs by the end of each given week.

[…]

Indeed, an unemployed worker is far more likely to find a job immediately after his or her unemployment benefits have been exhausted than in any other week.  In short, unemployed workers respond to incentives.

So there is true historical data that people do sit on unemployment until it runs out or is about to. The jobs, however, are simply not there this time. Even if people do sit on unemployment during this recession (and, no, it’s technically not over yet), they will likely not find a job anyway.

Hence Mishel’s recommendation:

[I]t’s not all that hard to provide the basic safety net of unemployment insurance, which not only helps victims but injects money into the economy… [P]rovide relief to state and local governments. Their retrenchment this summer and fall will cost us roughly a million public and private sector jobs… [A]ssist local governments and community-based organizations in the direct hiring of workers. [Quickly work on] transportation infrastructure and I think we could do a whole school modernization and rehab program this summer… A [better] jobs tax credit… [W]e should not be putting fiscal policy into neutral next year, which the Obama budget does. Unemployment will be at its peak.

On unemployment, if states lay off more works in the next two years, when they will still be finding themselves in a tax revenue ditch, our economy’s going to find itself in that ditch along with them. Keeping people on unemployment and keeping those public sector jobs filled increase demand and keep people from abject poverty which will be costlier in the future.

Right now, we need monetary expansion and fiscal expansion—the first to get our economy growing at a faster pace and the latter to keep people from falling deeper into a hole while the rest of the economy rises far above their heads.

Anything else is simply not good, at all.

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One thought on “For Fiscal Expansion

  1. Pingback: Getting Rid of Extended Unemployment

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