PRESIDENT OBAMA’S “AMERICAN JOBS ACT” – PLUS

On September 8, 2011, President Obama proposed the enactment of the American Jobs Act. Nearly everybody believes this proposal is not enough to return our economy to health but many believe it can be another restart. I believe there are some things the president could have said, and could have proposed, that would have considerably enhanced the core of his proposal. Additionally, these enhancements would have made his political base happier and could have put the Republican Party in a larger bind. My ideas follow in the balance of this essay and are based on seven underlying premises. The premises are:

1. The Republican Party wishes to create jobs. Let’s take them at their word, and the fact that H.R. 2 this year was entitled: Repealing the Job-Killing Health Care Law Act, should be understood to mean the Republican party favors job creation.

2. Republicans wish to expend as little as possible to create jobs.

3. In economics, the highest multiplier is when government expends money on goods and services. This is because all the money is spent and none is saved. Krugman I (http://krugman.blogs.nytimes.com/2011/09/03/the-austerity-economy/), Gordon Krenn Working Paper (http://faculty-web.at.northwestern.edu/economics/gordon/WPTheEndoftheGreatDepression.pdf)

4. Given the nature of President Obama proposed “American Jobs Act,” September 8, 2011, the vast majority of the benefits will come to an end by the end of 2012. While the CBO has not yet scored it, Macroadvisors, LLC reports (http://macroadvisers.blogspot.com/2011/09/american-jobs-act-significant-boost-to.html) it as follows: a) boost the level of GDP by 1.3% by the end of 2012, and by 0.2% by the end of 2013 and b) Raise nonfarm establishment employment by 1.3 million by the end of 2012 and 0.8 million by the end of 2013, relative to the baseline.

5. One of the problems with the fiscal stimulus in 2009, according to the Obama administration, was a lack of shovel-ready projects to create more jobs.

6. As the stimuli from 2009, and then late 2010, came to an end the economy began to sink again (http://krugman.blogs.nytimes.com/2011/07/29/stagnation-nation-2/) and, based on the projections of Macroadvisors, LLC, the same will happen when the stimulus created by the American Jobs Act comes to and end after 2012.

7. Even before September 2008, private industry was not creating enough jobs, and overall, unemployment rose during the years 2001-2008 (http://en.wikipedia.org/wiki/Economic_policy_of_the_George_W._Bush_administration#Unemployment). The seasonally adjusted unemployment rate rose from 4.2% in January 2001, peaking at 6.3% in June 2003 and reaching a trough of 4.4% in March 2007. After an economic slowdown, the rate rose again to 6.1% in August 2008 and up to 7.2% in December 2008. From December 2007 when the recession started to December 2008, an additional 3.6 million people became unemployed.

Using these premises, a slightly different address before Congress could have been given by President Obama on September 8, 2011.

The president would start by saying he will propose both short-term and long-term solutions for the lack of growth and employment in our country. These solutions need to be implemented before fiscal consolidation actually happens, but not before Congress can make plans for fiscal consolidation. This sort of strategy is consistent with what leading economists are suggesting, what the IMF has been suggesting [recent comments by Christine Lagarde (http://www.nytimes.com/2011/08/31/opinion/christine-lagardes-tough-message.html) and an IMF paper entitled Painful Medicine (http://www.imf.org/external/pubs/ft/fandd/2011/09/ball.htm)] and what Ben Bernanke is presently saying.

Both short-term and long-term solutions are needed in order to avoid past mistakes. The contours of the short-term, and especially the long-term, jobs solutions are informed by five facts. First, we know private industry has not created enough new jobs since 2008 as our unemployment rate remains 9.1 and over 14 million Americans are still out of work. Second, we also know private industry wasn’t consistently creating enough new jobs before the recession began in 2008. (Premise #7) Third, both Democrats and Republicans agree we need to create enough jobs to, once again, put our country back on sound footing and, obviously, it is best to do it as inexpensively as possible. (Premises 1 & 2) Fourth, our country’s most renown economists agree that, under the our present situation, the best, and cheapest, way for enough jobs to be created, is for government jump-starting the economy by creating the jobs through the direct purchase of goods and services. (Premises 3 & 4, Gordon Krenn Working Paper) Fifth, we didn’t have enough shovel-ready jobs ready in 2009, and we presently don’t have enough shovel-ready jobs to completely close the existing gap in unemployment. (Premise #1)

Given these five facts, the solution is actually fairly straightforward: Begin planning for the creation of shovel-ready jobs now so they are ready for implementation when the short-term stimulus begins to lose steam. If done right, this will truly close the unemployment and growth gaps. There are any number of ways to insure projects will be ready when needed, here’s mine.

The president asks each and every governor, from each and every state, to draft proposals for needed governmental jobs, service, works projects, etc. Think inside the box, think outside the box. Think big, think small. Then, after the first of the year, the president asks all the governors to come to Washington, D.C. for a two day conference on their ideas. This conference will be open to the public and can be broadcast on any cable/television station that wants to. The president will serve as moderator. This a great format for Barack Obama as he was stellar when he did this sort of thing with members of Congress about a month before the enactment of the Affordable Health Care Act.

