Full Employment will solve all our problems
The Following Commentary was delivered by Professor Michael Meeropol over WAMC radio in May of 2006.
THERE’S ONE POLICY THAT IS THE KEY TO SOLVING MOST OF OUR ECONOMIC PROBLEMS.
Are you worried about illegal immigration? Are you worried about global warming? … Worried about high gasoline prices? … About the trade deficit with China, the budget deficit, the unequal distribution of income and wealth? Are you worried about the lack of affordable housing and health care? I have a solution to all of these problems.
The solution is full employment.
You ask, how can one policy, even one you might agree with solve all these problems?
My answer is that every issue I have mentioned has a technically feasible economic solution. Unfortunately, every one of those solutions meets strong political opposition because of the potential cost to the economy – a cost that would be borne by people paying higher taxes and perhaps losing their jobs. Full employment – a situation in which the unemployment rate is never higher than four percent and is often lower – can permit us to adopt the technically feasible solutions without fear that those solutions will ruin people’s lives.[1]
Full employment, it may surprise you to know, is the law of the land. Passed in 1978 – it is called the Humphrey Hawkins Full Employment and Balanced Growth Act. This is a law that the recently deceased outstanding economist-citizen John Kenneth Galbraith embraced whole-heartedly when it was first considered over 30 years ago.[2] He embraced it for the same reason that he embraced Keynesian economics as a young Harvard instructor back in 1935, because he believed it was the right and proper role for government to correct for market failures, and the worst market failure of the 20th century was the Great Depression for which Keynes proposed a workable solution – government spending.[3]
AN EXAMPLE:
Since we have just experienced nationwide demonstrations around the immigration issue let me begin here. As I’ve said in previous commentary,[4] most Americans who fear immigration do so because of the downward pressure these immigrants allegedly create on the wages of low skilled workers. My solution is to raise the minimum wage dramatically and use the promise of full employment to create sufficient numbers of jobs so that the higher wage will not translate into higher unemployment.
If it’s environmental reform you’re most worried about – if you want to change our energy policies to stem the dangerous increases in greenhouse gases in our atmosphere,
but if you also fear that making those changes will put our very lifestyle in danger, a full employment policy guarantees that will not happen.[5] If government has to fund a crash program of research similar to that which created the first Atom and Hydrogen bombs and which put a man on the moon full employment will guarantee that people losing their jobs in one part of the economy will find similar good jobs in the new areas.
Or maybe you’re concerned about how much it would cost to guarantee that every American has health insurance. If taxes go up, how will businesses be able to continue creating jobs? The answer is that if taxes and government spending both rise the same amount, the result is an increase in total employment.[6] People have absolutely no problem paying more in taxes if their incomes rise more than their taxes do. That creates an increase in after tax income – take home pay.
The problem is that there has been less than full employment for most of the past 36 years, causing downward pressure on wages.[7] With very low unemployment (4% or less) wages will rise not fall and everyone will be able to afford to pay the higher taxes necessary to guarantee health insurance for all.
I could go on with examples.[8] All problems in our economy that need fixing can definitely be fixed if we keep alive a government policy which is actually supposed to be the law of the land – namely that the unemployment rate should be kept at 4% or less.
How do we do it? One good place to start is with your member of Congress. Ask him or her why there has been no effort to enforce the Humphrey-Hawkins Full Employment and Balanced Growth Act?
[1] First a definition. Full employment does not mean that everybody has a job. The common sense concept involves attempting to come up with an approximation of a situation where there is NO WASTE in the utilization of human resources. Clearly, someone who makes the choice to make her/his contribution to society by working full time in the home or doing volunteer work in a religious or civic organization should not be counted as “unemployed.” By convention, we don’t count anyone who is under 16 years of age as unemployed even though people aged 14 and 15 could undoubtedly make productive contributions by working at one job or another (and probably many do in family businesses even though we have officially banned child labor). Similarly, someone who has retired is not potentially part of the labor force unless he or she chooses to be. So the first thing to understand is that what we call the labor force is different from the population. [For an annual series of the Labor Force Participation Rate that shows the total population, the labor force, the employment ratio of the population, and, finally the unemployment rate, see the Economic Report of the President, 2006, p. 324-325.]
