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Nostalgic for the halcyon days of th 1930s, Marshall Auerback proposes the equivalent of a WPA to employ those who’ve lost their jobs during the Great Recession:

In my view, a universal Job Guarantee program would be the best way forward and truest to the spirit of the WPA. The jobs would pay basic wages and benefits with a goal to provide a living wage. The program would take all comers — anyone ready and willing to work, regardless of education, training, or experience. We could adapt the jobs to the workers. As the late Hyman Minsky put it, we could “take the workers as they are”, work them up to their ability, and then enhance their skills through on- the-job-training. Additionally, the guaranteed public service job would be a counter- cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. Such a program would remain a permanent feature of our economy, acting as a buffer stock to put a floor under unemployment, while maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.

My concerns about such a plan aren’t, as Yves Smith predicts in her introduction, that it would constitute “undue government intervention in the economy”. My concerns are that it would be outrageously expensive, it wouldn’t create as much growth as they think it would, and it would be impossible to contain.

My back-of-the-envelope calculation suggests that the cost per job would be about $28,000 a year. Adding another 25% for administrative costs (to quote one my favorite pictures, The Castle, “they’re dreaming”) would bring it to $35,000 per year per job. As a carve-out from existing programs that would be an adequate plan. As an add-on undoubtedly financed by borrowing, not so much.

Using a round number for those who’ve lost their jobs since 2006 plus those who could be expected to re-enter the labor force under such a plan of 10 million people that comes to a tidy $350 billion a year added to the deficit potentially in perpetuity. BTW take a look at Mish Shedlock’s estimates of the actual number of unemployed. The number of people who might show up for the guaranteed jobs could be much, much higher.

I’m not even going to attempt to determine the finance costs of such a plan. It would run into many multiples of the headline sum. That’s $350 billion on top of the more than a trillion that we’re borrowing per year already, a steep increase.

I think we should be very concerned about borrowing at that level. If the claim is made that the borrowing will be made up by the additional taxes collected we’re back to the cat and rat farm. It can’t work.

Is the world capable of sustaining an additional incremental level of borrowing of that size? That’s a question. I don’t know the answer. I can’t help but believe that at some point the sheer size of borrowing becomes a problem. You can’t borrow $1 trillion from a $1 billion bank.

There are so many reasons that such a plan is unlikely to produce the kind of economic growth we’d like to see it’s hard to know where to start. Deadweight loss comes to mind. Additionally, the plan assumes that those who take the jobs are willing to be trained and capable of being trained for the jobs that will exist at the point when the training is complete. That assumes a degree of prescience on the part of the program’s administrators that beggars credulity. That’s has typically been a key problem with job training programs. Too frequently they train people for jobs that don’t exist.

Further, the plan assumes that the story of the loss of jobs during the Great Recession is the Keynesian or neo-Keynesian one of insufficient aggregate demand. It ain’t necessarily so. BTW, while I’m on the subject try this thought experiment. Assume an economy that consists of just two industries: one with sticky prices that is subsidized so that it cannot decline and another without sticky prices that is not subsidized. What happens over the course of the business cycle?:

But the biggest problem with the plan is that it cannot be contained. Minimum wage may not sound like much but when you add healthcare, vacation, etc. (“the usual benefits”) and you’re earning $1 a day making bricks in Bangalore it sounds magnificent. It’s enough to live on and send money home to the family. Under the stated conditions (take all comers) the plan would attract tens of millions of people. And its costs would rise commensurately.

3 comments… add one

  • There is also a huge information problem. What is a person’s ability? Is it written on their forehead? Can you tell it by shaking their hands, looking in their ear? Is it how they tie their shoes?

    So you don’t know what a person’s ability is. Getting them to reveal it might be problematic as well. Note this program wont turn anyone away, so unless the work in extremely menial/low skill chances are you wont be able to “work them up to their ability.”

    Worst case scenario is you have a bunch of guys digging ditches and other low skill tasks. This is probably why people who are “employed” in this manner are still counted as unemployed and the program as being basically a form of government assistance.

    BTW take a look at Mish Shedlock’s estimates of the actual number of unemployed. The number of people who might show up for the guaranteed jobs could be much, much higher.

    In other words, about $580 billion year-in-year out possibly. Two to three years of that and you’d likely add $1.2 to – 1.6 trillion to the deficit.

    BTW, while I’m on the subject try this thought experiment. Assume an economy that consists of just two industries: one with sticky prices that is subsidized so that it cannot decline and another without sticky prices that is not subsidized. What happens over the course of the business cycle?

    And the “industry” with the sticky wages accepts anyone who applies. If the industry with the floating wages sees a wage decrease theoretically once the floating wage is below the sticky wage every employee shifts to the sticky wage “industry” and then it is game over.

  • fasteddiez

    Look, I agree with your conclusion, but mathematically have your forgotten tax revenues? I know they’re but a portion of outlays.

  • That was my point in talking about the “cat and rat farm”. Go to the link.

    No matter what the revenues are they will always be lower than the outlays. Anything else would be a form of perpetual motion.

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