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Employment

September 9, 2011

A full employment economy is the only healthy economy. Last week we visited the current employment depression via our forecast for headline and U-6 unemployment rates. This week, we’ll look at employment growth itself and what can and cannot work in getting jobs for a healthy economy. Plus the forecast. Grim forecast.

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We’re going to propose that in this day of high household debt and real asset deflation that the income multiplier be revised to a jobs multiplier. It is the number of jobs added, not the number of dollars that grows an economy as a function of our interdependence with each other.

And we’ll look at the special meaning of construction and government jobs. How do the loss of construction and government jobs means bad things for the total economy as measured by its most appropriate measure – employment?

The multiplier. What is it? Why has it broken down?

R.F. Kahn and John Maynard Keynes developed the concept of the Investment multiplier, which later came to be understood as the government spending multiplier. Keynes’ famous example from the General Theory, in its original and correct form:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it private enterprise on well tried principals of laissez-faire to dig the notes up again(the right to do so being obtained, of course, by tendering for leases of the note-bearing territory),there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

New investment exogenously introduced generates a multiple of the original investment, as companies organize and hire for the new event. This concept has been warped and adopted by conservatives to suggest that tax cuts always and everywhere stimulate economic activity. Rather than trying to tease out the sense of that, just realize that tax cuts that are not paid for, that is, government borrowing, may or may not stimulate the economy depending on the financial situation of the recipients. But borrowing by the government that is investment in even idle ventures such as in Keynes’ example will stimulate the economy, because it WILL create jobs and new spending in the private sector.

Simply look at the current experiment that we are running. The ARRA, also known as the Obama stimulus has one component that matched Keynes’ example. That was infrastructure spending. It had another that might be called a negative version, which was support to states to prevent layoffs of teachers, police and fire personnel. The ARRA spending on these two activities marks a line that the actual experience of the economy follows.

The chart in a recent piece by Paul Krugman displays government spending absent the transfer payments to the unemployed and others. It is dropping off a cliff as the ARRA expires.

“When the recession officially ended, spending was rising at an annual rate of around $60 billion; now it’s declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe 1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor in our growth slowdown.” Says Krugman. He adds, “Still, I guess the beatings will continue until morale improves.”

Borrowing from the future to make useful investments in our physical or social capital is productive on its face, and to our point here, when done in conditions of underemployment it produces a multiple of the investment by way of induced economic activity. New workers spend their incomes and thus increase the number of jobs in the consumer goods sector, which themselves prompt more jobs.

This is not necessarily true of tax cuts. Sorry, John Boenher. The profile of spending of a job-holder is quite different than the profile of spending out of marginal increase in monthly income of somebody already employed or already retired. Notice in our current experiment the absence of impact of the 2% payroll tax reduction, and particularly of the extension of the Bush tax cuts. Enormous expenditures, tiny impact. Maybe pays down debt, maybe buys a consumer discretionary made in China. The argument that this new consumption will induce big new hiring and investment is very weak, particularly when confronted with the evidence. It is particularly unclear how it can induce new investment in the context of the huge capacity now standing idle.

And how would we know if the jobs multiplier works?

Let’s use the construction sector as a proxy for investment goods workers to illustrate our point. We’ve dialed up several charts here. We have one from Calculated Risk showing the position of losses and gains in construction with respect to official recession calls. Pretty starkly predictive. Dropping before and through recessions, rising through recoveries. Another we produced shows the relation of construction jobs to total non-farm employment. Now construction is a relatively minor part of the whole jobs picture, but it does represent these investment impacts. Construction is almost by definition investment.

(click on image to get to the right and sad side)

Can we use government employment similarly? Yes. At least according to Demand Side. Since government employees are not involved in producing consumer goods, except on the margin, but are producing social capital – security in the case of police, safety in the case of fire departments, education in the case of teachers, social order in the case of courts, and so on. Even market structure in the case of regulators, and we’ve seen the impact of breakdowns in market structure in the absence of regulation.

I think we’ve all heard the claim that only the private sector produces jobs. I have anyway. And I’m left with nothing to say. What is your response when somebody says it only rains at night. Such an observation cannot come from experience or logic or even rationality. So, Where do you begin with your response?

The multiplier for state and local government spending is very high. Republican economic adviser Mark Zandi paid a heavy price for simply pointing this out. Zandi, an advisor to Republican presidential candidate John McCain, constructed a ranking of multipliers early last year in a defense of the ARRA, American Recovery and Reinvestment Act, the Obama Stimulus, for short. State and local spending came in over 1.5. While tax cuts to individuals came in around 1.0. It was down into the .30 range for some corporate tax breaks. At .30 every dollar of spending induces 30 cents of activity, a loss of 70 cents. Needless to say, perhaps, the reaction from the business constituency was large and nasty and swift. Zandi makes very few public pronouncements these days.