Once we know the labor force, those who are not working but “actively seeking work” are identified as unemployed. In 1961, the President’s Council of Economic Advisers argued that a four percent unemployment rate was as good an approximation of “full employment” as we were likely to get.
[2]I have already recommended Richard Parker, John Kenneth Galbraith, His Life, His Politics, His Economics (NY: Farrar, Straus and Giroux, 2005). The Humphrey-Hawkins Full Employment and Balanced Growth Act was actually introduced in 1975 as a very strong amendment to the Employment Act of 1946. It provided a mechanism whereby individuals who could not find a job could sue the government for triple damages. Needless to say, such “teeth” to enforce such a “promise” was stripped from the bill as it moved through the Congress. Even with all methods of compelling the government to actually deliver on the promise out of the bill, it faced very rough sledding in Congress and many economists went on record opposing it vigorously. Nevertheless, when that law was passed it provided a goal of four percent unemployment and three percent inflation.
[3]Keynes proposed a graduated income tax as well because he believed that very rich people did not spend as high a percentage of their incomes as did middle and lower income people and that the problem of a depressed economy was that first of all, businesses did not think it profitable enough to make investments and second of all, as people got laid off their incomes fell so consumption spending fell as well. A graduated income tax financing government spending on, say, roads would do two things at once. It would take money from high income individuals who were not spending much and give it to people who would be hired to produce these roads (for example) and those people would spend virtually all of their increases in income. At the same time, the building of the roads would be a useful addition to society’s infrastructure. In 1935, before he actually rearmed Germany, Hitler proved Keynes right by ending the depression when he hired lots of unemployed people to build the Autobahns. In the US, it took the high spending on World War II to end our depression.
The public works expenditures in Germany and the experiences of all industrialized countries during World War II proved that Keynes’ insight was correct. When private spending is too low to generate sufficient total demand to employ the workforce, government spending can take up the slack.
[4] See my commentary from April 7.
[5] In a rapidly growing economy, such significant changes occur without government intervention. Consider one simple example from the 20th century. As the automobile replaced the horse and the horse and buggy method of transportation, there was a significant decline in the job opportunities for people associated with that complex of businesses and services involved in raising, maintaining and utilizating “horse-power.” Because the economy was growing rapidly, the growth of jobs in automobiles and associated industries (rubber, servicing, etc.) as well as construction more than compensated for the loss of jobs in the “horse-related” industries. In the context of retrofitting our harnessing of energy, it will be the government’s responsibility to see that sufficient numbers of good jobs are created as certain industries shrink and even disappear. I believe it is much better to work our way through this using the political process than to HOPE that the natural economic processes will do it better. This is especially true because established industries often have the power to utilize government to PROTECT themselves from the declines being enforced by the market. This was never more true than now when we are finally beginning to understand the magnitude of the global warming problem and the dangers of continuing to rely on a hydro-carbon based energy system.
[6] Embedded in endnote (3) above is the explanation of this point. In some economics textbooks it is still taught as the concept of the Balanced Budget Multiplier. Basically the idea is that if taxes go up $10 million, that will reduce consumption expenditures on the part of those who pay the tax by some fraction (say 90%) of that $10 million. If that $10,000 is immediately spent to repair bridges, build schools, wire libraries for the internet, or any other useful infrastructure project, the people hired to do this work will spend some fraction (say 90%) of that $10 million AND at the same time, society’s total production will have gone up by the $10 million worth of bridges, schools, etc. that was produced. The usual economic critique of the balanced budget multiplier concept is to say that these government projects are “pork” and the money spent on them is wasted. While there is no doubt plenty of waste in government purchases of goods and services, there is no evidence that government projects are more wasteful than private ones (think of shopping malls built that never get filled by stores, for example! Think of all the fiber-optic cables laid during the dot-com boom – cables that may never be used!). Even if lots of government money is spent unwisely, the solution is more accountability in how government money is spent.
