NOTE: I will update this post as more emails are exchanged.

Philip Harvey, a Professor of Law and Economics at Rutgers School of Law, has a Ph.D. in economics and a J.D.  His research focuses on public policy options for securing economic and social human rights. His books inlcude Securing the Right to Employment: Social Welfare Policy and the Unemployed in the United States. 

On Feb. 9, 2014, in reference to my Dialog with Dean Baker, I asked Harvey, Professor of Law and Economics at Rutgers, the following question:

Do you agree with my formulation: “I know no one who is proposing that we depend ‘largely’ on direct government employment. I certainly do not, for I assume most new jobs will continue to be in the private sector.”

…I agree that direct job creation is “the only reliable way” to push up employment beyond what the private economy can safely achieve. But I don’t see that it is a “better way to respond to cyclical unemployment.” It seems both methods are needed. As you said at the forum, “How does the federal government guarantee it? By doing whatever it can to stimulate private sector employment, but at the end of the day, standing ready to provide jobs for any workers for whom jobs don’t exist in the regular labor marker.”

Wade

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PH: To paraphrase a former President, it depends on what “depends on” means. If we’re talking about job creation in general, then I certainly don’t propose relying “largely” on direct government job creation. The vast majority of jobs created in the economy—both those created to replace jobs that are eliminated (with no net job creation) and those created in excess of that number (and hence increasing total employment)—would continue to be created by the private and regular public sectors of the economy in the world I contemplate. And this would be true across all phases of the business cycle notwithstanding the operation of a large direct job creation program.

Right now the Social Security Trustees estimate that the U.S. unemployment rate will average about 5.5% over the long run (the average they project including booms and busts). I believe the direct job creation strategy would lower that projected average—perhaps to 4.5%. Why? Because a direct job creation program committed to securing the right to work on an ongoing basis would constitute a more effective “automatic stabilizer” of private sector economic activity than the existing “tool kit” of countercyclical policies on which the federal government relies—and that means recessions would be less severe on average. I say this not because of the program’s direct job creation effect. That would mainly serve a social welfare function—securing the right to work. Rather, it’s because the delivery of a fiscal stimulus via the kind of job creation program I advocate would do more to (1) forestall a downward recessionary spiral (layoffs leading to further layoffs), and (2) promote the continuation of regular investment activity by otherwise healthy private sector businesses (those who suffer business losses during a recession not because they participated in whatever excesses triggered the recession but simply because their customers—or the customers of their customers—are unemployed).

If I am right about the superior anti-cyclical effect of the direct job creation strategy, the average level of unemployment would fall closer to the NAIRU level (I know, you don’t like that term, but I think it’s serviceable), and that would translate into an increased level of private sector job formation. The direct job creation program would contribute an average of only 2.5%-3.5% of all employment (and all net job creation) in this scenario—enough to reduce the economy’s average unemployment rate from 4.5% to the full employment rate of 1%-2%.

If I am wrong, and the long-term average rate of employment in the U.S. turns out to be the 5.5% projected by the S.S. Trustees, then the direct job creation program would contribute an average of 3.5%-4.5% of all employment (and all net job creation).

On the other hand, if by “depends on” we’re talking about (1) how stimulus dollars should be spent during a recession to induce private sector job growth, and (2) how to close the job gap that remains at the top of the business cycle when the FED starts applying the brakes to prevent further private sector job growth, then it’s true that I advocate relying not just largely but almost entirely on direct government job creation.

I hope that explanation is clear.

Phil

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WH: It still seems to me that your position is too close to “either/or,” rather than “both/and.” It implies an opposition to other methods that could help and are politically popular, such as loans for new small businesses and temporary payroll tax reductions. Politically, such opposition risks alienating potential allies and intellectually, it’s not convincing to me.

