Putting Americans back to work

Robert Reich

Kai Ryssdal: Don't know if you've been keeping track, but we're now, what, nine-something minutes into the program and the words "debt limit" have not yet been uttered. So, needless to say, nothing new on that front. Politicians and pundits have been saying for weeks now that the debt limit debate is a real test of leadership for Congress and the president.

Commentator Robert Reich says they're failing an even more important test.

Robert Reich: The job recession shows no sign of ending. This isn't a temporary jobless recovery. It can no longer be blamed on supply disruptions from Japan, Europe's debt crisis, high oil prices, or bad weather.

No, this is something else -- and it's going to be with us for years unless Washington wakes up. We're in a vicious cycle in which consumers won't buy more -- because they're scared of losing their jobs and their pay is dropping. And businesses won't hire because they don't have enough customers.

Washington, meanwhile, is playing a game of chicken over raising the debt ceiling, from which will emerge a stop-gap measure putting off most long-term budget decisions until after the election. But no one from the president on down is coming up with a plan to get Americans back to work. And the lack of leadership is appalling.

It's not for lack of ideas: Exempting the first $20,000 of income from payroll taxes for the next two years to put more cash in people's pockets, for example. Recreating the WPA and Civilian Conservation Corps to put the long-term unemployed to work. Enlarging the Earned Income Tax Credit so lower-income Americans have more purchasing power. And allowing people who have lost part-time jobs to get partial unemployment benefits, so they too can buy.

What's lacking in Washington isn't ideas. It's political courage. The president doesn't think he can get a jobs plan through a fiercely partisan Congress, so he doesn't try. But that's no excuse. Average Americans are hurting, and the pain is not going away. The president needs to fight for their jobs and their wages. The battle over the deficit is a distraction from this far more important battle. He needs to explain to Americans what must be done. And put the burden on his opponents to explain why doing nothing is preferable.

Ryssdal: Robert Reich was secretary of labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America's Future. Our future includes David Frum in this space next week. 'Til then, tell us what you think -- click on this contact link.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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Perhaps a way to smooth the brain(less)waves sweeping wall street would be to prohibit e-trading & short selling. Yours ever so truly, Leonard

Warning: this is going to be long.

First, if any of you have access to the June 27th New Yorker, I recommend the article "A Dirty Business." You may not want to do it on an empty stomach though. Those who read it might then want to join in a dialog about regulation of Wall Street, and progressive taxation.

But to the subject of this thread.

For starters: there appears to be a belief among those who holler loudest for reducing government spending, and demand we cut taxes (or at least, keep them at where they are -- the lowest rates in most Americans' lifetimes) -- who are mostly the same people -- that money taxed simply disappears, and, that money spent by government is not part of the economy (or at least, does not contribute to the economy). If one stops and thinks about this for a moment one realizes it's arrant nonsense. How taxation, and government spending, affect the health of the economy rests on what and who is taxed and on how the money is used, and conversely, how the money would be used were it not taken by taxes.

Before going on it seems advisable to define "healthy economy." Some measure it simply by GDP, or the growth thereof. Others, by average income, or current corporate profits, or some other measure(s) dimly, if at all, related to the condition of human beings. I'm not one of those; to me, a healthy economy is one that does at least four things: encourages entrepreneurship so that jobs are continuously created; offers jobs to everyone seeking them which pay enough to live decently (and, insofar as possible, give at least a minimal sense of satisfaction to the worker); provides care for those unable to perform work worthy of compensation and reasonably insures against destitution of the elderly; and, does all this in ways that maximize human health, and demonstrate good stewardship. ("Stewardship:" taking care of the earth and its resources so that future generations can enjoy the same benefits.)

Also need to define what I mean in this essay as "true wealth:" not money, but useful things that money buys, and especially useful things the creation or use of which yield human satisfaction.

Everyone seems to agree that the recent (and to millions of Americans, current) recession is the worst since "The Great Depression." Everyone also seems to agree that so far at least, it hasn't been as bad as that one. From that point agreement ends; was it not so bad because of what government did, in spite of what government did, or just because it wasn't that bad? (Some would want to include "was it made worse by" in the question. I won't resist that.)

Unfortunately that question is impossible of a completely provable answer, because it speculates upon what would have happened but for -- and the line between what did and what would have happened is in almost all cases subject to debate. For example: Would AIG have failed had it not been rescued by public funds? Some say absolutely, and the evidence does seem strong. But, what would have happened had it been allowed to fail is far harder to pin down. Same for the big three car makers, and the big banks. Is there really any private commercial organization "too big to (allow to) fail?" Since so far we haven't let any, we don't really know. (Going forward, we need to prevent any private commercial organization from becoming big enough to ever again raise the question, but that's something for a different essay.)

We can however look at the post October 1929 experience for clues on what might or might not work. For that matter, we might also look at pre '29 history, for possible clues on what's happened this time.

