Bernanke’s speech Friday was more of the same: a misguided faith in the Federal Reserve. Reboot America manifesto signer Marshall Auerback on why more spending is the economy’s best hope to create jobs. Plus, join in with over 150 economists and historians who have pledged to get America back to work.
While insisting that the Federal Reserve stands ready to take further steps to prop up the slowing economy, Fed Chairman Ben Bernanke’s speech at the Jackson Hole economic symposium last week also contained a telling concession: “Central bankers alone cannot solve the world’s economic problems.” Amid a renewed bout of job-shedding—to be expected given the impact of the now-waning fiscal stimulus—and weak consumer spending unresponsive to interest-rate cuts, Bernanke’s implicit message was that there are limits to the impact of monetary policy.
And he’s right: While holding down interest rates may be beneficial at the margin, the U.S. economy desperately needs some direct spending injected. That can only come at present from fiscal policy, which is why it is odd that Bernanke (along with most of our policymakers in Washington) continues to resist more active fiscal policy responses to the problem of unemployment.
How long will it take for our political leaders to realize that adding monetary base to the system (more bank reserves) does very little to stimulate the economy? Whether or not we sustain a “double dip”—a return to recession in the definitional sense of two quarters of negative growth—it will still feel like that to millions of Americans due to the lack of job growth. This can only be achieved today via sustained fiscal policy action, whether via tax cuts or direct government spending. Deficit reduction per se should not be an objective of policy today, because as growth re-emerges, unemployment will come down, and the deficits we presently face will necessarily shrink.
What, then, should the government be doing today, given Bernanke’s concession of the limits of monetary policy? To start, the government could initiate a Job Guarantee program, using a “buffer stock” principle more common to factory inventories: The public sector could offer fixed-wage jobs for up to 35 hours per week to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers, which expands when private-sector activity declines, and then reverses as private hiring returns.
There is no greater waste than persistent unemployment.
The program would allow for the elimination of many existing government Welfare payments for anyone not specifically targeted for exemption, and would command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Minimum-wage legislation would no longer be needed as it would be established via this Job Guarantee program. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of “shovel-ready” labor it could draw from as needed, as some spread to the government wage paid to these employees.
Additionally, the guaranteed public-service job would be a counter-cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. It would therefore remain a permanent feature of our economy, in effect acting as a buffer stock to put a floor under unemployment, whilst maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.
In terms of jobs, policymakers must also assist the states via revenue sharing on a per capita basis with no strings attached. This will help the states to fund operations, keep workers employed, provide necessary services and fund infrastructure projects. This “radical” proposal was introduced by that noted progressive, Richard Nixon, in 1972, so the Obama administration would not be breaking new ground here.
It is clear that Bernanke and Co. think that monetary policy is the main game in town. Unfortunately, this misguided faith in the Fed just ensures the perpetuation of bad policies that help our financial elites, but do little for Main Street. Too much of Washington remains fixated on the “unsustainable” budget deficits and the anger over bailouts, making another stimulus package improbable. But in the face of today’s uncertainty, the private sector is understandably loath to spend, creating a huge drag on growth. Fearing for their jobs, individuals are paying down debt, not spending, which is a good on an individual basis, but has an adverse effect on the economy when done collectively. This is what Keynes meant when he discussed "the paradox of thrift."
That is the point that has to be driven home. Only the government can step into the breach in this circumstance. When critics begin to talk about “wasteful” government spending, it is worth reminding them that there is no greater waste than persistent unemployment. It dwarfs all other inefficiencies.
Marshall Auerback is a senior fellow at the Roosevelt Institute and consulting strategist with Pimco, the world's largest bond fund. He is also a fellow for the Economists for Peace and Security and regularly blogs at www.newdeal20.org.