Saturday, November 12, 2011

Stimulus -- What? Another One?

Yes, another one.

The biggest problem facing America right now is a screamingly high unemployment rate (9.0%, for the seasonally adjusted U3 – the most commonly reported figure, and 16.2% for the seasonally adjusted U6, which includes under-employed individuals and those who have given up on looking for work). This means there are about 14 million folk without jobs, and about 24 million folk who want more work but can’t find it. (The total civilian workforce is about 150 million.)

But unemployment isn’t just a crisis for those who've lost their jobs. It’s also an incredible burden on government finances. If the U3 unemployment rate were at 4.5% as it was during 1998 (it went as low as 4.0% in 2000, Clinton’s last year in office), then 7 million Americans would be off the dole AND paying taxes.

So raising employment rates ends up being a two-fer: we save on outlays to support the unemployed, and we get to tax their income as well. And, since being unemployed, especially for longer periods of time, is often very stressful (or worse), it is, at the end of the day, a three-fer.

So – how do we get these folks back to work? You, sir, the rather ochreous fellow in the back – do you have something you’d like to say.
More than two years after the ‘stimulus’ was enacted the American people are still asking the question, ‘where are the jobs?’ It’s time to close the book on the failed ‘stimulus’ era in Washington, and start working together to remove the government barriers holding back robust private-sector job creation and long-term economic growth. 

Excellent question, sir. You’ve stated the two most popular objections to a second stimulas package. The first is that the original stimulus didn’t work. The second is that the only way out of this mess to help the ballyhooed “job creators” do what they do best – create jobs.

Let’s take the second point first.

When an employer hires an extra worker, there is no question that the number of people on his payroll has increased. But hiring is very different from creating a new job in the society at large. Absent increased demand, that employer will have added to his company – but without affecting the number of unemployed at all.

Suppose you live in a town with one, crappy sandwich stop. You know you can run a better sandwich shop, so you start one up. And – as you guessed – you succeed. In fact, you do so well that you’ve got to hire yet another sandwich maker to handle all of your new business. You’ve now created one job – for your company.

The success of your sandwich shop, though, has come at the expense of your competitor. From a capitalist perspective, there’s nothing wrong with that. In fact, it’s a good thing, as people are getting more utility (in this case, the enjoyment of sandwiches) than they had before. But from the perspective of the owner of the other shop, it pretty much sucks. It sucks even harder for the sandwich maker he had to lay off – a good guy, nice to work with, always showed up on time. But without demand, that owner has to cut back, and the sandwich maker has to go.

So the crappy sandwich shop has lost one employee, and you’ve taken one on. The net employment effect to the town is 0.

Now imagine that a new employer shows up in town, and starts hiring folk. Now, the number of people who can afford to eat out at sandwich shops has increased. And most of them like your sandwiches, which mean you have to hire another sandwich maker. But this time, the crappy sandwich shop doesn’t have to fire anybody. And the net employment effect is now +1.

But you, as the sandwich shop owner, can’t really take credit for that job. You’re running a fine shop, but the key difference has been an increase in demand – which is due to the new employer! That’s the guy who should get credit, because not only has he hired people for his own company, but the spending of his employees has resulted in another employer – you – having to go and hire an additional employee

In the real world, that new employer is the federal government. When it engages in a stimulus program, it is adding demand to the economic system. And it’s that additional demand which gets people off the dole and back working and paying taxes.

Again, there’s nothing wrong, and a bunch right, when an employer adds his payroll. But hiring someone is fundamentally different from actually creating a job and reducing unemployment in society at large.

We'll tackle Speaker Boehner's second question tomorrow.

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