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  • Technorati: graph / links

    The government can create jobs


    by Sunny on 5th April, 2009 at 1:42 am    

    The New York Times reports:

    Years before Washington spent $787 billion on a national stimulus bill, it staged an unintended trial run in Louisiana, a huge injection of some $51 billion for which historians find few, if any, precedents in a single state. The experiment is still playing out, but some indicators suggest that what occurred in Louisiana — dumping a large amount of reconstruction money into a confined space in the three and a half years since Hurricane Katrina — has had a positive outcome. The state’s unemployment rate of 5.7 percent in February was considerably below the national average of 8.1 percent, and it was the only state to see a drop in unemployment from December to January. It was also the only state with an increase in non-farm employment in February.

    State economists specifically mention what one called “the ongoing building boom” from federal dollars as a main reason for the numbers. Largely a result of the damage caused by Hurricane Katrina, construction projects have not dried up as they have elsewhere, and a few can even be seen in downtown New Orleans.

    I want to highlight this article as part of a narrative I’m trying to construct - on an leftwing response to the economic crisis. There are many on the right, including Charlotte Gore most recently, who keep echoing Bobby Jindal’s hilariously outdated and Milton-Friedman-textbook view that government spending is bad and doesn’t create any jobs. The evidence states otherwise.



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    1. Concerned Asian — on 5th April, 2009 at 6:20 am  

      Sunny,

      Good effort but this is painfully amateurish. Your unfamiliarity with basic economics shines through, from the heading downwards. No one but a kook would turn to Jindal for economic knowledge nor bother to refute him. Please upscale your economic reading pronto!

    2. Rumbold — on 5th April, 2009 at 9:51 am  

      I don’t think that anyone has ever claimed that the government cannot create jobs. So what? If I had billions of pounds I could create jobs. It is not a skill in itself. The question is whether the government is more efficient than the market. Remember crowding out.

    3. Raj Saxena — on 5th April, 2009 at 10:19 am  

      1. Hurricane destroys lots of buildings.

      2. Government pays to reconstruct buildings.

      3. Jobs!

      You seem to be ignoring Step 1, Sunny.

    4. MaidMarian — on 5th April, 2009 at 12:04 pm  

      Rumbold - Yes, but I would look at this in a slightly different way. In terms of the state creating jobs we have, in Britain at least, gone down a route that is the worst of all worlds.

      The nationalised industries provided mass state employment. My grandad was a miner and though he never thought of himself as a state employee, it is difficult to see how else the National Coal Board’s employees could otherwise be described.

      Any number of nationalised industries industries that were nominally privatised were in fact put into the private sector in only a nominal sense. Railway companies, for example, do not compete in a market. They may well compete (hard) FOR a market, but that is under state franchise. The National Lottery operator may be a private sector company that competed FOR a market, but the state granted a licence.

      The system of privatisation is essentially a middle-ages system of fiefs that give a thin illusion of private enterprise but with all the inefficiency of state regulation actively distorting, monopolising, a market to back it. Moving a monopoly licence from one operator to another is not competition in any meaningful sense of the word. Worse, time and again regulators have shown that once a license is awarded there is painfully little that can be done.

      The left wing response about employment that Sunny looks for should be about going back to direct employment rather than the horribly inefficient system of licensed fiefs we see now. The problem comes when we need to say what industries should ‘go back’ to direct state oversight. I struggle to see, for example, an argument for renationalising BT.

    5. Riz Din — on 5th April, 2009 at 2:34 pm  

      After a massive crisis, gvt has to rebuild essential infrastructure, which is not really an increase in GDP even though it may be counted as such.

      I don’t doubt the necessity of some government spending (G) but how much G is a tricky thing, and what form G should take is critical. When G gets too large surely no one can doubt that like a parasite, it eats up the free enterprise that we rely on for progress. Okay, lets say you employ a man for $30k a year in public service. That’s $30k of tax payers money gone. Is that a good thing or should we give $30k of tax reduction instead?

      In terms of the economic consensus, Gregory Mankiw’s blog says that 90% of economists in a survey agreed that “Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy”.

