Unlike the New Deal, Obama’s Plan does not put People on the Public Payroll

I missed this when it first ran in the Washington Post: 

Unlike the New Deal, Obama’s plan does not put people on the public payroll, by Alec MacGillis, For The Washington Post, The Register Guard: To hear President Obama tell it, he’s been busy creating jobs since taking office. The $787 billion stimulus package, he said last winter, would “save or create 3.5 million jobs.” The White House is touting reports from recipients of stimulus funds asserting that they have created or saved 640,000 jobs so far.

Yet the national unemployment rate has now hit 10.2 percent… Obama declared recently that more action is needed: “I can promise you that I won’t let up until the Americans who want to find work can find work.”

It was a strong vow, but it raises a question: Why has a White House that talks so much about boosting employment steered clear of the most direct strategy that could keep Americans on the job?

Since taking office, the Obama administration has studiously avoided paying people to go to work, which could be accomplished by subsidizing workers’ private-sector employment or by creating new government-paid jobs. …

Instead Obama’s team has taken a more indirect approach, a prudence that critics on the left say is misplaced. … Engaging in more forthright job creation could invite some political pitfalls (such as those constant accusations of socialism), but is double-digit unemployment any less a political risk?

The administration is “scared of (any plans) seeming like old-fashioned make-work, but that’s what it is: You’re giving (people) jobs because they have nothing left to do,” said Dean Baker… “Giving people a shot at a job has to be worth a little bad publicity … but as in a lot of areas, they proved more cautious.”

White House officials … say they opted against direct jobs programs not for political reasons but because they thought such efforts would not produce long-term value.

“I think we got the Recovery Act right,” Larry Summers, the president’s chief economic adviser, said in an interview. “The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

Two-thirds of the stimulus went toward tax cuts, fiscal aid to states, and expanded unemployment benefits and food stamps. These efforts helped cushion the recession’s blow, saved public jobs and, by injecting demand into the economy, bolstered employment indirectly.

The remaining third of the stimulus, however, was expected to be the real jobs generator: $250 billion for infrastructure — roads, transit, water treatment — and for investments in energy efficiency, broadband access and other areas. But it is becoming clear that much of that spending is not producing many new jobs. …

Administration officials argue that these investments, if done right, will lay the groundwork for growth for years to come. And they say that given the depth of the recession, it’s hardly a bad thing for the stimulus to deliver some punch a year or two from now. … Summers said. “We designed the Recovery Act to ramp up over time, through 2010, and to make sure that the investments we made were important for the country’s future.”

In addition, public-works programs take longer to get started than people realize, officials say. … None of this persuades the critics… [who] … argue that there is plenty of direct job creation that could be done, short of heavy infrastructure, that could have lasting value. The liberal Economic Policy Institute has drafted a plan that, along with a new business tax credit for hiring that the White House is already considering, includes a pure public jobs proposal: giving money to states and cities to hire people to paint schools, board up vacant homes, staff child-care centers and reopen library branches. Workers would be paid the market wage. It would cost $35 billion for a year, not much more than the combined price tag for the homebuyers’ tax credit and the $250 checks that Obama has proposed sending to Social Security recipients. …

Conservative economists stand steadfast against any movement toward direct job creation. … Jobs programs “sound so good in theory, but it just doesn’t work that way,” said Larry Lindsey, director of the National Economic Council under President George W. Bush. It would be better to stick with safety-net benefits for those most in need and to enact new tax cuts, such as a suspension of the payroll tax to encourage hiring. …

One confusion here is the strict demarcation between “growth policy” and “stabilization policy.” Growth policy is an attempt to make the economy grow faster, and stabilization policy attempts to keep the economy as close as possible to that trend, i.e. to avoid business cycles.

When Republicans had the political microphone, they emphasized growth policy (because it allowed them to argue for what they really wanted, lower taxes, growth policy was simply the vehicle that allowed them to get there), and this was supported by academic work from people such as Robert Lucas who claimed that, from a welfare perspective, stabilization was of second order concern, growth policy was where policymakers should focus their effort if they wanted to enhance welfare. Summers’ remarks reflect this type of thinking.

But, as Stephen G Cecchetti, Piti Disyatat and Marion Kohler note, stabilization policy can also have first-order effects:

The primary objective of macroeconomic policy is to maximize welfare – measured typically as income per capita. In working to meet this goal, the first question is whether policymakers should be concerned with stabilizing the economy around its long-run growth path. Stabilization is secondary if it has little or no effect on the level of real growth; while fluctuations have distributional consequences, they are of little direct concern…

The current consensus – as embodied in a variety of New Keynesian models – is that volatility can lower the long-run level of growth; so, smoothing fluctuations has first-order effects on welfare. While this conclusion is not without dissenters – see, for example, Lucas and Sargent (1979) and Lucas (2003) – it is accepted among policymakers, as is clear from the explicit or implicit role that output smoothing plays in the objectives of many central banks.

Even so, as Summers makes clear, the administration shunned “make-work” type stabilization policy in favor of policies devoted to building (or rebuilding) infrastructure because they could defend these policies against political attacks by pointing to their growth enhancing capabilities (same for tax cuts, even though everyone knew they were intended mostly for stabilization). So called make-work programs were denounced as wasteful by the opponents of stabilization policy, in part because they completely ignore the potential multiplier effects of such spending, but also because they ignore the value to communities that comes from the types of “make work” activities such as, say, those listed above in the discussion of a proposal from the EPI, and because they forget that stabilization can affect long-run growth in modern models.

Letting people struggle when they could be helped is not an acceptable policy, but it seems to be the one we’ve adopted. Putting unemployed people to work doing things of value for their communities is not wasteful, and given the very poor state of the labor market, we need to do something, and we need to do it now.

Originally published at Economist’s View and reproduced here with the author’s permission.
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