[7] The unemployment rate has been below 5% seven years out of the past 35 and was at 4.5% or less only three. [Economic Report of the President, 2006, p. 324-325]
[8]Very briefly: The trade deficit with China is based in large part on a problem of the growth in productivity in American business. One of the side effects of full employment is higher rates of growth of productivity. We saw that quite dramatically during the years 1997-2000 when unemployment was permitted to fall to 4% [I say permitted because usually the Federal Reserve, our Central Bank, takes steps to stop unemployment from getting “too low” but in 1997 they chose not to take those steps.]. Productivity grew so much that some economists and politicians started talking about “new economy” with a permanently higher rate of productivity growth. See Economic Report of the President, 2001. The budget deficit was also briefly cured in the late 1990s in part because the full-employment associated rapid economic growth increased tax revenues faster than expected. Even though spending rose dramatically, tax revenues rose even more. As to the unequal distribution of income and wealth, periods of low unemployment have been the most significant periods of increase particularly for the incomes of low wage workers. One of the major policies associated with full employment is rising taxation and government spending. Since taxes fall for the most part of higher income individuals and some of the revenue is redistributed to lower income individuals (say with the Earned Income Tax Credit, for example) the more our government pushes low unemployment and faster economic growth through raising taxes and raising spending, the more the inequality of income and wealth is moderated. By the way, there is a cliché out there touted by politicians and pundits which claims that it is “impossible to tax and spend ourselves into prosperity.” That is errant nonsense. There are plenty of examples from our recent past when we in fact DID tax and spend ourselves into prosperity – the most dramatic example of this in fact was the late 1960s and the recently celebrated late 1990s. (In the 1990s, expenditures rose in absolute terms but fell as a percentage of GDP because the economy was growth so rapidly.). For the data, see Economic Report of the President, 2006, p. 376.
THERE’S ONE POLICY THAT IS THE KEY TO SOLVING MOST OF OUR ECONOMIC PROBLEMS.
Are you worried about illegal immigration? Are you worried about global warming? … Worried about high gasoline prices? … About the trade deficit with China, the budget deficit, the unequal distribution of income and wealth? Are you worried about the lack of affordable housing and health care? I have a solution to all of these problems.
The solution is full employment.
You ask, how can one policy, even one you might agree with solve all these problems?
My answer is that every issue I have mentioned has a technically feasible economic solution. Unfortunately, every one of those solutions meets strong political opposition because of the potential cost to the economy – a cost that would be borne by people paying higher taxes and perhaps losing their jobs. Full employment – a situation in which the unemployment rate is never higher than four percent and is often lower – can permit us to adopt the technically feasible solutions without fear that those solutions will ruin people’s lives.[1]
Full employment, it may surprise you to know, is the law of the land. Passed in 1978 – it is called the Humphrey Hawkins Full Employment and Balanced Growth Act. This is a law that the recently deceased outstanding economist-citizen John Kenneth Galbraith embraced whole-heartedly when it was first considered over 30 years ago.[2] He embraced it for the same reason that he embraced Keynesian economics as a young Harvard instructor back in 1935, because he believed it was the right and proper role for government to correct for market failures, and the worst market failure of the 20th century was the Great Depression for which Keynes proposed a workable solution – government spending.[3]
AN EXAMPLE:
Since we have just experienced nationwide demonstrations around the immigration issue let me begin here. As I’ve said in previous commentary,[4] most Americans who fear immigration do so because of the downward pressure these immigrants allegedly create on the wages of low skilled workers. My solution is to raise the minimum wage dramatically and use the promise of full employment to create sufficient numbers of jobs so that the higher wage will not translate into higher unemployment.