      However, 83% also agreed that “A large federal budget deficit has an adverse effect on the economy.” and 85% that “The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)”

      On the topic of tax cuts versus gvt spending, Mankiw looks at bang for buck of a $1 tax cut vs a $1 G increase and find studies that tend to show tax cuts have a higher multiplier. He says, ‘empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.’

      I believe the left and right are so caught up in ideological based views of how best to stimulate with G that they have lost any good sense of the pragmatic, evidence based starting point on which policy advice should be based. Personally, I think it would be a sin to opt for a second best solution based on political opinion versus doing what actually works best.

    6. Don — on 5th April, 2009 at 2:50 pm  

      I’m not an economist, but I found Johann Hari’s take on this interesting. (Second half of the article.)

      http://www.johannhari.com/archive/article.php?id=1470

      And as to ’shovel ready’ projects, flood defences spring to mind as a useful investment.

    7. comrade — on 5th April, 2009 at 4:13 pm  

      The plasters, brick-layer, eletritons are sitting at home depressed because they have no work, and governments plan to build thousands of new homes have been put on hold, reason no money, yet they found billions to bail out the banks. When people called for renationalision, the government did nationalise ‘the debt’

    8. MaidMarian — on 5th April, 2009 at 5:20 pm  

      Comrade (8) -

      I’m not altogether sure that is the full story. Yes, government nationalised debt, but the demand for that came in no small part from a public that demanded some security.

      The elephant in the room is house prices. And I will hazard a guess that some of the vast housing debt was run up by the plasterers, brick-layers and electricians you mention.

      This is where I think that renationalisation is a bit of a red-herring. You could say that government could cast people from their homes through nationalised bank house reposessions, but is that much different from a worker in a nationalised industry having their house put in jeopardy because the nationalised factory closes?

      Sure, there is a sense that the banks got special treatment, but the house price bubble that the public bought into did force the goverment’s hand. At least to some extent. Maybe you feel that the social price of bank failure was a price worth paying. I disagree.

      Rumbold is correct when he says that with the money it has, government can easily create jobs. The left’s response to recession seems remarkably unwilling to point out to the public at large that vast house price increases for the few at the expense of the many caused banking problems.

      I would like to see Sunny and others take this point on rather than the side issue about the state creating or not creating jobs. Is it really the place of government to stop a debt bubble? There are probably good arguments in both directions.

    9. steve — on 5th April, 2009 at 5:53 pm  

      Indeed, the driving force behind this recent downturn is the housing boom. More to the point, the buy to let market which drove the market higher and higher. These people should have been hit very very hard tax wise.

      The most depressing thing for me is that, yet, PFI, has not come onto the balance sheet for the country, and if you think things are bad now, wait for that bombshell to hit.

    10. Arif — on 5th April, 2009 at 9:39 pm  

      In the current economic climate, I do not think an increase in Government spending / investment would crowd out the private sector. The private sector is reacting to the situation with quite dramatic cuts.

      Rational as this might be from the perspective of individual businesses given their beliefs about the size of their future markets and ability to remain solvent with their current business models - I think that the impact overall will be to depress aggregate demand which will spiral into even lower expected demand, more cuts etc etc.

      Yes, I know this is sounds unsophisticatedly Keynesian, but for me this is the starting point for why the Government should create jobs: to enable the private sector to recalibrate their expectations of demand for their services, hence maintain the private sector jobs for long enough to allow the Government to start stepping back again when there is stable aggregate demand - hopefully alongside regulation / taxation to ensure that the structure of demand is not based on credit or asset inflation.

    11. Tom — on 5th April, 2009 at 10:09 pm  

      “You seem to be ignoring Step 1, Sunny.”

      There’s a certain truth in this - obviously catastrophic events that severely degrade essential national infrastructure leads to job creation when you rebuild it.

      However, that could describe Reagan/Thatcher/Bush economics, which always leads to underinvestment in national infrastructure that, if unchecked, results in catastrophes. The problem is that they happen across the country in small chunks, so aren’t as noticeable - Hatfield and Minneapolis spring to mind.

