Policies that promote – and discourage – job creation

January 29, 2010

Policies that promote – and discourage – job creation

In the latest sign that the jobs crisis remains dire, new state unemployment data released on January 22 show that joblessness rose in 43 states during the month of December. Unemployment now stands at 14.6% in Michigan, 12.6% in South Carolina, and 12.4% in California, with rates of underemployment significantly higher.

As EPI continues to promote its American Jobs Plan and push for aggressive policy action to create millions of badly needed jobs, it is also emphasizing that any jobs creation program has to be large enough to address the magnitude of the current problem. “We have to aim high,” EPI President Lawrence Mishel told a January 21 Senate hearing. He said any jobs creation effort must be done “on a scale that can really make a difference.” Compounding the problem of more than 15 million unemployed workers, Mishel said, are the 3.5 million workers who have dropped out of the workforce over the course of the recession. Many of them are discouraged workers who are likely to return after job growth resumes, which could cause unemployment rates to rise further.

Spending freeze = bad economic policy

While EPI applauds President Obama’s attention to the jobs crisis, which was the centerpiece of his January 27 State of the Union address, Mishel also warned that Obama’s proposed freeze on non-discretionary spending was “bad economic policy” that would make it much harder to create new jobs.

“It’s the recession, not out-of-control spending, that has been the main source of the increase in the budget deficit,” Mishel said in a statement issued ahead of the State of the Union address. “Shifting federal spending from less effective to more effective programs is certainly welcome, but it doesn’t justify an overall spending reduction – especially not at a time when we need the federal government to inject demand into a severely weakened economy in order to create jobs.” He stressed that the main cause of the large deficit was not government spending, but the recession, which had significantly reduced tax revenue. By contrast, had it not been for Recovery Act investments Obama signed into law last year, the economy would have shed 2 million additional jobs.

This complex matter of federal spending, when it makes sense and when it should be avoided, is examined in more depth in the recent paper, Budgeting for Recovery, by Economist Josh Bivens. The paper argues that worries about deficit spending are misplaced during weak economic times, when government spending can help stimulate the economy and offset declines in private sector investment. One dollar of stimulus spending, Bivens argued, typically generates more than a dollar in economic benefits.

Worst recession, by a long shot

In a separate analysis, Bivens offered the economic evidence to back up that commonly used phrase “worst recession since the Great Depression.” His January 27 Economic Snapshot charts the course of the current recession, as measured by gross domestic product (GDP) compared with the nine prior recessions in the post-War period. In all but one of the past downturns, GDP had returned to its pre-recession peak within seven quarters of the start of the recession. The exception was the 1973 recession, but even that downturn was less severe than the current one: Even after some recent quarterly growth, today’s recession remains 3.2% below its pre-recession peak. U.C. Berkeley economics professor J. Bradford DeLong highlighted Bivens’ research as the “graph of the day” on his blog.

Don’t break out the champagne just yet

New data released January 29 show that gross domestic product (GDP) grew at a 5.7% annual rate in the fourth quarter. The news was welcome, but as Bivens warned, not sufficient to declare “recovery accomplished.” Even if the growth rate were to be sustained for three years, it would still not create enough jobs to return to pre-recession levels of employment, Bivens said in an analysis on EPI.org.

Highest earners enjoy “a massive redistribution of wealth,” Senator says

EPI’s research on the massive earnings gap between the wealthiest Americans and everyone else became a highlight of the recent Senate hearings on job creations, when Senator Tom Harkin (D-Iowa) cited the data. “Talk about redistribution of wealth,” Harkin said. “That is a massive redistribution of wealth.” The data show that over the past three decades more than one-third of income growth in the United States has gone to the top one-tenth of 1% of earners, an exclusive group that includes only about 13,000 families. Mishel stressed that this huge inequality had contributed to the downturn, since most consumption was based on an inflated sense of assets, such as housing assets. “That was unstable growth and it fell apart,” Mishel said.

EPI in the news

EPI’s defense of the budget deficit has been featured prominently in the media. Mishel participated in a State of the Union preview on CBS News, where he argued that concerns about deficit spending were trumping the more urgent need to create jobs. “You can’t have it both ways,” he said. “If you want to create jobs you have to tolerate some higher deficits this year and next…. Every economist understands that.” The Christian Science Monitor also addressed the important function deficits could serve in a soft economy. It quoted Bivens saying, “It’s absolutely not as hopeless as some of the deficit hawks would have you believe.” National Public Radio also quoted Bivens saying that “the time to start reining the deficit back is when the economy starts to recover, and not a moment sooner." Research assistant Anna Turner offered the youth perspective on the deficit in a piece in The Huffington Post. “It is more helpful to look at current deficit spending as a means to an end instead of a purely negative entity,” Turner wrote. “Without this spending to encourage growth, we could well end up crawling out of the recession only to find ourselves in a jobless recovery.”

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