THE TRUEST test of the success or failure of our economy is jobs. Good jobs provide income, obviously, but also security, meaning, and community. Unemployment, in contrast, is bad not only for economic wellbeing but also for physical and mental health. A decent society, at least one where self-worth is as tied to employment as in ours, must ensure that all who want to work, can.
By this test, we are failing. Unemployment is shockingly high and underemployment is even higher. Worse yet, workforce participation has dropped to levels not seen since women began entering the work force en masse decades ago: people are simply giving up, concluding that there is no point in continuing to look for jobs that are not there.
The question of what to do about the unemployment problem depends on why good jobs are in such short supply. The obvious explanation gives an equally obvious answer: a shortage of demand means that potential employers see no profit in producing or hiring. The solution is to increase demand.
The problem is partly structural and partly cyclical. Structurally, for a generation, American workers’ wages have lagged behind their productivity gains. The profits from increased productivity have, instead, been redistributed upward to a tiny group of the super-rich. As a result, employee income has been dropping as a percentage of GNP. That causes a long-term problem: employee income is just another name for consumer demand. If ordinary Americans aren’t paid enough to buy what they produce, then companies can’t sell what they make except by exporting or by producing investment goods. But we no longer export, and there is no point in investing if there are no consumers to buy additional products. Low pay means low demand, and low demand means low profit, which, in turn, means lower investment, lower growth and—again—lower pay.
Wage stagnation began in the 1970s. But for most of the period since then, we avoided the low-demand/low-profit trap. In the early years, families responded to reduced income by working longer hours: stay-at-home wives went to work and primary jobs added hours. Collectively, the United States became the hardest working country in the developed world, with average hours worked per year far exceeding Europe and, recently, even Japan. But we’ve long since hit the limit. The single-income family and thirty-five-hour work week are now practically defunct.
More recently, families have maintained their spending despite reduced incomes by living off their capital. A stock-market boom followed by a real-estate bubble gave unexpected capital wealth to some, while the middle class cut its savings rate, ran up credit cards, and borrowed against its homes. By the beginning of the current crisis, Americans collectively were spending more than they were earning.
The inevitable collapse of the housing bubble ended that source of demand and led to the current cyclical collapse. We can no longer work harder or borrow more, and the strong dollar makes our exports uncompetitive. The only way to escape our trap is to increase domestic demand, which means we must increase Americans’ income.
High unemployment rates and low interest rates demonstrate that we have idle equipment, idle workers, and idle capital. Idle people and idle capital, of course, are the problem. But they could be an opportunity, if we took advantage of it.
To address the immediate unemployment problem, the U.S. government should spend on anything that puts people to work. This would get money in the hands of the currently unemployed, which would create additional demand, and therefore additional profits and jobs. Moreover, if the citizenry came to believe that the government is committed to full employment, people would be more inclined to spend instead of saving for the rainy day that they can see coming. Of course, it’d be better yet if we spent government money in useful ways. Right now, the federal government can borrow at near-zero interest, reflecting the fact that the private sector has nothing useful to do with its savings. We could use that opportunity both to create new jobs and to invest in the future—to begin the long-deferred transition to carbon-neutral energy sources; to build the train system that we, alone among states with modern economies, lack; to bring our communications infrastructure up to our competitors’ standards; to rebuild our crumbling schools and roads and dams and power plants; to invest in the education, research, and development that we need to be competitive in the future.
In the longer run, we need to deal with our underlying structural problems. In the first decades of the postwar period, productivity and wages marched in lockstep. Why did that change? The simplest answer is that we’ve drastically increased the bargaining power of capital over employees in the last generation, and we need to reverse that power imbalance. We’ve lost the private-sector unions, the (more) passive stock market, and the closed or export-oriented economy that marked those years. We need to address these changes:
• By giving employees political rights in the workplace, such a right to elect some members of the board in large companies, we could redirect corporate managers to increase pay and employment rather than single-mindedly focusing on investor returns.