    12. Sunny — on 5th April, 2009 at 10:32 pm  

      A lot of people seem concerned about me, without actually reading what I’ve written above. Oh dear.

      For a start - I echo what Arif said above. We don’t need a catastrophic event to spend money - but it can work when the economy is at less than ideal capacity.

      MaidMarian: Rumbold is correct when he says that with the money it has, government can easily create jobs. The left’s response to recession seems remarkably unwilling to point out to the public at large that vast house price increases for the few at the expense of the many caused banking problems.

      Well, not entirely - what caused the recession was a credit crunch precipitated by a banking sector that completely mis-priced risk and the securities they were holding.

      Riz: Okay, lets say you employ a man for $30k a year in public service. That’s $30k of tax payers money gone. Is that a good thing or should we give $30k of tax reduction instead?

      Rurely it depends how the $30k is spent - if it’s spent on important infrastructure, or educating an underclass then the net benefit for the economy can be higher than simply offering a tax cut to the middle classes - who may end up saving it.

    13. The Common Humanist — on 6th April, 2009 at 10:46 am  

      “I don’t think that anyone has ever claimed that the government cannot create jobs”

      Steele, the GOP Chair, recently explicitly said that.

      Which must have been news to many Federal employees currently in harms way.

    14. The Common Humanist — on 6th April, 2009 at 10:54 am  

      “The question is whether the government is more efficient than the market”

      And who does Govt contract to do the work?

      Markets fail as often as they succeed and are the creation of economic actors within the area of activity in question. They (insofar as they should be personnified) are the products of people, there is no mysticism necessary.

      “markets” have given us homes that are thermally and accoustically poor, as an example.

      “markets” would not have acted on air or water quality as another example.

      market mysticsm is a dangerous ideology, used often by simpletons on the right. Akin to O/D’ing on Marx from the left.

      In many areas much of the public will generally just take what is infront of them - housing being a prime example.

      Public policy has to take a lead - we have tried laissez faire far too often and it fails everytime.

    15. The Common Humanist — on 6th April, 2009 at 11:03 am  

      “However, that could describe Reagan/Thatcher/Bush economics, which always leads to underinvestment in national infrastructure that, if unchecked, results in catastrophes. The problem is that they happen across the country in small chunks, so aren’t as noticeable - Hatfield and Minneapolis spring to mind”

      That is a v good point. Conservatives always skimp on investment (After all its just us plebs who benefit so why bother….) and then the CentreLeft has to clean up the mess and do the necessary.

      One of Labours many problems is that it has tried to make up for 20 years of shameful Tory underinvestment across the breadth of society.

      So in short conservatism sucks.

    16. The Common Humanist — on 6th April, 2009 at 11:06 am  

      As a country we have a great need for more social carers (of all types). The creation of those types of jobs by Govt would be a step forward.

    17. MaidMarian — on 6th April, 2009 at 11:38 am  

      Sunny (12) - ‘what caused the recession was a credit crunch precipitated by a banking sector that completely mis-priced risk and the securities they were holding.’

      Sure, but I would like to clarify that because you (inadvertantly, I’m sure) quote me out of context.

      The comment by comrade that I was responding to was talking about the nationalisation of bank debts. My comment was more about the ‘bad loan’ mortgages and the demands from the public to protect the mortgage market.

      I accept that the recession was caused by more than house price inflation alone and I also agree that the bank bail-outs had a number of causes. Bashing bankers is one thing, but it takes two to make a bad debt. That may be two bankers, but it would be naive to think that the public did not buy into excessive levels of debt.

      I remain sceptical that the left has given a real answer to the question of house price inflation. By all means, use the state as a job creation mechanism - but that wont in itself prevent future runaway house price inflation that forces people to mortgage themself to the hilt and create the pressures on government to do something.

    18. comrade — on 6th April, 2009 at 6:32 pm  

      Maid Mariam

      Sure, there is a sense that the banks got special treatment, but the house price bubble that the public bought into did force the goverment’s hand. At least to some extent.

