Commentary: The Dilemma of the U.S. Unemployment

There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services, and then sit back and watch employment rise as businesses hire people to make the goods and services to meet that demand. The second path is not to worry about production of goods and services, but rather to try to boost employment directly through direct government hiring.

The first path is better: not only do you get more jobs, but you also get more useful stuff produced. The problem is that it does not take effect very quickly. It is subject to what Milton Friedman called “long and variable lags.” Thus, policies aimed at boosting employment by the end of, say, this calendar year needed to be put in place about a year ago to have time to have reached their full effect.

Some countries, China for example, did indeed, implement such job-creation policies a year ago and are already seeing the benefits. Others, like the United States, did not, and so unemployment remains at around 10%.  This is not to say that the Obama administration did not try to boost employment. A year ago, it set five policy initiatives in motion:  Additional deficit spending; Recapitalization of banks that appeared very vulnerable;

Asset purchases by the US Treasury and other executive-branch entities to reduce the quantity of risky assets that the battered and risk-intolerant private sector was holding.  Continued monetary easing via very low Federal Funds rates; Expansion of extraordinary policy interventions by the Federal Reserve.
The stress tests conducted by the US Treasury last year suggested that the banking sector had re-attained sufficient capital. And the Fed has continued its low-interest monetary policy. But the dysfunctional US Senate capped additional deficit spending at $600 billion over three years only half of the $1.2 trillion that was the technocratic goal.

Moreover, the Fed became gun-shy and did not continue to increase its balance sheet beyond $2 trillion. And large-scale market interventions funded and guided by the Treasury never came to pass on a sufficiently large scale to have any tangible effect on jobs. In short, perhaps two and a half out of the Obama administration's five policy initiatives came to fruition. And, in the face of a recessionary crisis that turned out to be roughly twice as large as was forecast at the end of 2008, such limited action was not enough to keep the US unemployment rate below 10% or even set it on a downward trajectory.

This brings us to the present moment, with US unemployment unacceptably high and refusing to fall. As a result, there is now a very strong case to turn the focus of the US economy from measures aimed at increasing demand to measures aimed at boosting employment directly (without worrying much about whether these measures are efficient in the sense of substantially raising the quantity of goods and services produced).

In practice, that means that the government either hires people and puts them to work or induces businesses to hire more people. We are talking about either direct government employment programs, or large tax credits for businesses that increase the number of workers they employ.There is still time for a substantial shift in federal spending toward high-employment (but in all likelihood low-value) projects to reduce unemployment before the end of 2010 if Congress acts quickly. And there is still time for a substantial temporary and incremental new-hire tax credit aimed at getting businesses to boost employment before the end of 2010.

But will Congress act quickly? Given the depth of political polarization in the US, and thus the need for 60 of 100 votes in the Senate to end a Republican filibuster, there is no sign of it being able to do so. Such a plan can get off the ground only if 50 Democratic senators are willing to rely on the budget reconciliation process used to combine the bills adopted by the House of Representatives and the Senate and are willing to accelerate that process and complete it within a month. Don't hold your breath.

J. Bradford DeLong - Former U.S. Assistant Secretary of Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research. Copyright: Project Syndicate, 2010 -

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