High household debt and asset price deflation mean the income multiplier is very low for tax cuts, but the jobs multiplier is unaffected. Government jobs, far from being a drag on such an economy, are actually quite potent as stimulus. Roads and teachers multiply jobs far faster than extra trips to the mall. The inverse is true, too, as we are about to see. Cutting government spending decreases jobs at a high rate. The multiplier works in the negative direction.

Let’s go through our graphs and see what the forecast is.

Chart 1 illustrates the relationship between construction jobs and total jobs, the same relationship that is displayed in CR’s chart with respect to recessions. In particular, please see … well, you can’t avoid seeing … the huge unprecedented drop in construction employment in the past three years. More than 2 million, 25% of construction workers, versus a drop of 7 million in total employment, say 5% of the employed. Total employment has leveled off a bit, and this, we believe, illustrates that construction workers are collecting unemployment and continuing to support the consumer sectors while they don’t work. But beware. The only reason the drop in construction workers was not greater was the support from the public sector in the ARRA. That support is petering out. As Paul Krugman calls it, we are entering the “austerity economy.”

Chart 2 illustrates the relationship with construction plus government workers. Here there is little predictive value. Government employment depends on tax revenues. These can lag recession and recovery. Most government employment is at the local level – roughly two-thirds — and local governments have had to cut teachers, fire and police to balance budgets being slammed by lower tax revenues, in many cases property tax revenues. Barely one-tenth of government employment is federal. Notice the total employment line leveling off while the combination of government and construction employment continues a steep decline.

Chart 3 is the first look at the forecast. Here you see a leveling off in construction employment in a manner not visible in the annual data. And you see our forecast extending that leveling off on a much more gradual slope than witnessed in the 2008-2010 period. Total employment declines somewhat more quickly, but again, not at the same steep rate as 2008-2010. Still, it is a decline and not the extension of the feeble improvements of the past eighteen months that most forecasters predict.

Chart 4 looks at the combined construction plus government workers, a rough and ready combination of jobs with the biggest multipliers. Here you see steepness. The decline in government workers is projected by us to continue apace. This decline is going to be the biggest drag on total employment, both in absolute terms and in its multiplier effect. We have the potential short-term shocks of 100,000 postal workers getting laid off and a potential bug from teacher layoffs that may have escaped by way of the seasonal adjustment to previous counts.

Why does total employment not drop in our forecast at the same rate or even steeper? Again the total reflects the support to the consumption sector by way of government transfers, in unemployment, social security, food stamps, and other safety net spending. Precisely the kind of spending that makes deficits unavoidable, even as government is cut.

Following our charts is one from the Center on Budget and Policy Priorities, displaying three years of state and local job loss. It is accelerating, and now is hitting 345,000 per year. The majority of the losses in the last year have been in education. Cutting teachers at a record rate.

Forecast

So the forecast is for down. It is not the crash we saw with the Great Financial Crisis, because debt-driven demand is not going to drop by 20 percent of GDP and investment in the real economy won’t go away overnight, since it has already gone away. But government jobs are going to wither in the climate of austerity, in the madness of austerity.

Employment will grow again when it is truly targeted. We have plenty to do and plenty of idle people and capacity which can be trained up to do it. The deficit is over a trillion dollars. If a third of that amount went to direct employment or infrastructure replacement repair and construction, there would be no employment problem and no economic malaise. Profit would quickly return to drive private sector investment. Yes, there would be inflation, but that would be the major cost of getting going. And inflation has the benefit in countering high debt levels. .

Not using the idle capacity in labor and other productive resources when the climate crisis is looming over us is the ultimate tragic irony.

You will notice our forecast contains no adjustment for the much-anticipated jobs speech by the president tomorrow. We do not expect substance. The president may recover his political fortunes, but we doubt there will be real movement in the economy.

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One Comment
  1. David Lazarus permalink

    One reason the jobs multiplier will not work as well is leakage. If there is a large sum for road improvements which can be lost a number of ways. High bonuses for contractor owners, which does not get fed back into the economy. Second if much of the costs are leaked to cheaper overseas suppliers that does not help either. There are ways of getting around this and that is to give the money to local communities for home insulation, if the materials are pre-sourced as domestically produced, then the only cost to the community would be labour and some transport and admin costs. This would minimise the leakage to the scheme overall. Extending unemployment will be effective as they are likely to spend most of the income. Targeting support for low income groups will be most effective but does have the look of socialism for some.

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