Want Less Debt? Offer More Jobs.

October 14th, 2011 at 12:19 pm | 39 Comments |

| Print

While the 2007 recession technically ended in October of 2009, most Americans would be hard pressed to let the technical details of what defines an economic slump get in the way of what everyone sees: we’re still mired in the economic doldrums, two-consecutive quarters of negative growth or not.

And with Congress barely able to agree on a time and place for a presidential speech much alone a series of economic packages to stimulate the housing, consumer, and labor markets, the Federal Reserve has stepped in to do its monetarist best.

After a $787 billion stimulus package, two-rounds of quantitative easing, and a third one called Operation Twist currently in effect, our unemployment rate is 9.1 percent–0.7 points lower than when the recession officially ended. Clearly something isn’t working, and the Federal Reserve toolkit of available fixes is running low.

Figuring out how to heat up the economy first means diagnosing the problem. Republicans in the House believe cutting the national debt and slicing taxes is more or less the silver bullet, but that doesn’t get at what a bevy economists think is the chief antigen to a healthy economy—excessive private debt.

From Barry Ritholtz and Chris Whalen, to Stephen Roach, currently non-executive chairman of Morgan Stanley Asia, and Steve Keen, some form of debt jubilee, or personal debt forgiveness, has been prescribed.

The Federal Reserve Bank of San Francisco is in their corner by virtue of this January report:

A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.

Household debt as a portion of the GDP is at 90 percent, and according to a New York Fed report on debt and credit, 71 percent of that household debt was stuck in mortgage payments. Making matters worse, 22 percent of all residential properties have owners shouldering loans that exceed the market value of their home.

Large amounts of debt means a consumer’s available income goes to making payments on that debt. The unemployment rate is currently too high, and with wages flat, those with a paycheck can’t get a jump on their debt obligations.

Some members of the Federal Reserve have proposed targeting a higher level of inflation (above two-percent annually) to increase the price on goods, thereby cutting into unemployment.

A BusinessWeek article suggested that in theory, the practice could work, but as economist Adam Hersh at the Center For American Progress explained in an interview, wages would have to rise, as well. “Having faster inflation is a textbook strategy for lowering the debt burden because it erodes real value of the debt that is owed,” he said. “But that’s only an effective policy to the extent that wages or incomes are growing faster than inflation.

“If they’re growing at the same pace you’re not lowering the debt burden relative to income. And if income is growing slower, then the debt burden is expanding out of the reach of their incomes.”

He says the only way for wages to rise, and for households to finally have a chance to peel back the debt that’s sagging the economy, is to vie for full employment. For what it’s worth, Christina Romer and Mike Konczal agree.

And this is where liberal economic thinking takes off: if the private sector is unwilling to hire, and it has every right to pursue efficiency curves that keeps it from hemorrhaging more revenue and risking even greater job loss, then the government must step in.

“A job is a job whether it goes to a private sector or government worker,” says Brad Kemp, an economist with Beacon Economics. Federal programs like the expired TANF-ECF, which had sweeping Republican support on the state and local level, paid most of the wage of an unemployed person to work for a company. Workers were given roughly $10 an hour and some quarter of a million otherwise unemployed workers had a job that gave them on the ground training.

He also supports direct tax credits that reward employers for hiring new talent, rather than tax cuts. “What happened when consumer spending started to rise in the 2000s? Imports went up, Kemp said. “Tax cuts for consumers stimulates the global economy but there is no guarantee tax cuts can lead to job growth.”

A federal jobs tax credit on the other hand is a spending incentive that can only be take advantage of if the employer actually hires someone.

Infrastructure projects are also a top recommendation by Kemp and others—not only can they employ many people, but the country could use a steel and concrete makeover. “Bad infrastructure limits growth, “ begins Kemp. “If it takes me one hour to drive five miles to work, do you not think that would inhibit my desire to move that city? If an aging electric grid leads to rolling brown outs, what that not spurn my decision as an employer to start a business in that city?”

Affording these credits and spending projects puts a greater debt burden on this country—and so do tax cuts, without the added benefit of knowing for sure whether those extra dollars will lead to jobs—but as Hirsh explains, interest rates are so low, borrowing the funds to subsidize the stimulus would pay for itself.

As more people are put to work, consumer spending jumps, and as seen in the late 1990s, wages also increased. Suddenly debt is manageable to more households, and increased employment means greater revenue for local, state, and federal governments.

Besides, it’s our tab—out of the $14.3 trillion the U.S. has racked up in debt, Americans are owed $9.8 trillion.


Correction: This article previously ascribed support for debt forgiveness to Barry Ritholtz, which is an inaccurate representation of his views on the matter. We regret the error.

Recent Posts by Mikhail Zinshteyn



39 Comments so far ↓

  • rbottoms

    No, no, no it’s uncertainty. Remember?

    Unleash the free market, cut taxes to zero, repatriate the money from the firms that shipped the jobs overseas and they pinkie swear they will create new jobs.

