The Ten Things The Government Could Do To Cut Unemployment In Half

Unemployment, according to a number of government officials and economists, has become intractable and the August jobless rate hit 9.6% as non-farm payrolls dropped 54,000. That cannot be said about any other US post-war recession.  Joblessness would reach about 9% or 10% at the peak of each of those recessions and as the economy improved, the percentage would fall to under 7% fairly quickly.  In the 1980 to 1983 recession, unemployment was 10.1% in June 1983.  It dropped to 7.2% a year later. By contrast, The Congressional Budget Office recently reported that unemployment increased by the 2008/2009 recession, will probably remain above 9% for the next year-and-a-half. That forecast will almost certainly be too optimistic if the economy slows or slips into another recession.

The Achilles Heel of the federal government’s $787 billion stimulus package is that it has done little to directly put people back to work. The programs that are part of the overall stimulus plan include tax breaks for individuals. Although it was not intended to work this way, a great deal of this money has been used for unemployment benefits for a job force out of work longer than expected. Most of the tens of billions of dollars that are earmarked for infrastructure improvements that are not tied to any specific job goals. If there are no direct incentives to add jobs during the rebuilding process this investment represents, there is little chance that infrastructure spending will aid the government’s efforts to bring down the jobless level.

Unemployment as it exists in the third quarter of  2010 has only a few causes. The problem is that each of these is daunting even if  it were solely responsible for this crisis. The first and most pronounced problem is that fear caused by the recession has driven businesses to fire more people. This has been followed by a refusal to hire more people even when there are signs that the economy might be improving.  Companies that cut workers will not add any of them back. Businesses can keep their margins high by forcing the people employed at each company to work harder or by hiring part-time workers. This process has not only increased productivity but it  also protects enterprises from the fear that another downturn  will force them to cut jobs for a second time. The current and  prolonged period of not employing new workers is not irrational, since most companies are less than two years removed from the disastrous effects of the credit and housing crisis and the shock that it caused through the commercial and consumer sectors.

The government’s reluctance, or rather the concerns of Congress and the Administration, to act forcefully to mitigate the economy’s most difficult issue stems from concern that it will cost the government substantial money  and almost certainly increase both the national debt and federal deficit. While that is true, it is also true that the notion of a “jobless recovery” was never sound and that high unemployment has become the anchor that will prevent any possible recovery in GDP. Consumer spending certainly will be will be paralyzed as long as 10% of Americans are unemployed and another large portion of the population is consumed with trepidation over their job security. Business investment will be slow because it so often depends on the consumer as customer.

24/7 Wall St. looked at ten possible solutions that could decrease unemployment to the 5%  level that most economists think is healthy and normal for an expanding economy. None of these plans are new, but some of them have not been used in America for decades and others have only been used by other nations. There are few complex aspects to any of these solutions, although most of them would require an organization as large as the federal government to administer them. And, some of these proposals would be unpopular with voters, at least those who are employed.

The Ten Things the Government Could do:

1. Tax Credits. Tax credits will almost certainly be part of any program to improve unemployment because businesses need a concrete reason to hire during a difficult economic period. Companies have become used to employing people part-time to keep the costs of benefits and severance low. Any plan to increase the number of full-time workers in the labor force will need to address this “part-time” issue. The federal government will need to provide a simple tax credit equal to the first year’s compensation of new workers or workers converted from part-time status. This would give enterprises that would like to expand but are ambivalent about the economy enough of an incentive to do so in many cases.

2. Funding Reduced Pay. Germany has a government policy which provides tax credits to companies that shorten work hours rather than lay off employees. This gives enterprises that want to increase their number of workers the ability to fund a portion of the cost by cutting the hours of  existing workers with the financial aid from Berlin.  The German government is effectively decreasing unemployment by aiding the  private sector when it needs to bring down costs. An enterprise that lowers the average compensation of its workers by 10% through reduced hours can add net new workers indirectly using government aid. Using the same system, a US company with 100 people could add 10 if the federal government offered a stipend to keep the balance of employees’ compensation “whole”.

