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How To Address Unemployment Like We Mean It

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Wednesday’s ADP Employment Report showed exactly what we all expected: a collapse in employment of historic levels. Their estimate puts monthly job losses at over 20 million, with the bulk of this (16 million) in the service sector. While their figures don’t always match the official data from the Bureau of Labor Statistics released later in the week, this time they were virtually identical. The BLS, too, put job losses at 20 million, with overall unemployment at a post-Great Depression high of 14.7%.

Leisure and Hospitality, which includes hotels, restaurants, and theme parks, lost 8.6 million. For reference, the worst one-month fall in total employment after the Financial Crisis was 835,000 in February 2009. Even summing the 26 consecutive months of contraction from February 2008 through March 2010 still only yields 8.6 million–less than half of what we just saw in a single month.

What can we do? First off let me tell you what we shouldn’t do. When unemployment was nearly this same rate in 1937 (14.3%), the eighth year of the Depression, the US government decided to reduce spending in order to address the budget deficit and the national debt. The unsurprising result was that the economy fell into a steep recession and the unemployment rate increased to 19% while tax revenues declined and the national debt increased. It took until 1940 to repair the damage.

Going into 1937, the deficit they were worried about  was 5..1% of GDP. We’re looking at closer to 18% even if GDP remains around $20 trillion, which is obviously doubtful. Because of this, politicians like Lindsey Graham are dead set against extending the unemployment benefit relief and Mitch McConnell and Rand Paul argue that the government is nearing the end of its ability to support the economy. It’s 1937 all over again.

Fortunately, they are dead wrong. Unfortunately, they are the ones making the decisions.

To put it all into perspective, consider this. In the $2 trillion CARES act, some of it was quite well-targeted. The $260 billion going into unemployment benefits, for example, is right where we need it and is a significant boost (adding $600/week to benefits). Notwithstanding the problem of overwhelmed unemployment offices and the fact that state governments will be soon be struggling to keep up due to collapsing tax revenues and rising costs, it’s aimed properly.

Unfortunately, it’s also estimated to run out at the end of July. Barring a miracle, we’ll need it well past that.

And what about the $900 billion earmarked for large and small businesses? Again, it’s clearly needed, but did you know that about $800 billion is in loans? Just when does the government expect them to experience the sudden burst of sales that will offset the months of lost revenue? This isn’t relief so much as a stay of execution. And, getting to the real issue here, the government doesn’t need them to repay the money, anyway. They didn’t borrow it in the first place.

Let me say that again because it’s critical to avoiding the mistakes of 1937: the federal government didn’t borrow it. Think about it for a minute: who would have been in a position to loan $2 trillion? China, poised to have its worst quarter in almost 50 years? Europe, where they hold all six top spots in COVID-19 mortality rates? American citizens, who would be digging deep into their pockets to loan the government money so that the government could turn around and give right back to them?

Of course not, none of that makes sense. Instead, we’re doing exactly the same thing we did the last time we faced a global disaster: the government is simply spending money into existence. From 1930 to 1941 (i.e, up to Pearl Harbor), U.S. unemployment averaged just over 17%. Where did we get the money to retool the largest economy in the world for a global war? From those very Americans who were just emerging from a decade-long economic catastrophe? As a matter of fact, no.

Rather, the federal government created money through spending–as they always do. This is nothing new or radical, and their brand-new dollars became the salaries and profits of those directly (and indirectly) involved in the war effort. Only after that did Americans have sufficient income to buy war bonds, an act that didn’t finance the war so much as tame inflation (see below).

Lindsey Graham, Mitch McConnell, Rand Paul and others, you’re wrong. In point of fact, the US government cannot possibly go bankrupt in its own currency and should therefore be taking a much greater, not lesser, role in relieving the misery being caused by the global pandemic. And ironically, it wouldn’t take anything terribly out of line with what we are already doing to get the job done. As an example, do you know the price tag of paying every unemployed American (let’s assume 25 million) the average American income ($40,000) for twelve months? $1 trillion, or half of what we just passed with the CARES act.

That’s for an entire year, of course (let’s hope that’s not necessary!) and it doesn’t take into account the fact that giving these folks an income creates a job for someone else. But the point is that even if we factor in relief to businesses, it is entirely within the realm of possibility to provide support on such a level. Furthermore, even if you did think that the US government could become insolvent in debt denominated in its own currency, we ran deficits that averaged over 20% of GDP for all of World War Two. Unemployment fell to below 2% and the 1950s aren’t exactly remembered as lean times. Indeed, they’re Happy Days!

Can government spending cause inflation? Sure, just as it did in World War Two. As a matter of fact, 1942 saw prices rise almost 10%. But, that’s not by any means inevitable and has not, in fact, been typical in the American experience. The reason for the jump in prices in early World War Two was that incomes and employment were rising rapidly while the availability of consumer goods was declining–an ideal environment for inflation. Hence the introduction of the wage and price controls and bond drives aimed at getting Americans to save rather than spend.

By contrast, with the high rates of unemployment after the Financial Crisis, those massive deficits led to almost no inflation whatsoever (1.8% from 2008 through 2011 and 1.7% from 2008 to 2019). Today, it is quite possible that we will witness rising prices in certain areas, but that’s a function of reduced production due to social distancing and illness, not because a helicopter dropped a bunch of money out (not that that causes inflation anyway).

Long story short, there is zero reason the government should not take an even more aggressive stance in maintaining incomes during this disaster. Nor should this be in the form of loans and $1200 checks. What we need, indeed, have needed as it would have been perfectly situated to stop the sort of hemorrhaging that we just saw, is a job guarantee whereby the federal government guarantees every American a chance to work. There is zero reason to expect the private sector, where labor is a cost to be minimized, to provide a job for every willing worker. The government CAN do that, and put people to work solving the social problems that business has no incentive to address. After all, what was World War Two but just that? If Sherman tanks had been profitable, Detroit would have had them in show rooms during peacetime.

It is abundantly clear that today we have, in addition to our usual social problems, serious pandemic-related shortages and needs throughout the economy. There’s plenty that needs to be done and there’s a source of funding available. As my colleague Pavlina Tcherneva is fond of saying, “Unemployment is a policy choice.”

There’s still plenty we can do. Let’s not repeat 1937.

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