    The Kenyan has raised taxes to rates not seen since Johnson, we all know that, regulations are strangling chemical manufacturers and banks are no longer able to do what they do best with all that sniping about fees and capital requirements.

    It’s like living under Stalin.

  • balconesfault

    And this is where liberal economic thinking takes off: if the private sector is unwilling to hire, and it has every right to pursue efficiency curves that keeps it from hemorrhaging more revenue and risking even greater job loss, then the government must step in.

    Exactly.

    I keep hearing people talking about the public sector competing with the private sector for talent. Right now there isn’t a competition. PhD’s with 20 years experience are applying for entry level state jobs. There is desperation … even among some very experienced, very talented people in the workforce.

    Normal arguments against government spending don’t work right now. It’s like being down by 20 with 5 minutes to go in the 4th quarter, and trying to establish your ground game.

  • willard landreth

    Why doesn’t your party recognize the obvious?

    It’s because the GOTP has fallen for the simplistic argument – it’s the Kenyan’s fault. How could the *marketplace* fail us? Our main economic plan is the make the Kenyan suffer as much as possible – it’s our version of sharing the pain.

    We don’t have a debt problem we have a revenue problem. When people don’t have money and need the bank to lend them (at usury rates) money to repay the bank the interest only, people don’t spend. But your party seems to be unable to recognize a simple fact.

  • ottovbvs

    No one disputes we have a huge debt overhang although in fact we’ve been more effective in reducing it than many other like Britain whose economy looks most like ours and had similar sized private and public debt issues. The problem with debt forgiveness programs is they are easier to say than do. Take the roughly 15 million mortgage holders who are underwater. Martin Feldstein suggested a possible program in the NYT a couple of days ago that he estimated would cost $350 billion. It sounded quite sensible to me but the chances are zero of getting the American public (let alone the Republicans who would immediately turn it into a political football if the administration ever proposed such a thing) to sign off on a $350 billion program to reduce their neighbor’s mortgage debt. If you’re talking purely monetarist solutions the inflationary ones proposed by conservative economists like Rogoff and Mankiw are the only ones that are remotely feasible. Basically the idea is the Fed goes for the QE of all time (like $2.5 trillion) and raises it’s inflation target to 6% plus, and ultimately we inflate away the debt. Of course the collateral damage would be considerable but these are the lengths you’re reduced to if you take fiscal stimulus off the table. Btw the goldbugs, inflationistas, sound money cranks, and others might be shocked to learn that the other day Romney made Mankiw (the advocate of massive inflation) his principal economic advisor!!!

    http://harvardmagazine.com/2011/10/harvard-economist-martin-feldstein-urges-mortgage-relief

  • buddyglass

    Additional benefit to inflation: U.S. exports rise and imports shrink. Supporting an increased level of exports will generate new jobs that had been eliminated by depressed domestic consumption.

    • ottovbvs

      Buddy; true but I’d argue the downsides to using inflation as a way out of this are far greater than the upsides. In this I do find myself with the sound money men. The obvious and least costly solution is a massive infrastructure stimulus program funded with money which we can borrow for effectively nothing. It’s a no brainer.

      • buddyglass

        Could do both. Even if inflation is used as a tool, it should never be allowed to rise “too fast”. That freaks people out and negates whatever benefit it might have had. But I could see sustained “moderate” inflation being a good thing.

  • Graychin

    The problem of consumer debt overhang is harder to solve than unemployment. We know how to put people to work. Passing something like Obama’s jobs bill would be a good start.

    The AJA would also put more money in the pockets of those with jobs, stimulating demand. And helping workers manage their existing debt.

    There is a very good reason why Congressional Republicans won’t allow this, even if it’s paid for. Everyone is waking up to what that reason actually is. The R’s haven’t exactly made a secret of it.

    • balconesfault

      We know how to put people to work. Passing something like Obama’s jobs bill would be a good start.

      On that note … why no discussion here about McConnells GOP Job Bill?

      You know – the one that wouldn’t actually do anything to create jobs?

      • willard landreth

        I believe that McConnell’s bill is a rehash of nearly 100 ys of republican economic philosophy. Their system never worked and never will – yet Americans continue to consider it — unbelievable. There is NOT one new proposal as I see it.

        I’ll say it again, there’s only one economic principle involved here “defeat the Kenyan” and let the poor and middle class share the pain of their obsession.

      • Graychin

        “…why no discussion here about McConnells GOP Job Bill? You know – the one that wouldn’t actually do anything to create jobs?”

        I think you answered your own question. :D

  • TerryF98

    This is the GOP jobs plan. I have never heard anything so ridiculous since the budget with no numbers that was their economy plan.

    McCain said.

    “We’d love to see, for example, a vote in the United States Senate on a moratorium on Federal regulations, which are coming out by the thousands, costing businesses billions and billions of jobs. We’d love to see a vote on that. But it will be interesting to see if the Majority Leader will allow it.”

  • Primrose

    We don’t think you are troll, Balsack aka cleverbot, aka tamade. We think you have an improper relationship to your medication, too much or too little, perhaps both.

