Is it possible for the government to reduce unemployment?

By Felix Salmon
September 8, 2010
proposals were essentially ways of front-loading attempts to create long-term economic growth, and that unemployment would come down as and when that growth arrived.

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There was a reasonably interesting call today between various bloggers and Jason Furman, an economic policy wonk at the White House. The main message was that the Obama administration’s new economic-stimulus proposals were essentially ways of front-loading attempts to create long-term economic growth, and that unemployment would come down as and when that growth arrived.

I wasn’t particularly convinced. There’s a colorable case — made today by Brad DeLong — that all of these proposals, coming as they do halfway into Obama’s four-year term in office, are too little too late, compared to the messages that Larry Summers and others were sending at the beginning of 2009.

On the call, Furman valiantly tried to paint policies like cash-for-clunkers and the extension of unemployment insurance as being all about creating jobs, but the fact is that it’s hard for any government to create jobs, beyond simply hiring more people, and the effect of those policies on the unemployment rate was surely minimal at best.

Mike Konczal honed in, with his question, on one of the key vicious cycles in the economy: the high unemployment rate is making the housing market worse, and then in turn the weak housing market is exacerbating the unemployment rate, by making it much harder for people to move to where the jobs are.

Furman waffled a bit, saying that while a couple of years ago it was the housing market which was instrumental in causing the broader economic crisis, now the “direction of causation” is in many cases the other way around, with the weak economy hurting the housing market. Well, yes. But that doesn’t really say much about jobs.

So I asked him again, about jobs in particular, and Furman started talking about the drivers of economic recovery, and how this time around it’s not going to be housing. He did eventually manage to bring jobs in, saying that the infrastructure bill and the R&D credit and the small business bill “taken together would have a meaningful impact on unemployment today”.

But they wouldn’t, would they. Of the three, only the small business bill looks like it’s really targeted at creating jobs, as opposed to stimulating the economy more broadly and hoping that somehow higher GDP is going to feed through into lower unemployment. But the unemployment problem is tough, and sticky, and I’d much rather see proposals really aimed at tackling it head-on, rather than just trying to get there through big-picture macroeconomic effects. Make it easy for people to move out of their underwater houses, for instance.

On the other hand, maybe what we’re seeing here is a White House economic team which is fully cognizant of what government economic policy can and can’t achieve. And while keeping the economy from slipping back into recession is something doable, bringing unemployment back down, even to where it was when Obama first took office, isn’t. They’re not going to admit that in public, but neither are they going to expend too much effort tilting at windmills.

14 comments

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Giving businesses a 100% tax credit on capital equipment is basically having the government pay for that equipment (for profitable companies, anyway). It should be a no-brainer for any company that is considering buying new equipment in the next 2 or 3 years, as a tax credit is far better than even accelerated depreciation.

And unlike government spending programs, this tax credit would make an impact almost immediately, as businesses could decide a whole lot faster than the government on what to invest in. If free capital equipment doesn’t create jobs, then there is probably nothing the government can do (short of requiring companies to invest) to make it happen.

the R&D tax credit is also similar, in that it splits the cost of R&D between a profitable company and the government (maybe now that Mark Hurd no longer runs HP, HP will increase their R&D budget and create some jobs, and possibly new products in a couple years).

Unlike tax cuts, which have no guarantee that the recipients will invest their proceeds, tax credits reward only those who have invested in their future. An investment tax credit-driven policy would be the most effective government jobs program possible, and would leave investment decisions up to the alleged professionals who run industry in America.

Posted by OnTheTimes | Report as abusive

“And while keeping the economy from slipping back into recession is something doable, bringing unemployment back down, even to where it was when Obama first took office, isn’t.”

That’s interesting. So, how many times would each member of the White House economic team have to vote to stay past 2012?

Posted by j657 | Report as abusive

Interesting. So the total wimp out vis a vis China is due to what, exactly? They think there are no jobs at stake?
We’ve lost 40% of our manufacturing jobs since China joined the WTO. See 2nd chart down:
http://www.huffingtonpost.com/dave-johns on/china-springs-the-trap_b_681855.html

I don’t get this passivity. What is their analysis? Maybe they don’t have the guts? Their analysis of the economy seems so 2005. Is it insularity? Someone, enlighten me.

Posted by nyet | Report as abusive

On paper, it is trivial to reduce unemployment, but it won’t happen because it runs counter to everything liberal.

What is the solution? The old IMF solution, done successfully in many countries. It is two pronged:
(1) Axe government spending
(2) Devalue. In our case, print money to inflate our way out of this debt/deflation mess. This means real printing, not sanitized nonsense.