• To reduce the damage done by short-term stock-market profiteering, we could tax rapid-fire trading and raise the tax rate on capital gains to well above the rate on dividends.
• We could direct the Treasury to maintain the dollar at a level that makes U.S. exports (and therefore U.S. jobs) competitive on international markets, so that American workers can benefit from rapidly rising wealth in emerging markets. A competitive dollar would also lead U.S. consumers to spend more at home, where their spending can support American jobs, while presenting a serious obstacle to Wal-Mart’s low-wage, cheap-import model of economic regress that has done so much damage to American towns.
• We could reduce corporate influence on Congress and regulators by requiring that all corporate lobbying and electioneering expenses be approved by the actual source of the funds—generally meaning that corporate decisions to lobby would be subject to a majority vote of employees and consumers.
• We could change labor organizing rules to allow unions to organize on an industry-wide, rather than plant-based, basis so that they can become effective representatives of broader interests in growth and employment, or make organizing a union of employees as easy as organizing a corporation (which often functions as a union of capital).
• We can create alternatives to the stock market, such as a national economic investment bank, to allow companies to fund themselves independently from its tyranny and instability. (See Lu Carpenter’s Dissent article “Four Years of Silent Depression” for a description of the French equivalent).
• We can reform the inefficient monopoly privileges of copyright and drug patents to reduce the unfair power of entrenched incumbents and permit more competition.
• We can find new ways to fund higher education, primary research, pharmaceutical R&D and similar investments in our future that do not depend on fleecing the middle class.
• We could institute reforms to bring medical care costs down to the levels in other advanced economies, thereby increasing pension security and reducing the burden on families.
• We can begin to remedy some of the long-term fiscal problems of the state governments by a large program of federal revenue sharing. Even leaving aside the race-to-the-bottom problems of inter-state competition, state-based funding makes downturns worse: states must cut back on employment in education and other vital services just when they should be ramping up.
JARED BERNSTEIN has been discussing this critical issue of unemployment in his useful new blog, On the Economy. Unfortunately, in a post last week, he illustrates precisely the problem with the current debate. Bernstein takes the current position of the Republican Party as an unchangeable obstacle. He writes:
One can and should wax about optimal ways to rev up the American jobs machine, which has thankfully shifted out of reverse but remains stuck in low gears. Yet given our political dynamics, if those ideas represent traditional Keynesian stimulus, they’ll be…um…hard to get through Congress. I’m all for a good fight, but with unemployment at 9%, and underemployment at 16%, we need more than a fight. We need a win.
This position—conceding that a “win” must be compatible with current Republican ideology—presents a problem, because the current position of the Republican Party, exemplified by the new House Republican “Plan for America’s Job Creators,” is to recommend more of the very policies that got us into this hole in the first place: cutting taxes for the very rich, using law to protect economic incumbents from competition and consumers rather than the other way around, and resolutely opposing any government investment in our future unless it generates immediate profits for current campaign contributors.
The Republican Party is opposed to stimulus that might work. Thus, rather than looking for the “vanishingly small” (as Bernstein puts it) overlap between functional solutions and ones that Republicans might support, maybe the Obama administration should be trying to shift the discussion by repeatedly pointing out that we know what we need to do to create jobs.
These are investments that will pay for themselves over time—and can be financed at no cost right now. Propose to pay for them with borrowed money to be repaid from the increased income they will create. Propose real solutions to put people to work and to undo the shift of bargaining power to the rich. Then make Congress vote on them. If one project gets voted down, propose two more. To win the war, sometimes we need to lose some battles. Make the Republicans and their Blue Dog Democratic allies vote against jobs over and over again. Sooner or later, the voters will get the message: unemployment and the destruction of the middle class are political choices, not an economic inevitability.
Daniel J.H. Greenwood teaches law at Hofstra University. He has published numerous law review articles, book chapters, and popular opinion pieces on corporate law, corporate speech rights, and the role of corporations in politics, as well as on minority religious rights and related topics.