Why a high employment economy is the best tool for fighting poverty.
By Robert Pollin,
Boston Review
Posted on February 4, 2011
Employment conditions in the United States today, in the aftermath of the 2008–09 Wall Street collapse and worldwide
Great Recession, remain disastrous --
worse than at any time since the Depression of the 1930s.
Since Barack Obama entered office in January 2009, the official unemployment rate has averaged more than 9.5 percent, representing some fifteen million people in a labor force of about 154 million. By a broader definition, including people employed for fewer hours than they would like and those discouraged from looking for work, the unemployment rate has been far higher --
16.5 percent, on average. Still worse, if we count people who have dropped out of the labor force, unemployment would rise to nearly
20 percent, or 30 million people, roughly twice the combined populations of New York, Los Angeles, and Chicago.
The first major act of the Obama administration was the economic stimulus -- the
American Recovery and Reinvestment Act -- which focused on fighting the recession and mass unemployment. This $787 billion program of tax cuts and government spending measures aimed to brace the economy’s rickety floor and thereby preserve existing jobs as well as generate new ones in both the public and private sectors. The stimulus program did succeed in preventing a full-scale 1930s-style depression. A
Wall Street Journal survey found that 75 percent of economists agreed that the stimulus succeeded in reducing unemployment. A detailed study by Alan Blinder, a Princeton economist and former Federal Reserve Vice Chair, and Mark Zandi, Chief Economist at Moody’s Analytics and an advisor to John McCain’s Presidential campaign, found that unemployment would likely have risen to nearly 17 percent in the absence of the stimulus.
But the stimulus has clearly proven inadequate for fully reversing the effects of the Wall Street collapse. Combined with the huge decline in tax revenues tied to the recession, the stimulus spending has also generated federal fiscal deficits of a magnitude the United States hasn’t seen since World War II -- around $1.4 trillion in 2009 and 2010, or 10 percent of
GDP each year. Bringing the U.S. economy, along with most of the rest of the world, out of the deep ditch into which Wall Street has shoved it will clearly be a long, hard struggle.
New rounds of major job-generating measures are crucial to the task of reversing the recession and driving down unemployment. These measures will involve both government spending and, equally important, financial-market regulations and incentives intended to force credit markets away from hyper-speculative practices and toward productive, high-employment investments. Such proposals fly in the face of the rising mantra in Washington and Europe in favor of fiscal austerity and business deregulation.
But beyond the challenges in advancing such short-term programs, there is a broader and longer-term goal that is not even on the agenda: creating and sustaining a full-employment economy in the United States. Especially at this historical juncture, as we attempt to grope our way out of the Great Recession and onto some kind of new growth trajectory, we need to be clear on the centrality of full employment as a policy goal. That is, we need to think about what exactly we mean by full employment; on why, properly defined, full employment is so fundamental to building a decent society; and on what kind of longer-term policy innovations will be needed both to get the U.S. economy to full employment and, once there, to stay. Success in answering these questions will necessarily engage large numbers of people coming at the issue from a wide range of perspectives. My proposals here are aimed at energizing this broader debate in fresh and constructive directions.
Why Full Employment?
There are good reasons to seek full employment -- good reasons for individuals, families, and the economy as a whole. Equally important, as we will see later, creating a full-employment economy can be joined effectively with another fundamental policy aim: ending our dependence on fossil fuels and creating an economy powered by clean energy.
From the individual’s standpoint, whether one can get a job -- and if so, whether that job offers decent pay and benefits, a clean and safe environment, and fair treatment for oneself and one’s coworkers -- matters a lot. Money is the most obvious consideration. But beyond the money, a job is also crucial for establishing a person’s sense of security and self-worth, health and safety, ability to raise a family, and chances to participate in the life of the community.
An abundance of job opportunities is also crucial to an economy’s overall health. As employment levels rise, so does total purchasing power in the economy since people have more money in their pockets to spend. This means more buoyant markets, greater business opportunities for both small and large firms, and strong incentives for private businesses to expand their operations. An economy that supports an abundance of decent jobs will also promote individual opportunity and equality because this kind of economy offers everyone the chance to provide for themselves and for their families.