Briefly on the latter: there developed a huge disparity in wealth; the top one or two percent owned and made vastly more than the bottom percent of folks -- and that "bottom percent" reached well up into double digits. Stock price-to earnings and price-to-assets ratios were very -- in many cases, ridiculously -- high. Speculation was rampant, and financial institutions were heavily involved in that speculation, with little if any restraint from government. There was growing homelessness Labor organizations had little power, and "unions" was a dirty word in most high government places. If that sounds familiar...it should!

But whatever the causes, no one denies that things got really bad, especially if one defines "bad" as the opposite of what I've posed above as "healthy." Banks quit lending. Entrepreneurship withered. Businesses closed (read, "jobs disappeared"). Bankruptcies skyrocketed. People quit buying. Indeed, that became a spiral. Again, sound familiar?

So, how did we get out of it?

The government, mostly but not entirely at the federal level, took several steps in the early 30's, some small, some dramatic, to keep people from simply starving to death (although some people still did). It also began scrutinizing financial and investment institutions and markets. But by the end of the 30's it had substantially slowed down on such efforts, and, (here I express an opinion perhaps not shared by all historians and economists, but I believe is held by a large majority of same) the Depression was not over.

By the early to mid 40's, it was, and the economy remained strong for many years.

Why? More to the point, was it "because of," in spite of," or "it just did?"

Again, to answer that with absolute certainty requires proving causation and dealing with "what would have happened otherwise?," so complete proof is impossible. We can however objectively describe what government did, and with at least some assurance, what commercial activities were caused thereby.

So, what did government do? That is, things relevant to the economy?

Here the answer is really short, and simple. It bought things, hired people, and provided for a significant redistribution of income. In doing this it took over an unprecedented share of the GDP (in those day, "GNP").

"It bought things." Some obvious: tanks, planes, guns. Some less obvious; clothing, tools, pencils -- you name it -- thereby guaranteeing markets for producers of all kinds of stuff.

"It hired people." A whole lot of people to use those things -- the tools and pencils, as well as the tanks and guns.

"It redistributed income." How did government pay for what they bought? Two ways: partly, by going into debt, and, to an unprecedented extent, through truly progressive income taxation. It taxed the rich! It also gave workers (read "unions") power never held before to bargain for a bigger share of the pie.

What happened then? In no particular order: banks, feeling confident that loan applicants could sell their products and pay back their loans, started lending. Entrepreneurs, big and small, assured of markets, began hiring. People, feeling confident they had paychecks coming, began (to the extent allowed by rationing) began buying. Big company sells airplanes on guaranteed contracts -- no risk of unused inventory. Big company needs parts; contracts with smaller companies, ditto. Smaller companies needs desk and tools and even pencils...etc., etc. etc. Bank extends credit; loans are paid. Again, a spiral, but this time, up. (Sadly, the things being bought were mostly to facilitate destroying things and killing people, but it's the buying, not the destroying and killing, that's relevant to the present subject.)

The recession, measured by breadlines and bankruptcies, ended. And, when rationing ended, things really took off. (Government then also invested in the education of millions of ex-servicemen and women, significantly raising the pool of educated labor.)

Here, 'twould be nice to call what followed "the result." Because of the difficulties of proving causation earlier stated, I'll not use that word, even though I do believe it applies. It is however provable what did follow: the longest stretch of prosperity, for all Americans, in history.

'Tis true, the richest didn't fare anything like the richest have fared the last ten years -- but they did o.k. But the poorest (at least to the extent not limited by still-rampant racial discrimination) did better than ever before, and we developed the largest and most well-off middle class in the history of the world.

Now, I'd like to pose something to think about: During the war the critical end products -- the tanks and planes and guns -- had absolutely no wealth-creating capacity. Once the weapon, or for that matter, any support materiel, was shipped overseas it not only stopped generating wealth, via usefulness in the domestic economy; the material that went into it was unavailable for domestic application, at least potentially producing scarcity that would raise prices and reduce production/consumption (reversing the economic spiral). (So -- we had price controls.)

But suppose the government today were able to spend anywhere near the share of GDP it occupied back then on stuff that, even after it was built or installed, did create wealth and domestic well being? Like a modern transportation system (think, not just highways and bridges, but buses and subways and high speed inter-city rail)? Or up-to-date and safe schools? Or state-of- the- art energy generation and transmission systems? Or decent medical care facilities so every American had real access to care when needed? Maybe even fully fund what's needed to maintain a great park system? What if it therefore bought stuff -- lots of stuff -- so banks knew entrepreneurs had no risk of unsold inventory, producers were confident of markets for their stuff, workers knew they'd have paychecks...??

Suppose it also reinstalled a truly progressive tax system, so that some of the richest 1 or so percent's money went less to playing the games they now play to amass even more money, generating no true wealth whatever, and instead were paying for things that do generate true wealth -- for every American? What might we have then?

