In response to the question “What is the single best thing Washington can do to jumpstart job creation?” Matt Yglesias writes, “The best step to create jobs and boost the economy would be for the Federal Reserve’s Open Market Committee to announce a plan to target inflation at 3 or 4 percent.” In a follow-up post, he’s even more emphatic: “The actual single best thing Washington can do to jumpstart job creation” is “adopt a higher inflation target.”
I’m no economist—the worst grade I got in college was in Econ 101; the professor was a newly hired economist by the name of Ben Bernanke—but I would have thought the single best thing the government could do to create jobs (and boost the economy) is, well, create jobs. You know, hire people, pay them, that sort of thing.
As my friend Doug Henwood, the economics whiz kid journalist of the left, pointed out to me in a Facebook exchange (reproduced here and here), the multiplier effects of a jobs program are far higher than, say, tax cuts (not something, it should be said, that Yglesias advocates): 1.60 to 1.70 in GDP growth for every dollar spent on a jobs program versus under .40 in GDP growth for every dollar lost in extending the Bush tax cuts. That’s because poor and middle-income people spend the money they have (not a lot of room for savings when your wages are so low to begin with), as opposed to the corporations and wealthy who’ve been squirreling it away of late.
And as my friend Gordon Lafer, one of the leading experts on labor politics in the country, pointed out to me in that same exchange, the House Labor Committee estimated it would cost the government less than $150 billion to create 1 million jobs for 2 years. “By comparison,” he adds, “last December’s extension of the Bush tax cuts just for those making over $250,000 is projected to cost $700 billion over 10 years.”
The government hiring people, in other words, is a lot cheaper—and more economically beneficial—than tax cuts or employer tax credits or the stimulus bill.
But if the idea of the government creating jobs seems too retro or radical, how about if the government just stopped firing people? Based on his work with the Labor Committee, Gordon estimates that the government—federal, state, and local—has shed anywhere from 1.5 million to 2 million employees in the last five years (that includes government-funded non-profits doing vital service-sector work like drug rehabilitation, soup kitchens, and so on). And as the recent jobs report demonstrates, letting government workers go is a major reason for the latest jump in unemployment, a point Yglesias himself has made here and here.
Instead of the government creating or not cutting jobs, Yglesias proposes it increase inflation. He offers three reasons for his position:
Higher inflation expectations would have a number of benefits. For starters, they would reduce real interest rates, mitigating the problem of the zero lower bound on nominal rates. They would also increase the cost of hoarding cash. This would encourage wealthy individuals and cash-rich firms to purchase real goods and services, or else invest in productive assets. Last, since mortgage debt is denominated in nominal terms, a faster rate of inflation would speed the deleveraging process and let households repair their balance sheet.
The first reason seems to assume the problem is that there is insufficient money out there for employers to hire people or purchase goods and services. Make it cheaper to borrow money, and employers will do so. But isn’t that what the Fed has been doing for a while now? The result, as Doug points out, is corporations (and financial markets) awash in cash, without much movement on employment.
Also, the fact that Yglesias (like so many others) is trying to figure out how to overcome a nominal interest rate that is nearing zero should tell us something about the utility of lowering interest rates in today’s economy. Seems like a classic, almost literal, case of “keep digging” when you’re in a hole.
As for the second reason, as I asked Doug and he confirmed, if hoarding cash becomes too expensive because of inflation, capital has plenty of other options, including taking its toys elsewhere, to keep its money safe.
What both of these reasons have in common is that instead of putting money into the hands of people who not only need it but would spend it, thereby stimulating demand and more jobs, they keep (or put more) money into the hands of people who already have it and don’t need to spend it in economically beneficial ways. Presumably because they are, in Yglesias’ eyes, the real movers and shakers of the economy, as opposed to the vast majority of middle- and working-class people or the government that represents them.
In a follow-up post, Yglesias says, “America would produce more real goods and services if people were spending more money, and people would spend more money if there was more money around to spend.” To my mind, that sounds like government should hire workers, wages should be increased, etc. But as Yglesias proceeds to gloss his own comment, it becomes clear that the money being spread around is not going to go into the hands of working people (at least not directly). Instead, channeling Ryan Avent, Yglesias suggests that the Fed should buy more Treasury bonds—something, Doug points out, the Fed has done twice since in recent years (since 2007, money in circulation has gone up by $1,350 billion), without much effect—and lower interest rates on the cash reserves of banks, thereby prodding them to lend more money. Share and spread the wealth, in other words, among the wealthy.
If you wanted a purer distillation of the Reaganite temper of our times, you’d be hard pressed to find it in any other notion than this: get more money into the hands of people with money, for they are the truly productive agents in our society, rather than into the hands of the people who might actually spend more money if they had more money to spend.
Again, I’m no economist, so I don’t want to claim a knowledge or expertise I don’t have. I come to this discussion as a political theorist and historian of political ideas. And what strikes me, in that capacity, is less the wrongness of these arguments than the historically bounded assumptions they reveal.
Yglesias might think, shrewd and sharp man of policy that he is (and, believe me, he’s sharp; one thing Matt Yglesias does not lack is intelligence), that he’s just following the facts. But the overwhelming fact I see in his argument is a refusal to consider or inability to imagine any policy lying beyond the perimeters of contemporary opinion.
It’s not our wages that are sticky; it’s our ideas.