      Your above comments seems to suggest it is the Public that are responsable for the house price bubble, I find this really add. Have a read of this, its part of longer article, written in 2007. I find it very difficult to write myself, because I do no come from a acadamic back ground . So please excuse me.

      ‘Subprime’ mortgages are offered to the low waged or those with poor credit ratings. By targeting the poorest to transform into temporary ‘consumers’, capitalism reaches the most desperate limit in its quest to squeeze demand out of stones.

      Using a tactic known as ‘bait and switch’, the economically vulnerable are lured into taking on what looks like a low-interest mortgage. After a year or two, the interest rate is ‘reset’ to a punishingly high level. The borrower must either submit to being bled dry, or default and lose his home. This cynical practice, now inveighed against in high moral tones in the capitalist press, would never have raised an eyebrow had the subprime scam not become enmeshed in the world of ‘securitised debt’, burning the fingers of people who ‘count’ – ie, capitalists.

      In recent years, with too much capital chasing after too few profitable investment opportunities, there has been something of a boom in the buying and selling of debt itself. The banks that lent money to the subprime victims followed suit, selling the debt on to investment banks, which then were given the right to recover the loan plus interest. These high-risk loans were then packaged up along with some (supposedly) less risky loans into something called ‘collaterised debt obligations’ (CDOs) and sold on to all manner of investors, not least pension fund managers.

      The subprime loans offered easy money – after all, even if the debtor defaulted, you still got his house. However, when the speculative investment in property development resulted in a glut and resultant collapse in house prices, aggravated by the number of repossessions choking the market, these ‘high risk’ loans began to be described as ‘toxic waste’. And because this bad debt passed between so many hands, at each stage further camouflaged as a different form of ‘financial instrument’ and ever more hopelessly entangled with what was supposed to be ‘good’ debt, it crept unannounced into the asset holdings of major investors, banks and pension funds all over the world.

      The exchange value of any commodity derives from the labour time it embodies and reveals itself as an average of price fluctuations on the market. Debt as commodity is no exception, however mysterious seems the process by which that labour time finds itself thus expressed. But in the case of complex financial instruments like CDOs, there is no open market to put a price on them. When the market was booming, nobody bothered to challenge the high valuations attributed to these CDOs by their vendors. However, once the market faltered, the valuations went through the floor. In the USA, Sowood Capital Management lost half its value in July and has since gone bust. Goldman Sachs only hung onto its hedge funds by an injection of $3bn, and Bear Stearns closed two hedge funds. The best and brightest at Harvard University’s investment team have lost $350m so far on a duff hedge fund investment.

      Such is the slippery nature of this shape-shifting debt that the damage does not stay solely with the investment agencies directly exposed to subprime debt. Since nobody knows for sure who is holding the ‘toxic waste’, there develops a general paranoia about lending to anyone. Every banker is sitting on an unacknowledged and unquantifiable heap of the stuff, and knows that each of his rivals is doing exactly the same. The result is a general freeze on lending. Despite the vast amounts of capital transfused into the patient by all the central banks, M&A activity remains close to paralysis at the time of writing, and nobody wants to buy debt any more.

      In short, the astronomic indebtedness made possible by years of low interest rates looks like coming back down to earth with an almighty bang.

    19. MaidMarian — on 6th April, 2009 at 7:24 pm  

      comrade - Thank you for your reply. In short, whilst I do not hold the public 100% responsible for the economic situation I most certainly attribute some of the blame to them.

      It is a view that has come in for some criticism on here but I am yet to hear any convincing arguments to the contrary. I am not questioning your argument that there have been some cynical banking practices and I accept fully that regulators should have been tougher. And yet…

      We always come back to things like this. ‘The subprime loans offered easy money – after all, even if the debtor defaulted, you still got his house.’ That applies to any mortgage, not just a sub-prime.

      There is too easy a temptation to blame the bankers. No one put a gun to the head of individuals and forced them to take on 125% mortgages. It was the public that sold houses to each other at recklessly inflated prices for 10 plus years. The public should have known better.