I think about that a lot. I also mourn over the huge sums we pour down the rat hole maintained by the military-industrial complex Ike warned us against. A complex born of necessity in 1941, but whose products 70 years later provide incredible subsidies to make stuff that once again, once produced, not only generate no wealth, but take from the material available for domestic use, creating scarcity, raising prices, and pushing the spiral in the wrong direction.

Congratulations -- or commiserations -- if you've made it to here. It at least has forced me to put to paper something really important to me.

Cut Spending. Increase revenue.

Take one unemployed worker. Give him a job.

No more unemployment to this guy means cutting spending.

Collect income tax on the new job means increase in revenue.

Repeat. Repeat. Repeat....

I remember the days of the Depression quite well. The CCC were the people who built trails and bridges in our national parks, forests, refuges. The WPA were the public works people who built our highways and bridges. Our neighbor worked for the WPA...got $2 week plus food and shelter. Hard work but better than nothing. When WWII came along, folks where I lived on the westcoast went to work in the shipyards. The yards may have been run by private companies but the federal govt is the one who was paying for those ships. Ditto for the airplanes from the aircraft manufacturers. The federal govt put the entire nation to work. It didn't matter if the name on the building was Westinghouse, or GE or GM or Boeing, the only customer was the federal govt.

Mitchell, the reason labor is in surplus is because we've outlawed the market value of much of those skills. As we create mandates on employers and legal liability we're increasing the effective cost of that labor. As you know labor and capital is interchangeable, so as we artificially create low interest rates, my company is investing in labor saving capital equipment so that can produce more product with less people. So we as country are doing exactly the wrong thing to solve unemployment- we're making the cost of hiring people more expensive, and we're making the cost of replacing people cheaper. I agree with you on the uncertaintly thing, it's nonsense, they are certain that we have a business unfriendly environment. Capital flows to where it can be best used, and right now that is out of the country. People don't desire to labor, they desire the product of their labor. My idea of full employment isn't to force my wife to work outside the home just so we can pay our rent. I'd rather have her working to take care of our children.

Wait, 5 people to every job and we're concerned that government is going to hog all the precious labor?
As for this argument that companies are not investing in jobs because they are afraid of the tax code or that the system is fixed, the circumstances simply don't back that up. Taxes are lower than they were under Clinton. The system of regulation is virtually identical to the system of the last 20 years. Are we really supposed to believe that a company would rather do nothing with it's reserves simply because healthcare was modified? Obvious nonsense. If you're a corporation, you expand because you believe there is a market for your product. If there is 15% real unemployment, you don't see a potential market so you wait. It's that simple. Make work jobs (if you can call upgrading bridges and highways or retrofitting buildings to be more energy efficient "make work jobs") provide a consumer base, so companies feel it is worthwhile to service those customers.
The truth is, this isn't complicated. However, it IS politics.

While Reich is correct that the central point is jobs, he misses a larger point about where those jobs come from. Agencies like WPA and CCC had success because we were not dealing with decades of irresponsible borrowing; we should not assume their recreation will have equal success.
But more importantly, we must realize that governments don't create jobs; customers create jobs. If we want to put Americans back to work, let's spend our money on American-made products, instead of helping the Chinese economy grow.

Kevin, I agree with you that the WPA didn't work. When you think about it, it's crazy to suck up valuable resources (labor) during a time of scarcity to build hiking trails. If had allowed business to pay equivalent wages to workers instead for productive activity, we would have ended our first great depression years sooner. We also need to save and invest more, squirelling is the right response. After all, where do you think the capital in capitalism comes from- savings!

This country needs to expand it's tax base and in that sentence I agree with Mr. Reich. Where he and I diverge on opinions is the government approach to achieving that goal. He suggests, indirectly, that supply side economics is the answer (Give the people more money through tax breaks, WPA, etc.) and they will spend it. But the WPA didn't work in the 30's and it won't work now because frightened families squirreled away much of the money that they got in fear of things getting even worse.

I suggest working on the demand side of the equation. Reduce the fear and uncertainty in the economy by simplifying the tax code and then resisting the temptation to tinker with it to favor one group over another. Make sure the "Average American" can get the same fair shake in taxes as the high priced corporation.

When corporations know that the rules are fair and fixed. They will be able to feel confident that investing in today's economy is a good bet.

Too many corporations are investing in the economies of other countries because they know they are going to get a better return on their investment AND they won't have their profits heavily taxed.

This is a great commentary on the state of mind of our government. Funniest thing... Two days after I sent a letter to the "Opinions" page of my local newspaper, and the day before the letter was printed, I turned on my public radio station, to hear Robert Reich saying virtually the exact same words I wrote. Now won't those with the power and money to end this wake up and smell the coffee too?


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