More on Unemployment Insurance for the 21st Century

Unemployment insurance for 21st century in the form of a jobs program could end the malinvestment and predations of politicians and foster a strong economy. We need jobs but we must be mindful of predator state capitalism. My proposal below addresses both of those concerns.

Yesterday, on the anniversary of the inauguration of the Works Progress Administration (WPA), it was striking to compare the unemployment record of Franklin Delano Roosevelt, and that of his modern day successor, Barack Obama. FDR’s achievements in putting Americans back to work are among the most impressive of his tenure; he took the rate from 25% to 9.6% by 1936. But so far, Obama’s policies have failed to “jump-start” unemployment in a significant way, even as Wall Street has continued a recovery utterly and totally divorced from Main Street.

It’s easy to see why: The debt loads remain too high while income and employment continue to fall. Meanwhile, delinquencies and foreclosures continue to rise. Even at current depressed prices, assets are overvalued. Many financial institutions (probably including most of the big ones) are hopelessly insolvent, holding mountains of toxic waste that will never be worth anything. By the same token, almost 14 million active job seekers remain unemployed. Another 6.4 million people who are not actively looking for work (and therefore are not counted as unemployed) say they want jobs. Among workers who are lucky enough to have jobs, 8.3 million are employed part-time but want full-time jobs. Taken together, there are well over 28 million people in the United States for whom the economy has not performed its most important function — providing enough jobs to go around.

The pace of recovery from the recession has been distressingly slow. It took only 18 months for the nation’s unemployment rate to climb from 5.0 percent to its peak of 10.1 percent in October 2009. In the 16 months since then, the rate has made up less than a quarter of that loss. True, we did dodge another Great Depression. That fact is attributable to the federal government’s forceful macroeconomic intervention in late 2008 and early 2009. Economists Alan Blinder and Mark Zandi (one a former Clinton appointee to the Federal Reserve Board of Governors, and the other a former economic adviser to Senator John McCain) have estimated that the nation’s unemployment rate would have reached 16 percent rather than its actual 10.1 percent in the absence of this intervention.

And yet, in spite of the historic successes of programs such as the WPA, the current government cannot seem to even begin to replicate it. The very fiscal stimulus that helped to avert an even greater economic calamity is now viewed as an excuse against further action to mitigate the scourge of unemployment. We continue to be plagued by misguided notions that our government faces imminent insolvency (imagine the fate of the US had the Roosevelt Administration embraced this idea!).

Part of the aversion toward embracing WPA-style programs today is the false idea that they did little to reduce unemployment, which some claim was only “solved” by the war. Most statistical studies understate the effect of the New Deal job creation measures because they don’t show how much of the decline in official employment was attributable to the multiplier effect of spending on direct job creation. Additionally, the “work relief” category does not include employment on public works funded by the Public Works Administration (PWA), nor the multiplier effect of PWA spending. The figures tell the story indirectly, however, in the path official unemployment followed — steeply declining in periods when work relief spending was high and either declining more slowly or increasing in periods when work relief spending was cut back*.

Estimates for the years prior to 1940 are intended to measure the number of persons who are totally unemployed, having no work at all. For the 1930s this concept, however, does include one large group of persons who had both work and income from work — those on emergency work. In the United States we are concerned with measuring lack of regular work and do not minimize the total by excluding persons with made work or emergency jobs. This contrasts sharply, for example, with the German practice during the 1930s when persons in the labor-force camps were classed as employed, and Soviet practice which includes employment in labor camps, if it includes it at all, as employment. Counting the WPA programs, FDR’s record on unemployment, notably in his first time of office, was formidable, as he took the rate down from 25% to 9.6% by 1936.

True, an economy can boom for a time, with what may appear to be inadequate levels of net government spending without rising unemployment. In these situations, as is evidenced in countries like the US during the Clinton Administration, GDP growth can be driven by an expansion in private debt. The problem with this strategy is that when the debt service levels reach some threshold percentage of income, the private sector will “run out of borrowing capacity” as incomes limit debt service. This tends to restructure their balance sheets to make them less precarious and as a consequence the aggregate demand from debt expansion slows and the economy falters. In this case, any fiscal drag (inadequate levels of net spending) begins to manifest as unemployment.

The Obama Administration remains fixated by deficit reduction at the expense of reducing unemployment. This is not helpful to recovery: In addition to inflicting lasting damage on an individual’s labor market prospects, unemployment is associated with increased rates of physical and mental illness, alcohol and drug abuse, child and spouse abuse, failed relationships and family dissolution, suicide and attempted suicide, and a host of other personal and social ills. All sectors of the unemployed suffer an increased risk of experiencing these problems, but since unemployment itself is distributed unequally among population groups, with disadvantaged workers bearing more than their fair share of its immediate burdens, so too are they destined to bear more than their fair share of its painful, longer-term consequences.

The existence of our current job shortage also makes it harder for us to dig our way out of the recession. Long term unemployment prevents the housing market from rebounding and the housing industry from recovering. It forces the consumer sector to wait anxiously for customers. It keeps capital goods producers waiting for a plausible customer.

A more effective way to restart the economic process on solid ground is to deal with the underlying cause of the problem: We have a credit-based economy, rather than an incomes-based economy. The whole boom of the 2000s (and more broadly the growth process that emerged at the in the early 1980s) was based on household borrowing and the continuation of negative saving trends (that is, household deficit spending). A good place to start recovery efforts, therefore, would be to change this method of economic growth by fostering more, not fewer WPA-type programs.

In my view, a universal Job Guarantee program would be the best way forward and truest to the spirit of the WPA. The jobs would pay basic wages and benefits with a goal to provide a living wage. The program would take all comers — anyone ready and willing to work, regardless of education, training, or experience. We could adapt the jobs to the workers. As the late Hyman Minsky put it, we could “take the workers as they are”, work them up to their ability, and then enhance their skills through on- the-job-training. Additionally, the guaranteed public service job would be a counter- cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. Such a program would remain a permanent feature of our economy, acting as a buffer stock to put a floor under unemployment, while maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.

Given the nature of today’s “predator state” (to use Jamie Galbraith’s felicitous phrase), politicians have a proclivity to reward those who “pay to play”. They tend toward wasteful spending and give goodies to campaign contributors. But we could take this power away from sock puppet politicians through a mechanism that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position. This would help to free the system from political parasites while increasing the freedom of the private sector to achieve its savings goals. What better way to celebrate the anniversary of the WPA’s inauguration?

A version of this article first appeared at New Deal 2.0.

*The original source of this finding was Michael R. Darby (1976) “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941″, Journal of Political Economy, 84(1), 1-16). Darby had studied the writings of Stanley Lebergott (1964) Manpower in Economic Growth: The American Record since 1800, New York, McGraw-Hill. He had constructed early data from the Great Depression. See also Weir, D.R. (1992) “A Century of U.S. Unemployment, 1890-1990: Revised Estimates and Evidence for Stabilization”, Research in Economic History, 14, 301-346. The hint that Darby picked up was in the original book by Stanley Lebergott on pages 184-5.