Expect one thing from President Obama’s speech on Thursday: a mini ARRA, a smaller version of essentially the same stimulus plan as that of 2009. He will probably call for putting the unemployed construction workers to work on infrastructure projects, he will propose tax incentives to firms to hire the unemployed, he will keep pushing for the weatherization of buildings and more funding to teachers and schools.
He will keep advocating a free trade agenda, whatever form that might take. And if informed pundits are correct, he will ask for about a third of the ARRA funds, around $300 billion.
In 2009 ARRA passed a total of $787 billion (which was extended to $840 billion). About a third was allocated to tax cuts, another third went to entitlements and the remaining third (about $275b of which $205b have been disbursed) went to finance various projects through grants, loans and contracts—yes, the same weatherization projects he was advocating at the beginning of his presidency, the same teacher retention programs, school renovations, the same subsidies to firms for (true, mostly green) energy production.
It does not appear that we will see much that is new tomorrow, but the approach will be much more timid, given the deficit phobia that has gripped Washington. To be clear, the Recovery Act worked, but had a rather small impact on jobs for two reasons 1) the actual direct job creation component was far too small (for the most part it was contained in that third, which went to grants, contracts and loans) and 2) it was poorly targeted (not all of these funds actually created new jobs for the unemployed—a topic for a different blog).
With such a small direct job creation component, it is no surprise that ARRA created only 1.2 million jobs in direct employment. If we consider the secondary, tertiary and subsequent effects from the entire ARRA spending (including tax rebates and entitlements) and account for a multiplier effect, whose high estimate according to the CBO is $2.50, we are looking at 3.3 million jobs created from ARRA in 2 years (2009-q2 to 2011-Q1). So yes the ARRA did create jobs but too few and at a time when the economy was experiencing its fastest private sector job loss since the Great Depression.
In January 2009, I argued that what the president should do in his ARRA proposal is offer direct employment to the jobless immediately and without delay. If instead of all the tax cuts, subsidies, and entitlement extensions he had offered full-time employment to the unemployed in a transitional public sector jobs at a living wage, we would have prevented the precipitous increase in the unemployment rate that followed. Furthermore, had we targeted the ARRA better (a topic for another discussion) we could have created 10-20 million jobs for the same price tag!
But we did not embrace the bold approach then and we will definitely not embrace it now. The President will once again offer tax cuts and tax incentives, subsidies and other cash support, which will leave a rather small amount for his “new” plan of putting Americans to work through construction and public infrastructure investment. Can we expect 100 billion in direct employment through infrastructure investment? It seems highly unlikely if his mini-ARRA is to contain all of these other components (tax cuts, rebates, incentives, subsidies). And if the direct employment portion of the ARRA in 2009 (which, again, was not very well targeted) created only 1.2 million jobs, how many jobs should we expect from his new and much smaller plan that he will advocate on Thursday? Whatever we hear will hardly make a dent in the unemployment rate. We have over 12 million unemployed people and millions more without full time employment. 1 or even 2 million jobs just don’t cut it.
Instead, I propose the following:
- Get whatever budget you can negotiate through Congress. If pundits are correct and the President proposes $300 billion and manages to get Congress to sign on it, he should spend every single penny on directly employing the unemployed.
- Set up an office where the jobless who want to work would sign up expressing their interest in working in a public project.
- Offer a base wage to all who show up for work. I have proposed a universal job offer for all of the unemployed at a living wage, but if the President only gets $300b that will be impossible. So we’ve got to work within these constraints to get the ‘most bang for the buck’.
- Match explicitly the jobless with the projects that we need done in the most distressed communities and in areas that require the most public investment.
So let’s take a look at what one could do with such a budget.
Some of most underserved and stressed sectors are those in basic education and health services. Currently we have 400,000 officially unemployed in the education, training and library services and 250,000 unemployed in the health service sector. Offer the jobless direct employment and place them in public hospitals and health center around the nation. They are all understaffed in these times of need. With the cuts in Head Start programs, basic education has been seriously undermined. Despite all of the reforms in our public schools, classrooms remain overcrowded and undermanned. Put the jobless teachers to work. Sadly, these workers in these two important sectors earn some of the lowest wages. On average, preschool teachers and health service workers get $12/hr (BLS data). If we devise a bold program that puts all of the 650,000 jobless from these sectors to work in a full time job for a year, only the wage bill will cost $16 billion dollars, which is peanuts in comparison with the actual value we get – a transitional/safety net job for the unemployed who work for the public purpose in key public sectors.