For these reasons, a high-employment economy is also the best tool for fighting poverty. We saw this vividly in the United States in the late 1960s when the Kennedy-Johnson tax cut and Vietnam-related government spending brought unemployment below 4 percent. This high-employment economy brought rising wages across the board, better working conditions, and less job discrimination against women, African Americans, and other historically marginalized populations.
An economy operating at full employment has the capacity to deliver great individual and social benefits. Why then doesn’t everybody agree that this should be a fundamental goal of public policy, with debates focused on the narrower question of the most effective means of achieving it?
In fact, after the Great Depression and World War II, creating full-employment conditions was the focus of economic policy throughout the world. The level of commitment to this goal did vary substantially according to country and political parties in power, but it was not until the high-inflation period of the 1970s and subsequent neoliberal revolution -- marked most decisively by the elections of Margaret Thatcher as U.K. prime minister in 1979 and Ronald Reagan as U.S. president in 1980 -- that full employment was supplanted as the centerpiece of economic policy. The new framework was friendlier to Wall Street and global capitalists. Neoliberals advanced macroeconomic policies aimed at maintaining low inflation rather than full employment; reducing the public sector, including welfare-state programs; eliminating or weakening pro-worker labor laws; eliminating barriers to international trade; and deregulating financial markets. Coming out of the Great Recession, our challenge is to create a new, workable full-employment policy, not simply to patch up and restart the failed neoliberal model.
Defining full employment is a more difficult task than one might imagine. This point was pounded into me when I was working in Bolivia in 1990 as part of an economic-advising team led by Keith Griffin of the University of California, Riverside. Griffin’s assignment was to develop a program that would address the human devastation wrought by the “shock therapy” program designed by economist Jeffrey Sachs to end the Bolivian hyperinflation of the 1980s. Sachs’s neoliberal approach consisted of massive cuts in government spending and public-sector layoffs.
Griffin asked me to examine employment policies, so I paid a visit to the economists at the Ministry of Planning. When I suggested that we discuss the country’s unemployment problem, they explained that the country had no unemployment problem. I asked about the people begging, shining shoes, or hawking batteries and Chiclets in the street below the window where we stood. The economists responded that those people were employed.
In the United States today, as in Bolivia in 1990, full employment has to be understood more precisely. It is not simply a matter of everyone spending their days trying to scratch out a living somehow. A workable definition of full employment should refer to an abundance of decent jobs. Defined in this way, a policy of full employment is most certainly a challenge to the prerogatives of capitalists and the logic of neoliberalism. How much of a challenge has been widely debated.
The Challenge to Capitalism
Ever since Karl Marx published his magnum opus,
Capital, in 1867, debates about unemployment have centered on whether it is an inevitable feature of a capitalist economy; whether full employment with decent wages and working conditions is achievable; and, if so, at what cost.
Much depends on how people understand the sources of unemployment. Debates typically identify three types of unemployment: voluntary unemployment, when people are out of work because they choose to be; frictional unemployment, when people are between jobs, receiving job training, or relocating; and involuntary unemployment, when people are making significant but unsuccessful efforts to find work. In principle, unemployment becomes a serious concern only when it is involuntary, but the distinctions between the three categories are not always evident, and the major theorists of unemployment have defined the boundaries in different ways.
Marx concluded that a high level of involuntary unemployment plays a significant role in the operations of a capitalist economy. In the justly famous 25th chapter of Volume I of Capital, “The General Law of Capitalist Accumulation,” Marx argued that in a free market–capitalist economy, capitalists gain higher profits because of their relatively strong bargaining position with respect to wages. Workers typically have less power because they have no other means of sustenance if they fail to get hired. Marx stressed that workers’ bargaining power diminishes further when unemployment and underemployment are high because the employed can be readily replaced by the “reserve army” of the unemployed outside the office, mine, or factory gates. When an economy is growing rapidly enough to deplete the reserve army, workers will utilize their increased bargaining power to raise wages. But profits are correspondingly squeezed and businesses invest less in new projects. Job creation falls, which, in turn, replenishes the reserve army.