If it’s environmental reform you’re most worried about – if you want to change our energy policies to stem the dangerous increases in greenhouse gases in our atmosphere,
but if you also fear that making those changes will put our very lifestyle in danger, a full employment policy guarantees that will not happen.[5] If government has to fund a crash program of research similar to that which created the first Atom and Hydrogen bombs and which put a man on the moon full employment will guarantee that people losing their jobs in one part of the economy will find similar good jobs in the new areas.
Or maybe you’re concerned about how much it would cost to guarantee that every American has health insurance. If taxes go up, how will businesses be able to continue creating jobs? The answer is that if taxes and government spending both rise the same amount, the result is an increase in total employment.[6] People have absolutely no problem paying more in taxes if their incomes rise more than their taxes do. That creates an increase in after tax income – take home pay.
The problem is that there has been less than full employment for most of the past 36 years, causing downward pressure on wages.[7] With very low unemployment (4% or less) wages will rise not fall and everyone will be able to afford to pay the higher taxes necessary to guarantee health insurance for all.
I could go on with examples.[8] All problems in our economy that need fixing can definitely be fixed if we keep alive a government policy which is actually supposed to be the law of the land – namely that the unemployment rate should be kept at 4% or less.
How do we do it? One good place to start is with your member of Congress. Ask him or her why there has been no effort to enforce the Humphrey-Hawkins Full Employment and Balanced Growth Act?
[1] First a definition. Full employment does not mean that everybody has a job. The common sense concept involves attempting to come up with an approximation of a situation where there is NO WASTE in the utilization of human resources. Clearly, someone who makes the choice to make her/his contribution to society by working full time in the home or doing volunteer work in a religious or civic organization should not be counted as “unemployed.” By convention, we don’t count anyone who is under 16 years of age as unemployed even though people aged 14 and 15 could undoubtedly make productive contributions by working at one job or another (and probably many do in family businesses even though we have officially banned child labor). Similarly, someone who has retired is not potentially part of the labor force unless he or she chooses to be. So the first thing to understand is that what we call the labor force is different from the population. [For an annual series of the Labor Force Participation Rate that shows the total population, the labor force, the employment ratio of the population, and, finally the unemployment rate, see the Economic Report of the President, 2006, p. 324-325.]
Once we know the labor force, those who are not working but “actively seeking work” are identified as unemployed. In 1961, the President’s Council of Economic Advisers argued that a four percent unemployment rate was as good an approximation of “full employment” as we were likely to get.
[2]I have already recommended Richard Parker, John Kenneth Galbraith, His Life, His Politics, His Economics (NY: Farrar, Straus and Giroux, 2005). The Humphrey-Hawkins Full Employment and Balanced Growth Act was actually introduced in 1975 as a very strong amendment to the Employment Act of 1946. It provided a mechanism whereby individuals who could not find a job could sue the government for triple damages. Needless to say, such “teeth” to enforce such a “promise” was stripped from the bill as it moved through the Congress. Even with all methods of compelling the government to actually deliver on the promise out of the bill, it faced very rough sledding in Congress and many economists went on record opposing it vigorously. Nevertheless, when that law was passed it provided a goal of four percent unemployment and three percent inflation.
[3]Keynes proposed a graduated income tax as well because he believed that very rich people did not spend as high a percentage of their incomes as did middle and lower income people and that the problem of a depressed economy was that first of all, businesses did not think it profitable enough to make investments and second of all, as people got laid off their incomes fell so consumption spending fell as well. A graduated income tax financing government spending on, say, roads would do two things at once. It would take money from high income individuals who were not spending much and give it to people who would be hired to produce these roads (for example) and those people would spend virtually all of their increases in income. At the same time, the building of the roads would be a useful addition to society’s infrastructure. In 1935, before he actually rearmed Germany, Hitler proved Keynes right by ending the depression when he hired lots of unemployed people to build the Autobahns. In the US, it took the high spending on World War II to end our depression.
