Monday, December 14, 2009

Some other ideas for increasing employment

Since the Democrats have already tried massive Keynesian spending to fight unemployment and come up empty, what can they do now? More of the same? They can try more spending, but it seems doubtful that it would have a different impact than the original stimulus.

Here are some other ideas of how to increase employment.

Greg Mankiw argues that it is time to try tax cuts instead of just another Keynesian stimulus. He notes that there is plenty of evidence to contradict the Democrats' arguments that Keynesian spending will do more to stimulate the economy than tax cuts.
One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity.

According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 — three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.
Meanwhile, Charles Lane has three good ideas of ways to stimulate the economy.

The first idea is to repeal sugar price supports which drive up the price of sugar in this country and drive manufacturers overseas to avoid the higher sugar prices in the U.S.
U.S. candy-makers and other food processors cite sugar costs as a major factor in their industry's recent job losses -- including 70,000 between 1997 and 2004.

In 2006, the Commerce Department estimated that the sugar program cost three confectionery manufacturing jobs for each job it saved in sugar growing and harvesting.
His second proposal is to repeal the Davis-Bacon Act which requires that all federal jobs pay the "prevailing wage." In effect, that means that they have to pay the union rate.
A large staff at the Labor Department calculates prevailing wages using a formula skewed to reflect union pay rates. This inflates the cost of labor on public construction by an average of about 10 percent, according to a 2008 study by the Beacon Hill Institute of Suffolk University in Boston. The added cost to taxpayers was $8.6 billion in 2007, the study found.

Repealing Davis-Bacon would enhance the employment impact of Obama's proposed infrastructure spending. In fact, the president has the power to suspend the law by declaring a national emergency. If the job crisis doesn't qualify, what does?

At the very least, Congress could change the size of covered projects from the absurdly low minimum established seven decades ago, $2,000, to a more plausible $1 million. The Congressional Budget Office estimates that would free up half a billion dollars over five years.
And finally, Lane proposes lowering the minimum wage which forces cuts in employment at the lower end.
But study after study has shown that this supposed benefit to the poor prices low-skilled workers out of entry-level jobs. It was unwise to keep raising the cost of hiring them in a recession.

Economist David Neumark, co-author of a definitive book on minimum wages, said in a June Wall Street Journal op-ed that the July increase probably killed 300,000 jobs that would have otherwise gone to teenagers and young adults.
As Charles Lane writes, if the politicians really cared about increasing employment, these are three things they would be advocating. But there are entrenched special interests that would oppose any such move. The sugar lobby would fight lifting the price supports and the unions would veto any repeal of Davis-Bacon or the minimum wage increase. And the politicians would rather cater to the special interests than take an action that would benefit many instead of the few.