Should Obama Boost Jobs More Directly?

by Noam Scheiber | November 9, 2009

Via Matt Yglesias, I see that Alec MacGillis had an interesting piece on this question in yesterday's Washington Post. There are a variety of ways the administration could target employment directly, of course, from a WPA-style federal jobs program to tax credits that subsidize hiring. Zubin and Kevin Drum have pointed out some problems with proposals near the WPA end of the spectrum. A more feasible approach might be a policy the Germans put in place, which apparently happens on a smaller scale in a few U.S. states:

There are programs in a handful of states that financially compensate employees who cut their hours to prevent broader layoffs at their companies -- an approach that costs relatively little, since it results in lower payouts of unemployment benefits, and that has helped Germany keep unemployment under 8 percent despite the deep slowdown there.

But it turns out MacGillis raised this idea with Larry Summers, who wasn't keen:

“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.”

In response to which Yglesias makes an interesting point about the relevant tradeoff: On the one hand, such policies tend to delay the restructuring that allows economies to grow quickly once they've recovered. On the other hand, these policies not only relieve a lot of short-term pain, they can also prevent long-term damage to people's labor-market prospects:

In a relatively brief or shallow recession, I think Summers would definitely be on the right side of this argument. In a longer recession, though, there’s a case to be made that the loss of job skills and labor market attachment that’s involved in a period of prolonged unemployment will create a bigger drag effect than anything that might be involved in delayed restructuring.

I mostly agree with this, with one caveat that cuts back in Summers's direction: If the long recession follows the bursting of a massive bubble, then the economy probably needs a lot more restructuring than usual, since by definition a bubble means there was a pretty egregious misallocation of resources going on. In this case, for example, you wouldn't necessarily want to keep people employed in the real estate/ construction sectors, or the financial sector for that matter, since the likelihood/hope is that those sectors will be a substantially smaller part of the economy going forward.

P.S. It's worth pointing out that Summers's statement of administration thinking here is pretty credible, since it would be in their short-term political interest to focus more directly on jobs. It's individuals who vote in elections, after all, not macro-economies...

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