There is an unlikely parallel on this issue between Marx and the late conservative economist Milton Friedman. Like Marx, Friedman held that high unemployment results when workers can flex their bargaining muscles. Friedman made this claim by looking at a labor market without unions or pro-worker government regulations such as minimum-wage standards. In that context Friedman found a perfect balance: market competition forces businesses to hire workers at a wage exactly equal to the amount that they are worth. If wages are too low, businesses will not be able to attract qualified employees, and will fail. If wages are too high, businesses will see profits disappear, and will fail. In Friedman’s scheme anyone who chooses not to work at the appropriate wage is voluntarily unemployed. As such, for Friedman, the “natural rate” (a term he coined) of involuntary unemployment is always effectively zero in a free-market economy.
So, for Friedman, strong labor unions and minimum-wage mandates are themselves the most basic barriers to a full-employment economy. This Friedmanite argument has been the defining theoretical proposition of the neoliberal approach to unemployment. It represents a dramatic reversal of the perspectives that were dominant in the aftermath of the 1930s Depression and into the 1970s.
Those once-ascendant conceptions were associated with the economist John Maynard Keynes. Keynes would have agreed with Friedman that full employment -- that is, zero involuntary unemployment -- is attainable under capitalism. But Keynes, who developed his argument during the Depression, understood the causes of mass involuntary unemployment in dramatically different terms. He blamed insufficiency in total spending in the economy -- private investment, household and government spending, and imbalances of imports and exports -- for mass involuntary unemployment. Keynes believed private investment decisions were especially important because they were subject to wide fluctuations at any given time, based on what he called private investors’ “animal spirits.” Animal spirits could fall for a number of reasons, including rising wages, import competition, or the bursting of a stock market bubble. Whatever the immediate cause of declining animal spirits, the impact would be a contraction of private investment. This in turn would produce mass involuntary unemployment.
Keynes believed that well-designed policies could counteract this tendency and thereby create and sustain full employment under capitalism. The Keynesian approach centered on macroeconomic policy. This included the idea that central governments could use fiscal policy to produce deficits and surpluses, and monetary policy to adjust interest rates and the availability of credit. The effective combination of fiscal and monetary policy would be used to maintain a level of overall demand in the economy that supports full employment.
Keynes’s arguments had a powerful impact. The Keynesian toolkit was critical to the full-employment goals of governments in advanced capitalist societies from the end of World War II until the rise of neoliberalism.
During this time Friedmanites on the right naturally challenged the Keynesian approach. But so did leftist critics, most forcefully Michał Kalecki, a Polish socialist economist and contemporary of Keynes. Kalecki argued that Keynes gave us sufficient technical understanding of capitalist economies to devise policies for sustaining full employment as well as business profits. But Kalecki suggested that the fundamental obstacles to full employment under capitalism were political, not technical: even though businesses could gain from full employment, they would nonetheless oppose it because it would embolden workers excessively, threatening capitalists’ control over the workplace, the pace and direction of economic activity, and even a society’s political institutions.
These arguments led Kalecki to a striking conclusion: full employment was achievable under capitalism, but the most effective way of doing so while maintaining capitalists’ social and political dominance was through fascism. Whether or not Kalecki was correct, he underscored dramatically the social and political challenges tied to building a full-employment economy.
The Challenge of Inflation
The Swedes developed the most effective answer to date to Kalecki’s challenge -- a non-fascist policy that can manage the conflicts that inevitably emerge between workers and capitalists in a full-employment economy. Their success turned on a solution to the most common argument against trying to operate an economy at full employment: the fear of excessive inflation.
In 1958 the British economist A.W. Phillips observed a long-term relationship between unemployment and inflation. Inflation, he found, goes up when unemployment goes down, and vice versa. This relationship has come to be known as the “Phillips Curve.” The logic behind the Phillips Curve follows readily from Marx’s idea that workers are able to bargain up wages when unemployment is low, causing profits to fall, which in turn means less business investment and a new round of rising unemployment. But Phillips suggested that business profits need not be squeezed at high employment: businesses could pass on higher labor costs to customers through price increases, causing a wage-price spiral, i.e. continuing inflation.
Indeed, it was the failure of the advanced capitalist economies -- in North America, Western Europe, and Japan -- to contain inflation in the 1970s that allowed the full-employment goal to be eclipsed by Friedman’s natural-rate theory. Economic policymakers worldwide became convinced that inflation resulting from low unemployment had become severe and uncontrollable.
