From NOBEL LAUREATE GARY BECKER and JUDGE POSNER'S BLOG, JULY 24, 2011
Job recovery in America has been disturbingly slow during the two years since the official end of the 2007-09 Great Recession. Unemployment has declined by only a single percentage point to 9.2% from its peak of 10.2% in 2009, while the percent of the adult population that is working is even lower than it was at the end of the recession. To put these figures in perspective, two years after the end of the severe recession of 1981-82, the unemployment rate was down by 3,6 percentage points from its peak of 10.8%, while the fraction working was up by 2.5 percentage points.
To be sure, while the recession of 1981-82 was the sharpest since the end of World War II prior to the Great Recession, it did not have as deep a financial crisis as the one that started in 2007. Although recoveries from financial crises are notoriously slow and erratic, the slowness of the current employment (and output) recovery is still obviously of great concern. The data on the duration of unemployment spells adds to the uneasiness. The great majority of workers can handle an unemployment spell of a few months since they can draw down savings, borrow from family members, live off a spouse’s earnings, and often qualify for unemployment compensation, Medicaid, and other government assistance programs. Unfortunately, however, many of the unemployed have been out of work for more than just a few months: over 40% have not had a regular job for at least 6 months, and almost one-third of the unemployed had not had a regular job for over a year.
Economists, political leaders, and public intellectuals have put forward various and conflicting ideas about how to improve the employment and unemployment picture. Some economists advocate further large fiscal stimulus packages in order to compensate for what is considered insufficient aggregate demand for goods and services by consumers and investors. Yet we already had close to a trillion dollar badly designed stimulus package, tax credits for first time homebuyers, a senseless “cash for clunkers” program, and other federal programs that have not had any clear sustained effect on moving the economy forward.
It is obvious now that forecasts by some economists in President Obama’s administration that these programs would reduce unemployment to under 8% were far too optimistic. Although little consensus exists on what in fact was achieved by the major $800 billion stimulus package, I do not know of convincing evidence that it accomplished a lot in reducing unemployment and raising employment. So it is hard to be optimistic that an additional stimulus package would be designed better or work any better, and of course, it would add to an already large fiscal deficit.
Other proposals to increase employment operate not by trying to stimulate aggregate demand for goods, but by directly encouraging employers to raise employment. One simple proposal is to give employers a subsidy for each worker employed, such as a subsidy equal to 10% of wages paid. This approach is simple but it would be expensive, and it would be inefficient since the vast majority of employees would have jobs without any subsidy. Even if the wage subsidy increased employment by 10 percentage points-which would be huge- 90% of the subsidy would be spent on workers who would have been employed anyway. At a 10% wage subsidy per worker, this means about 9% of the aggregate wage bill, which amounts to trillions of dollars, would simply be a transfer from taxpayers to employers. Such an expensive and inefficient program is hardly politically or economically attractive when the current political debate is over how far to cut, not increase, federal spending.
Recognizing the waste of such an overall wage subsidy, another approach subsidizes new hires only. This approach does avoid subsidizing all employment, but it fails to appreciate the magnitude of new hires even during bad times. The JOLTS data published by the federal government indicate that over 4 million persons are newly hired each month even during the current post recession period. Therefore, subsidizing new hires would pay subsidies for about 50 million new hires annually. If the subsidy per hire were $3000 (about 10% of their annual earnings), this would cost some $150 billion per year.
This is not chicken feed even for the federal government. Moreover, employers would try to game the system by laying off some workers so they can hire other workers and gain the new-hire subsidy. The result would be an increase in the number of persons becoming unemployed along with greater exits from the unemployment state. The net effect on employment would probably be positive and overall unemployment would tend to decrease, but the employment bang for the substantial bucks involved would be quite small.
Aside from the depth of the financial crisis, I believe the main source of slow hiring initially were the many anti-business proposals voiced by some members of Congress and even by the president. Many of these were discarded or tamed down, but Obamacare (the Patient Protection and Affordable Care Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act have raised the prospects of higher and less certain health care costs for businesses, and greater regulation and more uncertainty about government policy in the financial and consumer areas. Neither Act gives employers an incentive to expand their payrolls.
Adding to this is the huge uncertainty about what Democrats and Republicans can agree to on taming the large fiscal deficits, the looming entitlement crisis, and the exploding debt. No wonder that businesses are playing it close to their chests by keeping their payrolls down, and by their reluctance to commit to long-term investments.
The analysis in this post to me implies that the most effective solution to the weak recovery is not further stimulus packages, nor subsidies to employment or hiring, but an agreement between Congress and the president to cut trillions of dollars from federal spending during the next decade, and to reform the tax system toward a much broader and much flatter personal and corporate tax structure. The report of Obama’s National Commission on Fiscal Responsibility and Reform is a starting point, and Representative Ryan’s Roadmap also has excellent proposals on how to do this.