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A Fix For Today, and Tomorrow — Final Response
January 2, 2011
With Responses From
Jan 2, 2011
7 Min read time
Full employment and the welfare state.
Creating an economy with an abundance of decent employment opportunities—a “full-employment” economy, as I have used the term—is a matter of basic ethics. Without full employment, the fundamental notion of equal rights for everyone—the core idea emanating from the Enlightenment and elaborated upon in both the liberal and socialist traditions—faces insurmountable obstacles in practical implementation.
Figuring out how to create and sustain a full-employment economy inevitably requires serious engagement with, among other things, technical issues in economic theory and policy, high-brow political theory, and ground-level political fighting. Ruy Teixeira’s excellent comment provides a clear sense of the combustible brew of political challenges facing us, especially now, with employment conditions worse than at any time in the past 70 years. It is therefore no surprise that the eight respondents have delivered a wide array of arguments. I will focus on five of the major themes they raise.
Short- and Long-Run Policies
The comments by Michael Piore and Reihan Salam suggest that I should clarify the interrelationship between employment-generating policies for the short run, such as how to design an effective second-round stimulus program, and my primary concerns in this essay, which are longer-run strategies for sustaining full employment over time. My long-run full-employment proposals focus on changing the economy’s structure. This begins with significantly expanding investments in clean energy and education, and commensurately reducing spending on fossil-fuel energy and the military.
But we can begin to pursue this long-term agenda right now, and in a manner that addresses short-term needs. For example, making investments today in raising the energy efficiency of our existing building stock is the fastest way to re-employ the two million construction workers who have lost their jobs since 2008. The federal government also needs to continue closing the huge budget gaps faced by state and local governments due to the recession, in order to prevent, among other things, massive layoffs of teachers, school-bus drivers, and cafeteria workers. Precisely because clean energy and education investments are so central to expanding individual opportunity and protecting the environment, a stimulus program heavily weighted toward these priorities will be money effectively spent, in both the short and long runs.
Job Quantity and Quality
Some of the comments address the connection between the quantity and quality of jobs under full employment. In my view, many pieces are needed to raise the overall quality of employment opportunities, including a national minimum wage set at the highest possible level without threatening to raise unemployment, which is probably around twelve dollars an hour. A twelve-dollar minimum wage would substantially improve conditions for, among others, the care-sector workers that Eileen Appelbaum highlights in her valuable discussion.
However, the most effective means of raising job-quality standards in the United States is sustained full employment itself. Under full employment, workers’ bargaining power will rise. This was exactly Marx’s point 160 years ago in his chapter on the reserve army of labor, and this was equally the lesson of the late 1990s, when wages rose sharply in the United States, especially for those at the lower-end of the pay scale, as unemployment fell below 4 percent.
In a full-employment economy, unions also gain increased leverage as representatives of workers’ interests. Business owners typically employ, as needed, lawyers, accountants, public-relations firms, security guards, and scab laborers to enhance their bargaining strength, in addition to the leverage created by the reserve army outside the office or factory door. Working people deserve some effective countervailing representation. Thus, unlike Lane Kenworthy, I do not see full employment or strong unions as alternative routes for achieving rising working- and middle-class wages. Rather, the two are complementary. This is especially true since, as the Swedish example shows, strong unions can play a central role in managing inflationary pressures in an economy committed to full employment.
Full Employment and the Welfare State
Kenworthy presents a useful series of graphs showing that twenty relatively rich countries frequently deliver decent work conditions and living standards to low-income people without maintaining a full-employment economy. Following from these results, Kenworthy proposes expanding the Earned Income Tax Credit (EITC)—the U.S. government program that provides supplemental income for low-wage workers and their families—as a “back up” alternative to full employment.