(2) can’t happen without (1) because then you would be Zimbabwe. But (1) can’t happen as long as Obama is in power because he is the most uncompromising liberal ideologue ever to hold such power in America. And I voted for him because I thought he was a pragmatist, silly me. Bill Clinton he is not.

Posted by DanHess | Report as abusive

not sure axing government spending will work in an economy that has no demand from the private sector. the consumer is tapped out. and probably gun shy as far as spending goes, and that 70% of the entire economy if not higher since business doesn’t spend much if any thing without demand from a customer (consumer or government).
so given that we are about to try what Ireland has done. and we can see how well that has worked for them (hint they are worse off now than when they started off on their austerity budget). since consumers aren’t going to power the economy this time and business has been awol all decade. and with government about to start cutting back, that leaves what to create demand? we won’t be able to do any thing at all as far exports, as every other country is going to try and do the same thing. and they can also devalue their currency as fast we can. so that leave who? aliens from space?

Posted by willid3 | Report as abusive

DanHess, are you suggesting that businesses would increase investment and spending if only the government would cut spending? Because I’m wondering what will stop the economy from contracting if both government and private enterprise spend less.

The IMF solution may have worked in other countries, because they owed money to the US, and their currency was losing value relative to the dollar. Foreign businesses do not want to invest in third world countries where inflation is out of control, but the risk in the US is not of inflation, but of deflation. When those developing nations cut spending, inflation subsided, and foreigners were more willing to invest.

The businesses that you are willing to rely on to invest our way out of the flatline the economy is drawing will not invest if they don’t believe growth is imminent. They stopped investing in 2008, and have not resumed investing, as witnessed by their record cash hoards. No amount of tax cuts or spending cuts will make them believe they should increase investment.

I think the premise that the deficit hawks base their demands for spending cuts on is that government spending consumes capital that would otherwise be used for investment. That is not the case today, as there is plenty of capital available – again, the record cash hoards, and also, the free loans the Fed provides to banks to loan out to whoever is able to past their creditworthiness tests (usually the same people who are holding cash hoards). Government spending is not crowding private investment, there is just no will to invest, because corporate managers are content with the status quo, and do not want to risk investing when growth is not imminent.

The Republicans are not willing to do anything other than cut taxes, and that has proven every time to have no impact on investment. The capital equipment tax credit is something businesses will love, and makes the investment decision a relatively simple one, but it remains to be seen whether the Republicans will actually support something they would have easily voted for 4 years ago.

So I ask again, if the government reduces spending, who is going to step up and start investing, to prevent the downward spiral we fell into in 2009?

Posted by OnTheTimes | Report as abusive

The IMF solution is not a partisan one. The cure is in controlled devaluation. Devaluation is a cure for many reasons.

(1) Where does the demand come from? A. It comes from overseas. After the IMF solution, exports of a country surge and companies must hire like crazy to meet demand. B. It comes from the USA as we are forced to substitute American stuff for imports which are suddenly more expensive. Right now we are doing the opposite, importing cheap foreign goods and not providing American jobs.
This cure is not hypothetical. It has worked over and over again in many countries.
(2) Debts suddenly become managable in real terms.
(3) Asset inflation fixes the ‘underwater’ problem for homeowners everywhere

Devaluation (getting off the gold standard) is what pulled countries out of the Great Depression and it is what will work today.

But for devaluation to be controlled it must be accompanied by fiscal balance. That’s the second part of IMF’s two-part cure. Otherwise the devaluation is uncontrolled and the economy is trashed. Devaluation without fiscal balance is Mugabe economics.

Fiscal balance is not partisan. G. W. Bush was no good in that department either. Fiscal responsibility, IMF-style doesn’t involve tax cuts unmatched by spending cuts, his favorite thing. Or worse, tax cuts accompanied by spending increases, his other favorite thing.

As I said, Clinton is the model, fiscally speaking, working in a bipartisan way with the Repubs in Congress, cutting or holding the line on even entitlement spending while not cutting taxes.

Posted by DanHess | Report as abusive

Much of our trade deficit is with China, who control the ratio of the dollar to the renminbi, and they will not devalue the dollar enough to impact their exports to the U.S. Amazingly, even the euro has lost value relative to the dollar over the last couple years, as has the pound, so I don’t understand where the controlled devaluation will come from (ironically, the best way to force devaluation would be even more massive deficit spending, which you are opposed to).

We could reduce our imports significantly by investing in alternatives to imported oil, but that is a non-starter to much of Congress. In any case, the price of oil is dependent on factors beyond the value of the dollar, so given that two of the biggest contributors to our trade deficit are Chinese imports and oil, we’re not in a good position to substitute American stuff for imported stuff.