I’ve posted my Dialog with Dean Baker. My last email asked, “How does the “employer-of-last-resort” federal jobs program you and Bernstein recommend in Getting Back to Full Employment differ from what I’ve been proposing in this thread,…” He replied, “It would not be open-ended. It would be limited and experimental.”

My immediate inclination is to ask what limits he would impose and to ask if he would support an “employer-of-last-resort” federal jobs program as proposed on pp. 88-9 of their book if it ended on a certain date. My own sense is that four years would be an adequate experiment. After three years or so, of course, it could be extended. My intent is to try to find common ground.

What are your thoughts about Baker’s comments and my response to the issue of whether we should rely “not just largely but almost entirely on direct government job creation”?

I also posted this dialog, at [here].

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On February 20, 2014, Phil Harvey replied:

Point taken, but after having my proferred contribution to the progressive tool kit utterly and totally ignored for 25 years, I intentionally decided to be more aggressive. I’m willing to back off. Indeed, I’m inclined to accept your advice. You’ve certainly succeeded to a greater extent than I ever have in getting Baker to respond to your questions. But I think you should take seriously the likelihood that unless people like him feel compelled to respond seriously to the views expressed in your questions, they will continue to dismiss the New Deal employment assurance strategy in one or two sentence put downs.

It’s also pretty clear from his responses that he’s not willing to accept the “both/and” approach. He is convinced that the only role direct job creation can usefully play in responding to the problem of unemployment is as a work experience/training opportunity for disadvantaged workers—the success of which will be judged not by the benefits they derive while they are employed in the program, but by whether or not they successfully transition to regular employment outside the program. The problem with this strategy is that it ignores the fact that market economies suffer from a job shortage even at the top of the business cycle. A policy that aims merely to help disadvantaged workers “transition” to regular employment in a job short economy is destined to fail for reasons I have explained in considerable detail in my scholarly work. If you want everyone to have a seat in a game of musical chairs you have to add chairs to the circle. Helping chairless children to get a seat in the next round of the game only guarantees that someone else will end up without one.

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WH: I appreciate your flexibility, am pleased that my argument was cogent, and hear your concern about the emphasis on training.

Can you refer me to experiments of the sort Dean [suggested] that have already been done?
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PH: The most extensively-studied experiment was the CETA Public Service Employment program which operated from 1973 until it was terminated during Reagan’s first term in office. However, the the program assumed two very different forms during the course of that period.

It was first instituted as an anti-cyclical program to combat the recession of 1973-75. The conventional Keynesian remedy of increased deficit spending was considered inadvisable at the time because the recession was accompanied by high rates of inflation (“stagflation”). This version of the CETA program was badly designed, though, in that federal funding was provided to state and local governments without strong anti-displacement protections in place, and state and local governments accordingly took advantage of it to pay the salaries of local government employees who would have been employed with local funding in any event. As a result of this “fiscal substitution” problem, the CETA program was changed in 1978 to limit eligibility to disadvantaged workers living in poverty or near poverty. The result was less fiscal substitution, since this population generally lacked the qualification needed to take over jobs previously performed by regular public employees.

It was this second version of CETA that embodied the features that Baker presumably would include in the kind of direct job creation program he is prepared to endorse. So the experiment he proposes has already been conducted. Moreover, it was an experiment that was extensively studied by social scientists. What’s interesting about these studies, though, is that the primary measure of program success they tested was whether participants in the program experienced an increase in earnings after they left the program rather than whether they experienced in increase in earnings while they were employed in the program. In short, the researchers assumed that the reason program participants were poor is because they lacked the skills necessary to obtain presumptively available employment rather than because their weren’t enough jobs to go around. I have called attention to this defect in the research literature on the CETA program from my very first writing on the subject of direct job creation, and I have continued to emphasize that it is futile to try to end poverty without insuring the availability of enough jobs to provide work for everyone who wants it because of the musical chairs effect described in my earlier email.

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WH: Thanks much. Can you review the Dialog with Dean Baker and offer your comments?