3. Saving Small Business. Economists, Fed Chief Bernanke, and organizations like the Small Business Administration have repeatedly made the point that small businesses are and have been the primary engine of job creation in America. Companies with work forces under 500 create nearly half of private non-farm GDP. Large companies have had easy access to capital markets even with the depressed economy. They have been able to take advantage of historically low-interest rates to stockpile capital. By contrast, banks have been reluctant to fund small operations that have little or no cash and uncertain prospects and usually a relatively small number of customers. The idea that the federal government should shoulder some of the risk of small business loans has been proposed several time, but no legislation has been passed to support small business bank aid on a wide-scale basis. Without a well-funded small business sector, unemployment is unlikely to improve.

Also Read About: The States Where The Government Spends The Most And Least Per Person

4. Working For The Government. Many of the FDR economic stimulus programs of the 1930s were failures when viewed through the lens of permanent job replacement. But, giving people work, even it if is not permanent, helps buoy the economy during sharp downturns. The criticism of programs like these is often that they represent a step toward socialism. It is time to allow Americans to intelligently explore what price we are willing to pay to stabilize our volatile economy that has resulted in persistent unemployment without labels that are political and not productive.  Large initiatives like health care reform represent a similar challenge and eventually decisions about capitalism in the US will gather enough force so that programs put in place to help citizens during an historically difficult period may be set aside later. The Works Progress Administration was created in 1935. It added nearly eight million jobs to the economy by a number of measurements. The first three years of the WPA cost the country $7 billion, which by today’s standards would be several dozen times that. However, the jobs created allowed the government to avoid unemployment support to people who would have been essentially idle and gave them job skills that in many cases were useful when the economy recovered. The alternative that the government had during the Depression was to offer the unemployed no support at all. The ranks of the indigent would have swelled well beyond the appalling levels that they achieved in the years before WWII.

5.  Jobs Not Projects. A second stimulus package has been mentioned several times by the White House as the most likely option to reverse the slide in the economy. A stimulus package as large as the first one–nearly $800 billion–would encompass some of the other programs on this 24/7 Wall St. list. What should not be in a new stimulus package is as important as what should be. Not enough of the first stimulus package went to direct job creation and too much went to tax incentives. This slowed the rate at which the money had a significant impact on unemployment. The most badly crippled segments of the economy would need to receive money most rapidly. The state and municipal governments which have been almost completely destroyed by the downturn require money immediately, if for no other reason than to keep them from firing and furloughing more workers. The budget cuts of state and municipalities have been a tremendous burden on the economy because they have added hundreds of thousands of people to the ranks of the unemployed.The other weakness of the first stimulus is that it was based to some important extent in investment in specific sectors like infrastructure expansion. This ended up as an attempt to put large sums of money into industries and sectors of limited size. A new stimulus program would have to be much broader in its goals than the first that focused too much on modest-sized sectors of the economy.

6. China. It will be hard for the economy to recover and for the jobs picture to improve if China keeps it currency advantage compared to the US. The value of the yuan almost certainly improves China’s ability to keep the costs of its exports to the US low and raise the cost of imports from the US. Some analysts have said that the increase in cost of labor within China may even make the situation worse for the US. The People’s Republic will be anxious to pass along higher labor costs to its trade partners. The yuan’s value could be an effective tool for that. The federal government would have to do two things to get China to “rethink” its trade and currency policy. Each is risky. The first is that the Treasury Department would have to make a direct threat to Beijing to label it as a “currency manipulator”, a designations which carries with it a number of trade sanctions. The second action by the American government would require that “strategic” imports from China be taxed. This would probably have to include finished metals like aluminum and finished commodities like tires. Each of these tend to be products in which China can use it labor cost and currency advantage to allow its exporters high margins, often at the expense of competing American companies.

