Wednesday, June 15, 2011

Republican jobs plan is laughable says economist

Here are what the Republicans say that we need to do if we want to create jobs:

1. Eliminate the deficit as quickly as possible even if it means making drastic cuts in programs Americans genuinely like such as Medicare.

2. Drastically reduce the size of government by eliminating programs and laying off government employees so, as one Republican put it, they will have to get real jobs.

3. Remove the uncertainty about the future that is holding companies back from creating jobs by cutting individual and corporate taxes, for example by making the Bush tax cuts permanent or going even further as Pawlenty has proposed.

Now what would an economist think of this approach to job creation?  Not much.  In a recent article, Dean Baker, macroeconomist and co-founder of the Center for Economic and Policy Research looked at each of these Republican arguments and found them not just flawed but laughable.

Deficit Reduction

What’s wrong with aggressive deficit reduction?  Well, says Baker, the theory behind deficit reduction as a way to create jobs is based upon the following reasoning.  If the government runs a smaller deficit, it will not need to borrow as much, interest rates will decline, and the lower interest rates will give an incentive to firms to invest more in a number of things including hiring workers.  Additionally, lower interest rates will result in a decline in the value of the dollar thus making American-made goods more competitive on the world market.  That’s all fine and good says Baker, except for one thing.  Interest rates are already historically low.  They can’t go much lower.  Even if they did decline another 0.5 percent, that wouldn’t provide much incentive for firms to invest and it wouldn’t do much, if anything, to lower the value of the dollar.  So much for rapid deficit reduction as a job creation strategy.

Smaller Government

Well, how about abolishing some programs or entire departments and getting rid of those lazy government employees?  Would that result in more private sector hiring?  Not likely, says Baker.  Here’s why.  The theory behind the smaller government approach is that those public sector workers dumped into the private job market will increase the supply of available workers.  Wages will fall and the private sector will have an incentive to hire more workers because they won’t have to pay as much to get them.  Will that work?  Again, says Baker, not likely. Logically laying off workers can’t result in more hiring driven by lower wage costs.  Why?  The only way this could work is if the private sector hired fewer workers than were laid off.  If they hired the same or more workers than were laid off the labor supply would shrink, not grow and wages would rise, not fall, thus wiping out any wage-driven reason to hire.  Additionally, why would you ever lay off government employees, if you are trying to bring down unemployment?  When you lay off workers you INCREASE unemployment, you don’t DECREASE it.

Remove uncertainty by cutting taxes

This argument is based upon the notion that businesses aren’t hiring because they are worried about the future fearing that taxes might go up.  If they were assured that taxes would not go up, then they would go ahead and hire.  So, does that sound reasonable?  Well, says Baker, it may sound reasonable but it is definitely not logical.  Think about it.  If you ran a business and you were worried that you might have to pay more taxes in the future, wouldn’t it make more sense to invest and try to boost profits in low-tax now than wait to high-tax future? 

In short, the Republican approach to job creation isn’t just wrong; it is so illogical that it is laughable.

Read Baker’s article here: 

So, what will work?  Baker doesn’t offer specific proposals but let me offer some.

Let’s start with a basic premise. 

Businesses hire people because they have work to do, orders to fill or customers to serve, that they cannot handle with existing staff.  When demand drops, as it does during a recession, businesses my keep workers on for awhile but eventually, they will start laying off people and/or cutting back hours.  When that happens, businesses will not start hiring again until demand picks up.

So, if you have high unemployment, what can a government do?  Well, government can step in and try to create demand directly by buying stuff.  That’s what the stimulus was all about.  No matter what Republicans tell you, the stimulus did work.  It created demand that would not have been there had there not been a stimulus.  However, the stimulus wasn’t big enough and didn’t last long enough to really bring unemployment down dramatically.  We should have had a stimulus perhaps twice as big that lasted twice as long and it should have included lots of immediate, upfront spending—most in 2009 and 2010.

Government could have a direct impact also by hiring people who are out of work to work in the national parks, help with clean ups from floods and national disasters or do other work where there is a need for labor on  short term basis.  These people will spend the money, thereby creating demand.  Once businesses begin hiring to meet the increased demand, you can send these temporary government workers back to the private job market.  You might even set up a work/training program where these temporary workers spend part of their day or week working for the government and part of the day learning new skills that will make them more employable once the economy improves.

What about cutting taxes?  The trick here is to remember that what you are trying to do is generate demand.  You want the people whose taxes are cut to use the extra money they keep to go out and buy stuff, thereby creating demand.  Not everyone will do that.  Some people will just take the extra money and pay down debt or they might invest it in something.  But, neither of those uses of the extra money creates short term demand, which is what you are after. Let me use an analogy.  Let’s assume that food sales have fallen off.  You want to create demand for food.  You have two options.  You can give money to a man who is starving or you can give money to a man who has just finished a big meal and is stuffed.  Which one would be most likely to spend the money you give them on food?  Would it be the starving man or the full man?  Obviously, you would give the starving man the money, not just because it would be the right thing to do but because you can be pretty sure he is going to use that money to buy food.  The full man might also buy food but you can’t be certain.  He might just spend a little of it for an extra desert.  Or, he might just wait to spend the money until he gets hungry which might take awhile since he has just eaten.  Lesson:  If you are going to try to use tax cuts to stimulate demand, then you want the tax cuts to go largely to people who are in desperate need of extra cash to spend right away on the basics such as food, water, clothing, shelter, gas, etc.  In other words, you would direct your tax cuts to the lower income levels.  Indeed, you might actually increase taxes on the rich and then turn around and use that additional revenue to pay for tax cuts for the poor. 

All of these things would work.   They would increase demand for goods and services that eventually would translate into new jobs. 

What will NOT work?  Almost everything Republicans propose.  In fact, if wanted to pick just the WRONG things to do, you would put together a plan pretty much like what the Republicans propose.  It is as if they WANT a second recession.  It is as if they WANT unemployment to stay high and even increase.  It is as if they believed that if the government did all the WRONG things and the economy got in worse shape that they would have a better chance of winning in 2012 because they could blame bad times on Democrats and run on that old “Are you better off than you were four years ago” platform.  The Republicans wouldn’t do that would they?  You betcha.

No comments: