Campaign to lower unemployment essential

Harold R.Chorney
Montreal
February 9th, 2010

The New York Times' Bob
Herbert is correctly arguing that something massive is needed to lower the unemployment rate to reasonable levels in all income classes in the U.S.

What is needed to address this enormous problem is an all out Campaign to End Unemployment above 3-4 % of the labour force. This low rate should prevail throughout even the lowest income classes.

It may be even be possible to lower the rate below this level.But that would require a new consensus at the Federal Reserve on how low unemployment can fall before it acts to raise interest rates in response to supposed inflationary expectations in the bond market.

Some unemployment is accounted for by the simple desire to change jobs . But this may only be 1 or 2 % points. The late William Vickery, a Columbia university economist who won the Nobel prize and came originally from British Columbia argued that 1 % unemployment in the U.S. was both possible and feasible.

The key to lowering unemployment is to adopt very serious targets and provide the resources both from the Federal Reserve in terms of low interest rates and employment generating infrastructure spending from the Federal and state governments. This cannot happen if short term deficit reduction through expenditure cuts are the priority of government.

Unemployment in the past could be reduced in this way in a matter of months. Just look at the experience from the period 1939 to 1943.The rate in the U.S. fell from over 12 % in 1939 to under three percent by 1943. Unemployment fell to very low rates from high rates once the political opposition to government spending and deficits was eliminated by the patriotic exigencies of wartime.

But there is no need for another war to solve the problem. The point is what ended unemployment then and what could end it now is well planned government financed investment in the economy in highway projects, bridge construction and renewal ,air transportation up-grading, energy efficient mass transportation, harbour improvements, city beautification and renewal, reforestation, irrigation and water control projects , improved educational facilities, social, and co-operative housing projects, investments in innovative technologies, awards to job creating entrepreneurship.

Some of this is part of the current stimulus bill. But the amount of the stimulus although it has helped to reverse the slump in growth is regrettably too small to accomplish the laudable goal of dramatic reductions in the unemployment rate.

With proper regulation low interest rates do not have to result in another bubble. The concern about the public sector deficit is understandable, although largely misguided.   Before people leap to conclusions about its burden they should understand that there are very serious methodological issues involved in its calculation. One of them is what is the acceptable rate of unemployment that the government is using to calculate the structural deficit associated with medicaid and medicare and the aging of the population.

It matters a lot what rate you
choose because other things being equal a higher rate enlarges the structural deficit.

It also matters how you account for expenditures such as health care and education. If you consider a large portion of them as investments in human capital they then get amortized over a long time period and are included in capital budgets rather than the current budget. I could go on and have in my many publications on this issue dating back to 1983, but the main point is that a lot of politics and debate clouds the issue of how to account for the burden of the debt. There is a lot of myth and hysteria   here.

It would be far better to attack unemployment and put things right first . Then the U.S. and other countries can turn to their public sector debts and have a properly informed debate on the basis of a far more just society.