But this global march toward Friedmanite economics misread the primary cause of high inflation in the 1970s, which was not low unemployment, but the two oil price shocks: the three-fold jump in 1973–74 and a similar spike in 1979. Nonetheless, those who would build a full-employment economy must address the issue of inflation.
Sweden is one country that did so. Its successful long-term model emerged from the work of the economists Rudolf Meidner and Gösta Rehn. Meidner and Rehn recommended using macroeconomic policy to stimulate overall demand in the economy and thereby expand the number of decent-paying jobs. But they understood that unacceptably high inflation could result if stimulus were the only tool for achieving zero involuntary unemployment. So they also favored limiting such policy interventions and settled for a more modest unemployment target of 3 percent. They believed some slack in the economy would keep upward wage pressure from producing headlong inflation.
Alongside restraints on job-stimulus policies, Meidner and Rehn supported the government’s active labor-market interventions to help as many as possible of the remaining unemployed workers into jobs. These interventions included travel and relocation allowances, retraining programs, and other measures targeted at mopping up frictional unemployment.
The policy functioned with the cooperation of working people and their union representatives. Sweden’s main unions accepted restrictions on job stimulus and their own wage demands in order to help fight excessive inflation as full employment approached. Sweden thus succeeded at maintaining unemployment at an average rate of 2.1 percent between 1960 and 1989. Inflation averaged a fairly high 6.7 percent, but this period includes the consequences of the 1970s’ oil shocks. The shocks no doubt undermined the effectiveness of Sweden’s approach, but the model worked for many years because of the unions’ restraint in wage bargaining.
This approach could not be transplanted intact into the U.S. economy today, since the current U.S. labor movement is far less powerful than the Swedish movement of the 1960s–1970s. But the lessons from Sweden for American labor are more about general principles than specific historical conditions. The U.S. labor movement should take it upon itself to design a workable full-employment program today, recognizing in that program the importance of inflation control. The unions should be specific as to how they could help achieve and maintain full employment with low inflation, building in relevant methods from the Swedish model. Through such measures, the representatives of U.S. workers could bring significant new voices to the debate over inflation as well as employment, rather than giving free rein over the management of inflation to the Federal Reserve and Wall Street.
Yet even if the Swedish model were modified to American realities, it is not clear that it would work. Despite their success, the Swedes largely abandoned their commitment to a full-employment economy in the early 1990s, shifting their priority much more toward inflation control. Between 1993 and 2006, unemployment rose to an average of 7.6 percent, while inflation fell sharply, to an average of 1.5 percent. Economist Helen Ginsburg and social worker Marguerite Rosenthal attribute the shift to “the growing power of Swedish business, pressures from globalization and the race to join the European Union, with its requirements for low budget deficits and inflation but none for low unemployment.” Meidner himself explained that as Sweden prepared to apply for E.U. membership at “the beginning of the 1990s . . . the Social Democratic government explicitly changed its priorities. The main objective was shifted from full employment to price stability.” The question, then, is whether the model has become unworkable in our contemporary globalized economy.
The Challenge of Globalization
Actually, the issue for the United States (and Sweden) today is not globalization
per se, but the neoliberal policy framework that has defined the process of globalization for the past 35 years.
In the U.S. labor market, neoliberal policy has exposed working people to the credible threat of increased competition from workers in poor countries. Effectively, the reserve army of labor for jobs done by U.S. workers has expanded even though Americans consume -- and will continue to consume -- trillions of dollars of domestically manufactured products. The U.S. economy remains a nearly $15 trillion operation, employing 140 million people. But U.S. workers could increasingly be supplanted by workers in poor countries willing to accept much lower wages. Employers can tell workers, “If you won’t accept a pay cut, we’ll move.” Or, “If you want a union, fine. We’ll start buying what you make from China.”
The drop in average wages since 1973 suggests the seriousness of this problem. In 2009 the average non-supervisory worker in the United States earned $18.62 an hour (in 2009 dollars) -- 7 percent below the 1972 peak of $20.20 per hour (also in 2009 dollars). But this is only half the story. While wages fell, average labor productivity in the United States rose by 105 percent. In exchange for being twice as productive as they were in 1972, American workers took a 7 percent pay cut.