7. Underwriting Exports. The Administration has said that the economy needs to evolve from a consumer-based economy to one that relies more on exports. If the issues of trade with China are resolved, there are still some hurdles to this goal. Among the most meaningful is the cost of physical shipping. For products which have low profit margins, the price of air, sea, or ground transportation can be the difference between a significant “cost of goods sold” one that is manageable. The government could elect to underwrite the cost of shipping, particularly for businesses that are relatively small or larger manufacturing businesses which are in sectors that have had large layoffs. The direct government payment of export shipping costs would almost certainly become a trade issue with other nations, but that is one of many hurdles that almost any other trade-based solution to the economy and employment faces. The Administration is correct. Consumer spending will never again be 65% to 70% of GDP. Export increases have to be part of the solution.

8. The Minimum Wage. The part of the work force that usually has no savings and no visible means of withstanding a long period of unemployment is the lower class, those who live at or below the poverty level. These workers are often paid only the minimum wage and receive no or the most modest benefits. The government could choose to reimburse some part of the minimum wage paid to each American who is compensated at this level This would give many workers who among the lowest paid in the country a chance to keep their jobs. It would allow many modest-sized businesses that pay people the minimum wage an opportunity to avoid lay-offs or find capital to bring on new people.

9. Construction Jobs. The industry that has been hit as hard if not harder than any other during the recession is construction. The intractability of this portion of the unemployed population is well described. Those construction workers without money cannot afford to move to areas where there is still some work in this sector.  This has created large pools of unemployed workers in the areas of California, Nevada, and Florida. These regions often have jobless rates above 15% and in some cases 20%. The towns that these people inhabit have sharply dropping real estate prices, record-setting foreclosures, and a tax base erosion that forces them to cut essential services. But the construction industry is not universally depressed. People who build a house cannot build nuclear reactors, but they can work on infrastructure products including the building and improvement of schools and government-owned facilities. The current stimulus package has reserves for just this kind of construction work.

10. Immigration. There is an extent to which the immigration argument that undocumented workers from abroad take American jobs is reasonable. The true of that is hard to refute. It is equally hard to say that immigrants, even those with illegal status, should be sent back to the nations they came from immediately and without any provision for their economic futures. The immigration issue debate has become more violent as the recession has continued. It may be that the federal government’s best course would be to ignore the issue of who has come to America and focus on the economic impact of the migration. Some states have exacerbated jobless problems due to immigrants and others are not affected at all.  The southern states that border Mexico are those that have had the worst economic impact. Other states like Ohio and Illinois have substantial labor problems that have nothing to do with immigration at all. The most logical solution to the problem is to provide supplemental aid to states that have large illegal immigrant populations to create more public sector jobs–jobs that the states and municipalities within them may find essential but that cannot be performed due to the recession. It may be harder to find a job in New Mexico because of immigrants. That does not mean that there is still not important work to do in some of the state’s financially beleaguered regions. The emotion  surrounding the immigration issue makes it one of the most difficult unemployment issues of all to solve.

Too much has been made of the similarity between the current economic times and those of the 1930s and the Roosevelt government’s reaction. American is not a rural country now. It is not a manufacturing one either. Most of the work force is now in the service sectors, and this has created a large set of problems that cannot be helped by FDR-like solutions.

The solutions to improving the unemployment problems that are the most difficult politically and emotionally are the trends away from capitalism that more government aid creates.  Pre-WWII was a period of great government support for workers, and post-WWII in the US was perhaps the greatest expansion of a capitalist economy in history. If Americans choose more social support from the federal government, this does not mean that this course can not be changed when economic stability is more assured. This will be a decision that citizens and politicians can and will make in the future just as they do with each new set of circumstances and each new generation.

Another hurdle is more immediate. Many economists and institution like the IMF have made it clear that America’s national debt will reach levels which will become progressively more difficult to fund over the next ten years. That could produce a long period of austerity which would change the lives of ten of millions of Americans who rely now or will rely on the social safety net. That leaves the federal government and the voters with a decision. Either the US can choose to do as little as possible to address unemployment, or it can take the risk of spending hundreds of billions of to get the jobless rate back to recovery levels and hope that the economy grows in tandem with that.

Douglas A. McIntyre