I agree that making the EITC more generous is a highly desirable goal. But the benefits of an expanded EITC vary dramatically depending on the proportion of low-income workers who have full-time or nearly full-time jobs. This was made clear in recent research by my coworkers Jeannette Wicks-Lim and Jeff Thompson at the Political Economy Research Institute. They measured the benefits to low-income families of a greatly expanded EITC along with a $12.30 minimum wage under the actual employment levels from 2005–2007. They then examined how much the benefits to families would increase if all low-wage workers with part-time jobs were raised to full-time. They show that raising all low-wage workers to full-time, combined with the EITC expansion and minimum wage increase, raises nearly four times more families above a basic-budget income line than the expansion of the EITC and rise in minimum wage implemented under actual labor market conditions. In short, an expanded EITC and similar measures should be seen as supplements to full employment, not as substitutes.
We can begin to pursue the long-term agenda right now, and in a manner that addresses short-term needs.
Globalization and Trade
Eileen Appelbaum challenges my contention that the United States can achieve full employment without having to reduce its trade deficit much below the current level of about 4 percent of GDP. Aside from the fact that in the late 1990s U.S. unemployment fell below 4 percent while operating with a trade deficit equivalent to the current level, there is a more general issue at play. That is, most other countries, especially developing countries, benefit more from selling products in U.S. markets than the U.S. economy is harmed by running trade deficits at current levels. The U.S. dollar remains the world’s most desirable currency, which enables the United States, uniquely, to continue importing more than it exports without having to undertake serious adjustments to close that gap. The United States should pursue industrial policies to promote innovation and growth in manufacturing, especially around clean energy and related environmental projects. But this does not mean it should be committed to expanding domestic job opportunities by reducing opportunities in, for example, Vietnam, Kenya, and Guatemala.
That said, Jayati Ghosh contributes an important dimension to this debate, by showing why developing economies, including successful exporters such as China and India, should shift their growth strategies away from relying on exporting to rich countries. Ghosh argues that developing countries should instead raise wages and improve working conditions among the still-overwhelming majority of poor people within their borders. This will lead to growing domestic markets in the developing world, enabling working people there to buy the products they themselves produce.
While Ghosh’s wage-led growth model for developing countries is compelling, it will not be implemented overnight. In the meantime, developing countries will continue to rely substantially on selling their products in U.S. markets. But this need not pose major difficulties within the United States precisely because we are capable of achieving full employment while maintaining a trade deficit at roughly the current level. I therefore agree with Ghosh that “the current atmosphere of animosity between workers in developed and developing countries is both unnecessary and counterproductive.”
Governments Can Succeed and Markets Do Fail
Andrew Morriss and Roger Meiners provide a healthy reminder that governments at all levels in the United States are frequently incompetent or corrupt in managing the economy. But their arguments are so one-sided as to weaken the credibility of the valid concerns they raise.
In fact, government initiatives are frequently successful, sometimes emphatically so. Government programs in the Unites States have produced, among other things, a large number of outstanding public universities and a Social Security system that has succeeded in dramatically reducing poverty among the aged and disabled. Research by the late Vernon Ruttan, a leading authority on the economics of technological change, shows how the public sector has played “an important role in the research and technology development for almost every industry in which the United States was, in the late twentieth century, globally competitive.” Ruttan points to the aerospace, computer, and Internet industries as three epoch-defining cases. And just as surely as government action has frequently been effective, markets do regularly fail. The classic book Manias, Panics, and Crashes by the late Charles Kindleberger makes clear that, throughout the history of capitalism, unregulated financial markets have persistently produced instability and crises.
Morriss and Meiners assert, “Creating well-paying jobs is less difficult than Pollin would have us believe.” But they offer no explanation for the now nearly 40-year trend in which average wages in the United States have stagnated while average labor productivity has doubled. They also denounce the government’s efforts under Presidents Nixon, Ford, and Carter to promote full employment. However, during 1976–79, under Ford and Carter, job creation coming out of the 1974–75 recession grew at a 4 percent average annual rate. Such employment growth is unmatched in the post–World War II era. If we could achieve a 4 percent rate of employment growth now, the official unemployment rate would be under 5 percent in time for the 2012 election. Surely there are some positive lessons we might extract from that experience, the last time the federal government prioritized full employment.
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