What to Do about Unemployment in the Short Term?—Posner

Becker is pessimistic that much can be done in the short term to stimulate employment. That is doubtless correct in a realistic sense, but I think it worth pointing out that if politics were not what they are much could probably be done and at low net cost and possibly even with net cost savings. 

The simplest short-term (but also long-term) stimulant to employment would be to reduce the minimum wage, which has risen greatly in recent years. This would reduce the cost of labor to employers and hence encourage the substitution of labor for capital inputs. The minimum-wage appears to have its greatest disemployment effects among blacks and teenagers, moreover, and those are two of the groups with the highest unemployment rates. 

True, the reduction of the minimum wage would reduce some incomes by increasing the supply of labor, and reduced incomes would result in reduced consumption which could in turn reduce production and therefore employment. But this effect would probably be offset by the effect of lower labor costs in stimulating production. 

The Fair Labor Standards Act, which imposes the federal minimum wage, also requires that overtime wages be at least 50 percent higher than the employer’s normal hourly wage for the workers asked to work overtime. The reason for the rule (a Depression measure) is to discourage overtime and thus spread the available work among more employees. If this is the effect, it is an argument for making the overtime wage an even higher percentage of the normal wage than the current 150 percent. The counterargument is that regular pay would fall to compensate an increase in the overtime wage, so employers would not hire additional workers.

A simple way to stimulate employment would be suspension of the Davis-Bacon Act, which requires federal government contractors to pay “prevailing wages” often tied to inflated union-negotiated pay scales. And along with that, reversal of efforts by the Democratic-controlled National Labor Relations Board to enourage unionization, which by driving up wages reduces the demand for labor. Unionization also reduces the efficiency with which labor is employed by imposing the restrictions typically found in collective bargaining contracts, such as requiring that layoffs be in reverse order of seniority and limiting employers’ authority to switch workers between jobs. 

Unemployment benefits, which normally last for only six months, have been progressively extended during the current depression (I do not accept the proposition that the financial crisis of 2008 merely triggered a “recession” that ended two years ago when GDP stopped falling in nominal terms) to almost two years. The longer the benefits period (and the higher the benefits), the slower are unemployed workers to obtain new employment; and the longer they are out of work the less likely they are ever to return to work, because their work skills and attitudes erode over time. With so many two-income households nowadays, the decision of one spouse to give up on looking for a market job and instead becoming a full-time household producer (“housewife” or “house husband”) becomes an attractive option. 

Cuts in the size of unemployment benefits, and of other subsidy programs attractive to the unemployed, such as food stamps and Medicaid, would similarly encourage greater job search by unemployed persons. 

A recent study by the economist Steve Davis, and his colleagues, finds that the vigor of job search by the unemployed is currently much lower than in previous economic downturns, though this may be due in part to realistic pessimism about the posibility of finding work. 

All these measures would be costless to the government. A new stimulus (that is, deficit spending intended to stimulate the economy) would not be, but if well designed and implemented (tremendous ifs!) could be effective in increasing employment, and if so pay for itself. This is the Keynesian remedy, which has become discredited not because it is unsound but because the $800 billion-plus stimulus enacted in February 2009 was so poorly designed and implemented. (And because of the disastrous prediction by Christina Romer, the incoming chairwoman of the Council of Economic Advisers, in January 2009 that without a stimulus the unemployment rate might rise above 8 percent. It rose to 10 percent. and now is above 9 percent, with the stimulus. What made the prediction reckless, as well as politically disastrous when it turned out to be false, was that no one could predict in January 2009 what the unemployment rate would be at any date in the future.) 

Much of the stimulus consisted of transfer payments to individuals, for example in the form of tax credits. Such transfers are not effective in stimulating employment. They are transitory boosts in income and a large percentage of such boosts is saved rather than spent and what is spent has only an indirect future impact on employment: a slight rise in consumer spending may have negligible effects on production if sellers have a lot of inventory, and even if they increase production they may do so by squeezing more work ouf of their existing workforce rather than by hiring additional workers. 

A more intelligent part of the stimulus was the transfers to state governments. They enabled the states that were on the brink of insolvency and may therefore have had difficulty borrowing to retain a number of teachers and other public employees whom they would otherwise have had to lay off. The transfers thus forestalled an increase in unemployment. 

Best of all—and the core of Keynesian depression remedies—was—in theory—the modest part of the stimulus allocated for public works, particularly roadbuilding and –repair and other construction-related projects (such as insulating houses, and painting and otherwise refurbishing public buildings). Because of the collapse of the housing market, unemployment was (and remains) very high among construction workers. If the government hires construction companies for new projects, the effect on the employment of construction workers should be positive and immediate. 

But here is where failure of implementation was critical. Although American roads, bridges, and other infrastructure are in poor shape, the government proved incapable of laumching new construction projects in timely fashion. For rather than placing a tough-minded, experienced business executive in charge and telling him to cut through bureaucratic red tape (as the Administration had done successfully with regard to the government takeover of General Motors and Chrysler), the President placed the Vice President in charge of administering the stimulus. He had neither the time nor the business and managerial background required for such an assignment, or the interest or temperament 

Nevertheless the stimulus doubtless had some positive effect on employment, since it did inject more than $800 billion into the economy in a short period, most of which would otherwise have remained in rather inert savings. But as with many issues in macroeconomics this one cannot be resolved with any confidence. But if government expenditures were reduced in ways that did not significantly increase unemployment, and the savings allocated to a stimulus program focused entirely on creating labor-intensive public projects promptly implemented, there would be a positive effect on employment with no net increase in government spending. 