      I recognise you will mark me down as heartless, but the stark reality is that those like my wife and I are left with a distorted housing market to support despite being careful. Maybe you think I am being harsh. Let me be clear, I do not abrogate banks from responsibility for, for instance, the monoline insurance scandal (Google it - it is what your cut and paste is actually talking about).

      But it takes two to make a bad debt. And it takes a lot of them to make a debt so big it has to be nationalised.

      Unless, of course you feel that the government should have let banks go to the wall and we as a society be left to pick up the pieces?

    20. douglas clark — on 6th April, 2009 at 7:37 pm  

      Maid Marian,

      Nah!

      It was irresponsible banking and what went on behind it that got us where we are today. It is not the folk that took the 125% that was on offer that were wrong. It was the idiots that offered it in the first place.

      It does not take two to make a bad debt, quite the opposite, it only takes a bank to do it.

      Me? I’d have let every bank go to the wall and funded new ones. Or perhaps credit unions….

    21. comrade — on 6th April, 2009 at 9:00 pm  

      Maid Marian,
      We seem to be blaming every else, accept the captalist system that we live in, receantly I was under the elussion that we were ruled by our elected represantatives. But know I find out its Medoff {madeoff} and Leaman brothers. I beleive, you fully support captalism, which is based on maximum extraction of Profits for it self,other wise it will not be captalism. We all know that captalism will only invest, which will yeild Maximum profits, My orginal post was in this context. You mentioned your father was a Miner, You would probably kwow better why the pitts were closed, putting thousands of of Miner on the scrap-heap, When we have a thousand year of coal reserves under our feet.

    22. MaidMarian — on 6th April, 2009 at 9:23 pm  

      douglas clark (20) - New banks/credit unions: yes, but that is still not the point. How can government stop a bubble? New banks and credit unions that get into trouble will either take people down with them or need a bail out.

      My point in my previous comments is that any response needs to take on the issues surrounding how to stop a bubble. How can one stop people selling their houses recklessly? Is it the place of government to stop people borrowing? I don’t claim I know.

      Bad mortgages are only one part of this issue. Northern Rock’s mortgage book is probably a very good asset. As I understand it, many banks worked the same way as NR did when they wanted to grow their business quickly - NR were unlucky in the sense that they lacked liquidity when the credit crunch hit, other banks got lucky.

      In the sense of a whole bank, NR is a good national asset. The total share value is a tiny amount of the taxpayer’s exposure, so why sell good business off on the cheap to vulture banks? There is a good case that NR should run as a nationalised industry and if a good offer comes in, sell the mortgage book.

      But as Sunny points out at 12, there is more to this than mortgages. The credit crunch bottoms out at banks not knowing exactly how credit worthy each other are. Bad loans/defaults are a big part of that. I agree totally that banks are culpable. Going back to Northern Rock, the key aspect is that any bank that lends 7 pounds for every 1 pound of clients deposits is indulging in serious gearing as they are totally exposed to market risk if conditions get rough. And yes, regulators should have been more assertive.

      But equally the banks did not force anyone to bankrupt them-self with multiple mortgages and the like. But is it the role of government to protect people from them-self? The answer, I think lies in the separation of retail and investment banking, but that carries with it few guarantees and would probably involve a regulator doing some second-guessing.

      comrade - your criticism would hold if I thought that being a shareholder entitled one to compensation. I don’t.

    23. Dave S — on 6th April, 2009 at 11:10 pm  

      Seriously, repeat after me and remember: “There isn’t a job good enough for me. There isn’t a job good enough for anyone.”

      Thanks to S.L. Lowndes for that one - every bit as relevant today as it was in 1982.

      Work, to meet my own needs: yes, very much so!

      Employment: no.

      It’s time to read “The Abolition Of Work” by Bob Black, and get inspired.

      We should be aiming for nothing less than full unemployment!

    24. Topics about Banking » Comment on The government can create jobs by MaidMarian — on 7th April, 2009 at 10:44 am  

      [...] Job Searching Blog put an intriguing blog post on Comment on The government can create jobs by MaidMarianHere’s a quick excerptThe answer, I think lies in the separation of retail and investment banking, but that carries with it few guarantees and would probably… [...]



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