The public works expenditures in Germany and the experiences of all industrialized countries during World War II proved that Keynes’ insight was correct. When private spending is too low to generate sufficient total demand to employ the workforce, government spending can take up the slack.
[4] See my commentary from April 7.
[5] In a rapidly growing economy, such significant changes occur without government intervention. Consider one simple example from the 20th century. As the automobile replaced the horse and the horse and buggy method of transportation, there was a significant decline in the job opportunities for people associated with that complex of businesses and services involved in raising, maintaining and utilizating “horse-power.” Because the economy was growing rapidly, the growth of jobs in automobiles and associated industries (rubber, servicing, etc.) as well as construction more than compensated for the loss of jobs in the “horse-related” industries. In the context of retrofitting our harnessing of energy, it will be the government’s responsibility to see that sufficient numbers of good jobs are created as certain industries shrink and even disappear. I believe it is much better to work our way through this using the political process than to HOPE that the natural economic processes will do it better. This is especially true because established industries often have the power to utilize government to PROTECT themselves from the declines being enforced by the market. This was never more true than now when we are finally beginning to understand the magnitude of the global warming problem and the dangers of continuing to rely on a hydro-carbon based energy system.
[6] Embedded in endnote (3) above is the explanation of this point. In some economics textbooks it is still taught as the concept of the Balanced Budget Multiplier. Basically the idea is that if taxes go up $10 million, that will reduce consumption expenditures on the part of those who pay the tax by some fraction (say 90%) of that $10 million. If that $10,000 is immediately spent to repair bridges, build schools, wire libraries for the internet, or any other useful infrastructure project, the people hired to do this work will spend some fraction (say 90%) of that $10 million AND at the same time, society’s total production will have gone up by the $10 million worth of bridges, schools, etc. that was produced. The usual economic critique of the balanced budget multiplier concept is to say that these government projects are “pork” and the money spent on them is wasted. While there is no doubt plenty of waste in government purchases of goods and services, there is no evidence that government projects are more wasteful than private ones (think of shopping malls built that never get filled by stores, for example! Think of all the fiber-optic cables laid during the dot-com boom – cables that may never be used!). Even if lots of government money is spent unwisely, the solution is more accountability in how government money is spent.
[7] The unemployment rate has been below 5% seven years out of the past 35 and was at 4.5% or less only three. [Economic Report of the President, 2006, p. 324-325]
[8]Very briefly: The trade deficit with China is based in large part on a problem of the growth in productivity in American business. One of the side effects of full employment is higher rates of growth of productivity. We saw that quite dramatically during the years 1997-2000 when unemployment was permitted to fall to 4% [I say permitted because usually the Federal Reserve, our Central Bank, takes steps to stop unemployment from getting “too low” but in 1997 they chose not to take those steps.]. Productivity grew so much that some economists and politicians started talking about “new economy” with a permanently higher rate of productivity growth. See Economic Report of the President, 2001. The budget deficit was also briefly cured in the late 1990s in part because the full-employment associated rapid economic growth increased tax revenues faster than expected. Even though spending rose dramatically, tax revenues rose even more. As to the unequal distribution of income and wealth, periods of low unemployment have been the most significant periods of increase particularly for the incomes of low wage workers. One of the major policies associated with full employment is rising taxation and government spending. Since taxes fall for the most part of higher income individuals and some of the revenue is redistributed to lower income individuals (say with the Earned Income Tax Credit, for example) the more our government pushes low unemployment and faster economic growth through raising taxes and raising spending, the more the inequality of income and wealth is moderated. By the way, there is a cliché out there touted by politicians and pundits which claims that it is “impossible to tax and spend ourselves into prosperity.” That is errant nonsense. There are plenty of examples from our recent past when we in fact DID tax and spend ourselves into prosperity – the most dramatic example of this in fact was the late 1960s and the recently celebrated late 1990s. (In the 1990s, expenditures rose in absolute terms but fell as a percentage of GDP because the economy was growth so rapidly.). For the data, see Economic Report of the President, 2006, p. 376.
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