But all these are pipe dreams, because of the politics of U.S. economic policy. The government is likely to do anything to stimulate employment. Eventually the economy will recover on its own, as consumers dissave and thus increase consumption, and with the increased consumption will come increased production and hence increased employment.

Comments

[jure gubanc]

It is strange how posner is jumping his views from free market to keynes, he is not either keynesian nor austrian. One painful fact of keynesianism is that there are thousands of keynesian economists and as much different plans of recovery and as much different plans of planning the economy. Unfortunately i live in a postsocialist country(now dominated with keynesianism, corporatism and ''national'' interests)- Slovenia ,where all my relatives worked in workers'' self managing'' companies and faiths of milions of people in yugoslavia depended heavily on the special wisdom of socialist geniuses(kardelj invented workers self managing much before american socialists like m.moore- and it was failure , exploitation of hard working people). USA never had such a hard experience with totalitarianism that is what makes it more vulnerable to liberals ideas(camouflaged totalitarians). We are ''rescuing''our national goverment bank for fourth time now with a huge proportions of taxpayers money. We have nationalized goverment runed health care system- with no inovations in medical technology, with one of the longest waiting lists in cancer treatment, with huge lack of special medical appliances, with painfully strong doctors union... We have goverment run pension system with never ending strikes and generation plundering, we have national colossus companies with thousands of workers operating solely with never ending goverment subsidies-always on strikes and misery, and we have many o too many keynesian economists who are educating public all the time- and you know what every keynesian does? Every keynesian has different vision of planing the economy. Everything we do and at any time we ''rescue'' our economy there is never enough- never enough subsidies to our airlines, breweries,news, public tvs, telecom. companies... How can you ever try to talk with keynesians, they act like never grown up kids who think they are smart enough to control markets better than millions of people combined do. Keynesianism is a field for ingnorant and very arogant people- which we have in myriads. They ignore their previous mistakes and arogantly think that they are called upon to save my peoples lives from our lack of capabilities. There is no plan good enough for them- someone wants to subsidise airline ind., other housing market, still other poor families, foreign workers, environment, earth, bees... the list has end in total submission of liberty to those gods on earth. Remember they act like little kids- with no responsibility, when they fail they just need better plan and more - money and trials. Every krugman is for goverment plans and actions- and every krugman is recsuing himself all the time with excuses- that plans are not good- they will never get that they are not good-not good enough , but temptation of being smart with other peoples money is just too strong and like posner said- they simply have to do something, just to satisfy their needs. Oh posner and americans you should now the history of keynesianism in eu and yugoslavia better, and you would only laugh to krugmans. best regards jure from slovenia

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@Jack.

I love you man. You're a rational ideologue who is wired into the real world existence of the unemployed and the underemployed; and the working poor, and the poor (including moms and dads- fully 1 out of every 5 children in America) .

One can stay in the tower or get down in the weeds but as someone who has some smarts both learned and street, the action is on the streets. I have the benefit of hindsight in posting this comment tonight- weeks after you. Tonight I'm watching social unrest unfold not in Tunisia, Bahrain, Yemen, Egypt, Libya or Syria....but England for God Save the Queen's sake. For a fifth surreal night.

Societal rebellion is a non-quantified externality of inequality, and one that increases exponentially as does the inequality gap. In the global Twitter generation in which we live, America and England are separated by no more than one degrees of tweetaration. Social conditions in the US are such that I fear we're floating into the perfect storm. Unchecked and unabated, how long might you expect the disenfranchised to behave like sheep?

Those costs will not be insignificant. Think.

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[Denver]

Pournelle has some good suggestions.

http://jerrypournelle.com/chaosmanor/?p=1837

"On the other hand, I doubt that Obama will or even can allow any of these proposals to happen.

My general principle is that economic growth happens when energy is cheap and there is a maximum of economic freedom, and of those two, economic freedom is probably the more important.

First, change all the rules for small business exemptions from regulations by doubling the maximum number of employees you can have for the exemption. There are a number of regulations that apply only to businesses with fewer than 10 employees; make that number 20. There are other regulations that apply only to this with more than 50 employees. Make that 100. Etc. The first time I proposed this I got mail saying it was useless because there aren’t any successful small businesses willing to expand but prevented by the threat of regulation. I have considerable evidence to the contrary; and besides, if there are no such businesses, then there won’t be any consequences of adopting this. In fact, though, I am quite sure there are many businesses successful enough to expand that would do so if the regulations weren’t so onerous.

Second, repeal Dodd Frank. It is estimated that Dodd Frank costs a hundred billion dollars a year. We have already seen that many banks find they have more people working in regulation compliance than in banking. Dodd Frank doesn’t do what it was supposed to do, and we got along without it before we enacted it. It hasn’t worked, and it ought to go.

Third, repeal Sarbanes Oxley. That’s another that costs too much and doesn’t accomplish what it set out to do."

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The sad fact is many people will never recover from this. Not only are people loosing their jobs but also their homes, cars, and personal items. Even if people can get another job, they will never get back their family homes and memories of such bad times. There is no going back, only trying to move forward and salvage what you can.

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Having higher numbers of occupants per existing structure doesn't bode well for selling off the homes having fallen or about to fall into the laps of bankers.All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it. We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

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