How to Create Jobs

One of the typical responses to Resident Bush's disastrous jobs record from our good friends on the right is to call into question the ability of government to create jobs in the first place. "Employers create jobs, not government!" goes the mantra.

Problem is that Federal government policies have a profound effect on job creation. That's how I came to assert such in a recent Yahoo forum discussion. In that I said: "Any semi-competent Washington policy wonk knows exactly how to stimulate job creation in this economy."

Of course, that was immediately challenged by a friend of mine, who replied: "Not being a semi-competent Washington policy wonk, I guess I don't know, so I'll bite. How?"

The answer is my attempt at a primer on how Washington policy wonks would approach it, using Keynesian, post-Keynesian as well as monetarist strategies that are fairly well known and understood. Problem is, these prescriptions are opposed by the power structure of the Republican Party today, resulting in the unpleasant fact that our Resident Bush will be the first President since Herbert Hoover to preside over a net job loss during his administration.

"OK. You asked for it. There are two main ways that the Federal government can stimuate economic and therefore job growth. In the short term, trade spending/tax policies that generate very little growth to policies that generate more (duh.). A one pager exec summary of an important Economy.com study (the folks behind the Dismal Scientist) is a good backgrounder.

Basically, expenditures targeting low to middle income people grow the economy short term far more than expenditures targeted to affluent people. For example, committing more funds to extending unemployment benefits adds $1.74 to GDP for every $1.00 spent. By contrast, reducing taxes on stock dividends only adds 9 cents to GDP per dollar of taxes reduced. So doing a little math here, if you repeal the dividend tax cut, and take the estimated $36 billion in revenues split evenly between increased benefits to the unemployed and to reducing the budget deficit, that action would increase GDP by $28 billion in the first year alone (about a 0.3% increase in growth.) You'd lose $3.24 billion in GDP growth from repealing the dividend tax reduction, (.09 X $36 billion) and gain $31 billion in GDP from extending unemployment benefits, (1.74 X $18 billion).

Paying more money in unemployment benefits to reduce unemployment seems to be counter-intuitive. But, if you think it through, it makes sense. An unemployed person receiving unemployment benefits is the person most likely to spend those benefits quickly in ways that keep the money recycling through the domestic economy: food, rent, bus fare, utility bills etc., which are all provided courtesy of employed workers, very few of whom could possibly be outsourced to India.

Follow this trade-off policy throughout the budget: More state aid instead of more generous business depletion allowances etc etc. and in each instance take the revenue generated and split it between paying down the deficit and paying for high-growth initiatives. In all, I suggest trading about $100 billion in tax cuts to the affluent in favor of about $50 billion in human needs spending increases such as unemployment compensation, food stamps, housing credits, AFDC, child care and education, mostly administered on a state or local level.

Then, do the same math on another dimension: capital intensive government spending happens to offer less growth bang for the dollar than labor intensive enterprises. This means a road construction or a mass transit project will offer more growth than military spending. Right now we have $75 billion in military spending going toward outmoded cold war era weapons systems designed to fight the Soviets in Europe. The list of them was put together by a group I'm involved in called Business Leaders for Sensible Priorities by Ronald Reagan's former asst Secy of Defense Lawrence Korb.

Now take that $75 billion and put $45 billion into education (school construction/repair), providing health insurance to all uninsured children, reducing class sizes to 15 for all kids grades 1-6 and fully funding Head Start so every kid who's qualified for it gets it. Then, take $10 billion for energy tax credits to jump start alternative energy industries. Take $20 billion to reduce the deficit. Switching from military spending to state level domestic spending of this magnitude would add, net-net, about $35 billion in additional GDP growth per year.

Doing these things will tangibly increase short term economic growth by about $85-90 billion, or about 0.8% additional growth than what we are doing right now. At the same time, we also accomplish a $70 billion decrease in the budget deficit per year. That's just the first year. Two things happen which compound the benefits over the long term.

(1) Every dollar we take from the deficit reduces the amount of interest we have to pay on the national debt. So next year's mandatory budget demands decrease. As economic growth recycles through the economy, the need for unemployment, food stamps etc. decreases, which also reduces Federal budget needs next year. Funding children's health insurance, Head Start, after school programs etc. also increases the work force, as single moms are not forced onto welfare and Medicaid to treat sick kids. That raises payrolls, payroll taxes and simultaneously reduces Federal budget needs next year. This means we can cut the deficit more next year.

(2) At the same time, reducing the budget deficit also reduces the supply of government bonds which must be bought by investors. (I say must be bought, because by definition the money has to come from somewhere and the Feds will be forced to raise the yields they pay on Treasury bonds higher and higher until they find enough buyers.) Private entrepreneurs compete with the government for financing. If the Treasury market is paying X% for guaranteed bond investment, then entrepreneurs seeking risk financing must offer (X+Y)%, where Y is a big enough number to get people interested. If there's a ton of new Treasuries to finance, longer term rates will have to rise relative to shorter term rates to attract buyers. This directly raises the cost of capital for entrepreneurs, as they have to compete with gov't paper. Pay down the deficit, or better yet, return to a surplus, and you remove a huge expense for entrepreneurs.

When the Clinton administration was paying down the deficit and moving to a budget surplus, long term Treasuries were actually paying less interest than money market accounts at the time, simply because of supply and demand. (By contrast, the return to deficit spending means that 10-yr Treasury rates are now 3-4% higher than money market rates, meaning risk capital financing is now more expensive relative to risk free idle cash.) Check out the chart that shows the correlation of deficits and interest rate spreads. Federal Reserve Board Chairman Alan Greenspan is on record crediting this 1990's fiscal policy with fueling the incredible financing boom that brought us from 386 Dos-based computers to the computer age we enjoy today. On july 18, 2001, Greenspan reported to Congres that the return to surpluses and the consequent rise in national saving "provided resources for the technology-driven boom in domestic investment in recent years."

So all of this creates a feedback loop. Short term economic stimulus via domestic, human needs spending increases short term growth, which increase next year's Federal revenues as well as reduces mandatory spending needs, thereby increasing the bite you can take out of the deficit next year. Meanwhile by chipping away at the deficit, and turning them into surpluses over time, you unleash private investment directed to entrepreneurial activity that otherwise was shackled to government bonds, and a long term economic growth engine is built.

It's a textbook case of economic karma. To enjoy enormous bounty yourself, you first take care of those who need it the most.

This is exactly what Bill Clinton did in 1993 with his long term economic growth plan. The Republicans thought it was nonsense and would cause a huge recession. Rep. Newt Gingrich summed up their feelings about Clintonomics in August 1993: "The tax increase will kill jobs and lead to a recession, and the recession will force people off of work and onto unemployment and will actually increase the deficit." What followed was the largest, longest economic growth period in human history, creating more jobs, starting more businesses and accumulating more millionaires than even the Republican's most exotic fantasies could imagine. From Clinton's inauguration in 1993 to Bush's inauguration in 2001, 22.1 million non-farm jobs were created.

Welcome to the Democratic Party.