While the majority of the time during the two days will be allocated to the requests from the governors, and discussions about many of their requests, the first three hours will be devoted to presentations from leading economists to simply explain our economic situation and what is needed. The value of this will become more evident by the end of this essay. Attendance by a governor, and proposals from a governor, are not mandated. But understand, no proposals, no opportunity for assistance from Washington, D.C. for jobs. And if this country’s leading economists are right, it will be a very nice experiment to compare in two or three years the employment rate in the states that participate and those that do not participate.

The virtues of this proposal should be apparent. First, it plans for the future so we are not back at this same place in 2013 when this next stimulus comes to an end. Second, to the extent possible, it hits the Republicans fairly hard. Private industry isn’t creating, and hasn’t created, enough jobs since 2001. Second, the Republicans say they want jobs, they say they want the most bang for the buck and this plan is what leading economists say will do the trick. Third, yes the stimuli tried before haven’t solved the problems, but each time the stimuli came to an end things got worse. This suggests that a larger “shock treatment” stimulus will have greater success (The economists will explain all this to the American public at the Washington, D.C. conference with the governors.). Fourth, there is little the Republicans can do to stop this and, from the point in time when the conference ends, the president will have months to sell the product of the conference to the American people.

The final component to this is the political necessity to explain to the American public that the actions to jump-start the economy with government spending will last only as long as necessary because, when the recovery becomes self-sustaining, the nation needs to address the remaining issue of bringing our debt down to better levels. I believe this means directly addressing the small government/big government debate within the context of our current economic situation.

Paul Krugman gave an address (http://www.palgrave-journals.com/eej/journal/v37/n3/full/eej20118a.html) in Moscow to the Eastern Economic Association the week of September 5, 2011. Towards the end he said:

But what became clear in the policy debate after the 2008 crisis was that many economists — including many macroeconomists — don’t know the simplest multiplier analysis. They literally know nothing about models in which aggregate demand can be determined by more than the quantity of money. I’m not saying that they have looked into such models and rejected them; they are unaware that it's even possible to tell a logically consistent Keynesian story. We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.

As long as monetary policy could bear the burden of macroeconomic stabilization, this didn’t seem to matter too much: even as equilibrium business cycle theory became increasingly dominant in graduate study, central banks, like medieval monasteries, kept the old learning alive. But once we were hit with such a severe banking and balance sheet crisis that monetary policy hit the zero lower bound, it was crucial that the economics profession be able to weigh in knowledgeably and coherently on other possible actions. And it turned out that it couldn’t.

Obviously, this is true. But there is another part to this that Krugman skirts around and it has to do with political philosophy and the small government/big government debate. In this country, we can generally lump people into two belief systems (I know over-simplification, but bear with me.). Some people believe in small government and some people believe in a more expansive role for government in solving the problems that face our nation. The monetary policy as the instrument of macroeconomic stabilization school of thought, that is a tenet of the Milton Friedman neo-classical school of economics, and that Krugman speaks about, is consistent with an overarching small government belief system. So, if one is a small government advocate, until this crisis, there could be unity between an overarching small government belief system and a small role for government in the realm of macroeconomics. However, once this crisis hit, a crisis that called for a Keynesian macroeconomics solution of a sizable governmental fiscal stimulus, people who possessed an overarching small government belief system couldn’t separate their overarching (small) role of government belief system from their macroeconomics views, despite the fact that macroeconomics isn’t so much a belief system as it is, or should be, a rigorous, empirical, endeavor. For this reason, they couldn’t see, or wouldn’t allow themselves to see, the difference between the two and how it could be possible to retain the overarching belief system of small government and, at the same time, allow for an exception to their belief system when it comes to macroeconomics when an economy descends into a liquidity trap.

For this reason, in order for President Obama to make head-way with the American public, he has to directly address this conflict and show how it is possible to have a rule (small government belief system) and an exception to a rule (The macroeconomic necessity of governmental fiscal stimulus in a liquidity trap. Krugman II (http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/), Krugman III (http://krugman.blogs.nytimes.com/2008/12/29/optimal-fiscal-policy-in-a-liquidity-trap-ultra-wonkish/) Note: Both of these were written in late 2008. Hence, the correct path forward was out there since that time.).

Krugman addresses this conflict at the ended of his address by saying:

What we really need is a change in the destructive social dynamics that brought us to this point. And I wish I knew how to do that. But my problem is obvious: I’m an economist, and it seems that we need some kind of sociologist to solve our profession's problems.

I admire Krugman greatly, but what is needed isn’t a sociologist but an educator and a great communicator to make sense for the American public what noted economists, like Paul Krugman, have been saying for the past three years. Fortunately, an educator and a communicator is living at 1600 Pennsylvania Avenue right now. Not only does the buck stop there, sometimes, it starts there too.

In conclusion, this whole matter is obviously more nuanced than what I have presented in this short essay. Further, the president will have to figure out a way to finesse his way around his mistakes of: 1) placing fiscal consolidation before job creating during the deficit ceiling debate and 2) the constraints he placed on fiscal expenditures for sufficient job-creation, that should bring to an end the gaps in unemployment and demand, when he agreed to creating a plan for fiscal consolidation before Thanksgiving of this year. Still, I firmly believe what I have written is an outline to a better approach than the one chosen by President Obama on September 8, 2011, And no reason exists that this approach can’t be added to the president’s approach.

9/10/2011

© Copyrighted by James N. Perlman. 2011 All Rights Reserved.