Unless our policy environment changes dramatically, these threat effects will become more pronounced. This point was brought home in a 2006 Foreign Affairs article by Blinder, the Princeton economist. Blinder argues that 20–30 percent of U.S. jobs (up to 40 million jobs) can be performed by workers in poor countries. He includes all manufacturing jobs as well as what he calls “impersonal service” jobs, which can be performed over the Internet -- the work of, among others, back-office accountants, lawyers, engineers, architects, and laboratory technicians, as well as their support staff. This doesn’t mean that anything like 40 million jobs will actually be outsourced. The point is that the employers of these 40 million workers gain leverage over wages and working conditions from credible threats to outsource.
But while outsourcing is a critical challenge, globalization need not take a toll on high-quality domestic employment. Despite intense pressures from globalization in the late 1990s, unemployment in the United States fell below 4 percent for the first time since 1969. The long-term decline in wages then temporarily reversed itself. Workers attained better health and pension benefits. The poverty rate declined. The patterns we observed in the 1960s quickly began to reassert themselves.
The experience of the late 1990s doesn’t provide a usable model for full employment since the economic growth that drove employment was based on an unsustainable stock-market bubble much like the housing bubble that we’re still recovering from. But it does suggest some important lessons.
One notable feature of the 1990s experience is that the United States reached near-full employment while the share of immigrant workers in the labor force was roughly equal to today’s. This puts lie to the increasingly vocal perspective that the current jobs crisis is a result of immigrants taking jobs that should be filled by native workers and suggests that immigration would not be a barrier to full employment.
Another misconception about unemployment is that it is increased by the trade deficit -- the value of imports minus exports. The current U.S. trade deficit is similar to that of the late 1990s. Yet now, one popular, bipartisan job-creation strategy calls for increasing exports of U.S. goods and services while importing less. This would lower the value of the U.S. dollar relative to the euro, yen, British pound, and yuan, making U.S. exports cheaper on foreign markets and foreign imports more expensive in the United States. Of course, other countries are equally interested in creating more jobs at home by increasing exports and lowering imports and are prepared to retaliate against U.S. actions to lower the value of the dollar. The most likely effect of such efforts is a series of currency skirmishes between countries whose workers would see little benefit.
The lesson is clear: we can approach full employment with rising wages even after allowing for current levels of global integration, immigration, and trade deficits. The problem, then, is not globalization itself but the absence of a full-employment agenda designed to address the challenges of globalization.
Creating Jobs: Education and Clean Energy
What kind of full-employment policy could work in our globalized age?
At its foundation, such a policy would channel more public and private investment in the United States toward those industries that efficiently generate an abundance of good domestic jobs. Using data I developed with colleagues at the Political Economy Research Institute (working directly from the industrial surveys and input-output tables of the U.S. Department of Commerce) we can ascertain the job-creating effects of spending in various sectors of the U.S. economy. Consider four possible areas of investment: education, the military, clean energy, and fossil-fuel energy. By a significant margin, education is the most effective source of job creation among these alternatives -- roughly 29 jobs per $1 million in spending. Clean-energy investments are second, with about seventeen jobs per $1 million of spending. The U.S. military creates about twelve jobs, while spending within the fossil-fuel sector creates about five jobs per $1 million.
These figures combine three categories of job creation: direct, indirect, and induced. Direct jobs are those created by an activity itself, such as building a wind turbine, hiring school teachers, opening a military base in Afghanistan, or transporting oil from the Persian Gulf to Houston. Indirect jobs are those generated by businesses providing equipment to support the direct activities, such as steel manufacturers supplying a wind turbine manufacturer, or a paper company providing office supplies to a school, military base, or an oil company’s corporate headquarters. An induced job is generated when people who are newly hired -- either through direct or indirect job creation -- spend the money they have begun to earn. This is frequently termed the “multiplier effect” of direct and indirect job creation. Small businesses, in particular, benefit from such multiplier effects thanks to the market opportunities that direct and indirect job creation can generate -- think of a lunch counter at a wind-energy work site.