Obama wasted the first year+ of his tenure trying to obatin partisan solutions, and the Republicans refused ** everything ** he suggested, only because they did not want to co-operate at all. They are completely unwilling to cooperate on any bi-partisan solution. It will be interesting to see how they respond to the completely Republican idea of 100$ tax credits on capital equipment.

I expected inflation in the US (which is the deflation you are seeking) to help us pay down our debts, but there is no other currency that the world is comfortable with. The euro is basically where it was four years ago, in spite of massive US deficits, and the pound is even lower. The yen seems to be irrelevant, so I just don’t see inflation or any kind of devaluation happening. The only way to jump-start the economy will be to put all the idle cash to work, and that doesn’t look likely.

Growth is not driven by consumption, or by low interest rates, or by easy credit. It can only happen when those with money are willing to invest it.

Posted by OnTheTimes | Report as abusive

OnTheTimes –

“the best way to force devaluation would be even more massive deficit spending”

No. The best way to achieve devaluation would be straight up new money. In other words, raw monetary policy. Keynes called it “monetary policy a l’outrance” in his Treatise on Money in 1930. This was before he got sidetracked. Deficit spending doesn’t do it.

What happens with deficit spending? The government sells bonds (which pulls money out of circulation) and uses the proceeds to spend (which puts the same money back into circulation). This is like the guy who wanted to make his blanket longer so he cut a foot of material from one end to sew onto the other end. Gee, is it longer? No, its just a mess.

Of course, naked new money is a dangerous thing and you need to have a budget in balance, or else investors lose all confidence. Obama’s full bore spending is racing full speed in the opposite direction. If you think the extreme structural deficits of the health care bill were bipartisan, you are delusional.

Posted by DanHess | Report as abusive

So when the market determines the value of the dollar, how does the US say, “no, the dollar is worth only this much”? I know China can set the value of its currency, but that’s because they peg it to ours. What would you fix the “new” dollar to?

The health care plan was hardly “Obama’s”. It was all he could get past his own party, who didn’t get the memo that their recent electoral success was largely due to him, and have been placing almost as many obstacles in his path as the other party. He needed/wanted a health care bill, and had to keep every democratic senator happy, which was ridiculous. You called him uncompromising, which is ironic, since it was his repeated attempts at getting all Democrats and some Republicans on board that wasted his first year. While I have a bunch of complaints about his policy choices, even Clinton would have seen every initiative of his blocked by the obstructionists in Congress, whose goal was to prevent all legislation.

Posted by OnTheTimes | Report as abusive

The private market just finished destroying 8 million jobs. And it’s going to turn around soon?

You must be kidding, right? Everyone at this post is being sarcastic, right?

We need jobs, or at least instill in the public’s mind an expectation jobs will be created. Obama should announce a $300 billion annual infrastructure bill. That will create 5.4 million jobs (per UMass estimates).
And we need the stuff ($2.2 trillion already indentified by American Society of Civil Engineers). The private market isn’t going to do this anyway, so it’s justifiably government’s responsibility. That said the money will end up in private corporate coffers, so why should they bitch?

I think the real problem is no one in the White House and probably Congress too, knows how to issue an RFP. Cripes, starting issuing RFPs and then write checks. How hard is that? It’s two simple, direct steps to begin creating jobs.

We don’t need any more tax cuts/breaks. They don’t create domestic jobs because we’ve already shipped overseas most of what consumer demand buys. We were told by economists this was a good thing. At the time I didn’t realize the economists were being sarcastic. Right?

Posted by Beezer | Report as abusive

viva la revolucion

Posted by DanHess | Report as abusive

This nonsense about the Chinese ruining the American economy is an excuse. If we stopped buying from the Chinese, we would by buying from Vietnam, Indonesia, Sri Lanka; you know what I am getting at. The American manufacturers still don’t get the business.

If our goods had to come from local manufacturers, inflation would be 500% and the DJIA would be at 3000 because none of the companies would be making any money. They also cannot afford to pay LeBron/Tiger and company the tens of millions every year. This is America’s problem and others have their own problems and also have no obligation to solve ours.

On the other side, our government is so bogged down by political dogma and gross inefficiency; there is practically zero chances of change. It’s like a 1500-lb. overweight monster lying in bed. You gotta to lose some weight or die a slow painful death.

God bless.

Posted by doctorjay317 | Report as abusive

Fiscal austerity and money printing. Really, it works.

It is what is happening in Britain right now and they are faring much better than we are. Their bubble actually exceeded ours by quite a bit.

American substitution works too. Not for shoes but there are many things, such as cars and airplanes and Subzero fridges that can go either way.

Posted by DanHess | Report as abusive