Let’s take the Construction and Installation occupation. There are 2.6 million jobless people who used to earn an average of $20/hr. Put them to work. All of them. The wage bill for a year-long transitional full-time job in the public sector for all would cost $108 billion.
Employment in farms/fisheries can also deliver considerable bang for the buck, as can those in food preparation services. In both of these industries the average wage is $9/hr and the jobless rate is 200,000 and 1,000,000 respectively. Hire the jobless farmers to work on soil improvement, runoff prevention, water purification projects, river bank fortification. Fund some of them to set up community farming and transition to sustainable agriculture. Staff U.S. food banks, school cafeterias, community centers, and homeless shelters across the nation with people who lost their jobs in the food preparation industry. After all, nearly 1 in 4 children in the US live in households that struggle to put food on the table. Surely this is one of the most pressing needs to be met. The wage bill for hiring those 1.2 million people? $22 billion dollars.
And of course we have 800,000 unemployed youth to think about. Can we not put them to work for the public purpose? Can we not ask them to participate in mass reforestation projects, in clean-up and improvement of our public spaces, recreational areas, hiking trails and boardwalks? Can we not put them to work where they can gain valuable experience, start building livelong skill while they help the community? The wage bill for a year at $8/hr: $13 billion
Approximately 4 million jobs in direct job creation for a wage bill of $160 billion.
Yes, of course, of course, there are so many caveats and issues to address.
First of all, we have to double (or triple) these costs to account for materials. This means that $300 billion is the bare minimum President Obama should be asking for. But if we account for the secondary and tertiary job creation effects in the private sector after the multiplier effect from the newly created demand, we can calculate the total job creation effect from this small program that would be greater than 4 million. The extra income will be taxed and the deficit will take care of itself (even though as I have said before, deficit reduction per se should not guide policy decisions). Not only will this approach propel the economy forward, but in the end we will have a much greater employment effect to show for with a smaller stimulus than the one from 2009.
Now I would personally prefer if the President asked for another $800 billion and put 10 million people to work. I would also prefer that the public sector offer a lower wage than that of the private sector in order not to compete with and crowd out private sector employment. There are many other benefits to establishing a living wage floor in the public sector, which I have discussed elsewhere in my academic work.
The above calculations are used, because federal construction contractors are required to pay their workers no less than the locally prevailing wages. However, if the government were to create a new department that can be called, for example, “Transitional Public Employment” which directly employs in the public sector the workers for the above-mentioned projects and does not contract them out (the projects can be administered at the state or local level of course to increase efficiency), then it can create many more jobs for the same budget. If these jobs were created at an established based wage (Warren Mosler has proposed $8/hr; I prefer a slightly higher wage to bring it closer to a living wage for most states, e.g., $10/hr), then we can fund the wage bill for 7-9 million people.
Granted, these are rather simple calculations but they are based on actual Bureau of Labor Statistics data and give the bare minimum job creation we should be shooting for with a $300+ billion budget. Recall, we have 20 million people who are unemployed and underemployed, so our plans must be much more ambitious.
All the above does is provide a sense of perspective. We need the most “bang for the buck” that we can get. And direct employment of the unemployed in a manner that fits the job to the people and their skills to the needs of the communities is the only way to go.
So go ahead, Mr. President, hire the unemployed. Of course, you’ve also got to actually sit down with your agency planners and execute this plan. And for this, a lot of cleverness and imagination will be required. But do not despair we’ve done it before; we can surely do it again.
I can already hear the critics. “No, the government can’t do anything right. It is an administrative nightmare, really an impossibility, to organize these projects”. I’ve heard it all. But I have studied the New Deal and other massive large scale public investment projects around the world and in most cases, they were up and running in a few months and many were enormously successful. To the naysayers I can only respond “Argue for your limitations, and sure enough they are yours”. Do we really believe that Americans cannot do something if they want to do it?