Two main factors account for the differences in job creation across sectors. The first is relative labor intensity, i.e., how much of the investment is expended on hiring as opposed to plant. For example, a clean energy–investment program utilizes far more of its overall budget on hiring than on acquiring machines, supplies, property (either on- or offshore), and energy itself. The second factor is relative domestic content per overall spending. The clean-energy sector relies much more than the fossil-fuel sector on economic activities taking place within the United States -- such as retrofitting homes or upgrading the electrical system -- and less on imports. While average wages in both education and clean energy are 10–20 percent lower than those in the military and fossil-fuel sectors, the absolute numbers of jobs created in education and clean energy are so much higher than in the other sectors that these investments produce far more high-paying as well as low- paying jobs.
What would happen if we transfer 25 percent of total spending in the military ($690 billion) and fossil-fuel ($635 billion) sectors -- that is, about $330 billion per year -- in equal shares to education and clean energy?
Before assessing the effect that this shift in spending priorities would have on employment, we should also recognize its crucial and complementary political and environmental benefits. Reducing the Pentagon’s budget by 25 percent would return military funding to its pre-Iraq and Afghanistan levels, which is consistent with the Obama administration’s stated commitment to ending those wars while otherwise maintaining the military at roughly the level that prevailed at the end of the Clinton presidency.
Meanwhile, cutting spending on fossil fuels and transferring it to clean energy furthers the imperative of controlling carbon-dioxide emissions to fight global climate change. If we are going to meet the widely recognized minimum reduction target necessary to stabilize average global temperatures at acceptable levels -- 80 percent below our 2000 level by 2050 -- we will need to reduce fossil-fuel spending by far more than the $165 billion per year proposed here.
Finally, transferring that same amount each year into spending on education could, for example, drop the average classroom size nationwide from 23 to nineteen students, increase the average financial-aid award for college students by $1,500, and enable substantial improvements in school buildings. There are many appropriate combinations of these and other priorities.
Returning to employment effects, by redirecting $330 billion annually from the military and fossil-fuel sectors to education and clean energy, we would create about 4.8 million more jobs assuming no change in total spending. The job expansion would be across all sectors and activities: there would be new opportunities for highly paid engineers, researchers, lawyers, and business consultants as well as for elementary school teachers, carpenters, bus drivers, cleaning staff at hotels, and lunch-counter workers at wind-energy construction sites.
With 4.8 million new jobs, the present unemployment rate would decrease by about one-third, from 9.6 to 6.5 percent. This kind of large-scale shift in spending will not occur rapidly enough to affect unemployment right now, but it would change the overall employment picture over the next few years. For example, assume that through some combination of normal recovery and interventions from the Obama administration and the Fed the unemployment rate would fall over the next two years to 7 percent. If a shift in spending created 4.8 million additional jobs, that 7 percent unemployment rate would fall to about 3.9 percent. Remember that when unemployment dropped below 4 percent in the 1960s and 1990s, workers also saw major gains in bargaining power and rising real wages. Poverty also fell significantly in both periods.
The Political Challenge
We cannot assume that everything else about the U.S. labor market would stay the same after 4.8 million new jobs were created through this kind of policy initiative. There would no doubt be skill shortages in some areas and labor gluts in other areas. There would also be a rise in inflationary pressures. These pressures would have to be managed creatively, with labor representatives playing a leading role.
More broadly, setting full employment as the centerpiece of economic policy would entail a fundamental break from the Friedmanite/neoliberal model. The Great Recession is the disastrous, if logical, culmination of the neoliberal project. Putting an end to neoliberalism will require nothing less than an epoch-defining reallocation of political power away from the interests of big business and Wall Street and toward the middle class, working people, and the poor, while mounting a strong defense of the environment. Businesses will still be able to earn healthy profits in a full-employment, low-carbon U.S. economy.
Much else must be in place in order to achieve these aims. Pressingly, we need a financial-regulatory regime that channels private funding toward productive, employment-generating activities -- not the Wall Street Casino. But rather than addressing every social and political force prevailing on issues of employment, it is enough to focus on two fundamental points: full employment remains a moral imperative for creating a decent society, and full employment is attainable in the United States today. And here I mean full employment that looks something like Sweden’s in the 1960s and 1970s, not fascist or Bolivian full employment.
Whether full employment is ever achieved in the United States is a matter of political will. Is there the political will, in the United States, to fight for something as basic as the right to a decent job? This is the gigantic political question before us, as we struggle our way out of the Great Recession.