    Why don’t you stop trying to be cute, or clever or whatever it is that you are going for, and just in a rational and respectful manner discuss the political matters of the day. If you are not interested in doing that, go somewhere where your offerings will be appreciated. The internet is large and contains multitudes.

    But what you keep doing now is not discussion it is exhibition.

    • balconesfault

      +1

    • balconesfault

      ahh – looks like balsac has been edited out. Which is good, since he’s akin to some guy at a jazz concert who keep shouting “Play Freebird Again!”

      • ottovbvs

        bf. you spoke too soon he’s resurfaced on another thread as giles goat boy.

        • bidthesoldiersshoot

          I do believe you spoke too soon too, otto. Check out Mr. Bingham. He’s not exactly out of “Pride and Prejudice.”

        • Bingham

          Dude,

          Just admit you’re gay.

          Then the rest of us can get on with discussing ideas without the overwhelming cultural baggage of your homosexuality, OK?

        • ottovbvs

          “He’s not exactly out of “Pride and Prejudice.”

          It’s Mr Bingley!

        • bidthesoldiersshoot

          Thanks, otto. Obviously I combined Mr Bingley and Mr Wickham to get giles goat boy.

  • armstp

    “After a $787 billion stimulus package, two-rounds of quantitative easing, and a third one called Operation Twist currently in effect, our unemployment rate is 9.1 percent–0.7 points lower than when the recession officially ended. Clearly something isn’t working, and the Federal Reserve toolkit of available fixes is running low.”

    It is not that these programs have not worked to move the unemployment rate, it is really three things that have impacted the unemployment rate (1) state and local governments have laid of over 500,000 in the last 2 years and (2) without the say stimulus we would be another 3.0 million jobs in the hole and we could easily be at 15% unemployment, according to objective economic analysis and (3) more of those who had previously given-up have entered the work force again, holding down the unemployment rate.

    “…what a bevy economists think is the chief antigen to a healthy economy—excessive private debt.

    I would argue this a little differently. What we need is that consumers, who have seen their personal debt decrease substantially over the last two years, need to be adding to their private debt to consume more to stimulate the economy. It is the decline in private debt that is actually hurting the economy.

    “Total outstanding household debt as a percentage of GDP has fallen roughly six percentage points between 2009:Q1 and 2010:Q2 (see Chart 2). This decline is the largest on record in the post-war period. ”

    The rest of your post I agree with. You are basically just describing the Obama jobs bill/plan.

    • ottovbvs

      “Total outstanding household debt as a percentage of GDP has fallen roughly six percentage points between 2009:Q1 and 2010:Q2 (see Chart 2). This decline is the largest on record in the post-war period. ”

      This is true as I pointed out above but it doesn’t alter the fact it’s still pretty large particularly the mortgage debt portion tied to homes that are underwater. The problem is the political obstacles to passing any sort of debt reduction program are insuperable and therefore the entire issue is moot.

    • bidthesoldiersshoot

      “What we need is that consumers, who have seen their personal debt decrease substantially over the last two years, need to be adding to their private debt to consume more to stimulate the economy. It is the decline in private debt that is actually hurting the economy.”

      Spot on, armstp, but what in the world could possibly motivate those consumers to be adding to their debt? They watch the news and know what to expect from too much debt.

      The only thing useful about today’s cheaper dollars is paying off old debt. And if you argue that the flat screen tv is going to be more expensive next month, you have opened the door to hyperinflation and we don’t want to go there. The prudent consumer is not buying these days and we have to look for something else besides aggregate demand for relief.

  • Arms Merchant

    This article is stupid beyond belief.

    Every government job is supported by taking from those who create wealth. With a few exceptions (S&T investment), wealth is created exclusively in the private sector. “Creating more government jobs” is just the old broken window fallacy; it does nothing to help the overall situation, because you’re still just moving the same amount of value around, not growing.

    The only thing that is changed is that the people with government jobs are paying down debt with value created in the private sector that has been taken by threat of force through taxation. Aggregate demand does not go up, because the same amount of value is simply shifted to different people.

    This administration has done its best to discourage businesses from expanding, with its demonization of big business, subsidizing favored constituents (green energy, General Electric) while punishing others (Boeing, Gibson Guitars), the ACA, Dodd-Frank, and the out-of-control EPA (which is actually encouraging groups to sue them). Their poster boy is Dick Durbin, who lets a merchants lobby write a bill for him that caps merchant fees and then whines that Bank of America is passing on the new costs to their customers. What a hypocrite.

    Four ways out of a debt deflation spiral: Default, nationalization, inflation, and growth. The Keynesians never seem to read the part where Keynes says you save during the fat times to spend for the lean. They think that printing and spending money will create real jobs. Wrong!

    And inflation will only shift the burden of paying down debt to the productive sector–people with jobs and creditors pay for the deadbeat’s bad decisions–nothing gained. Sure the unemployed get relief, but the producers are already paying for them, so now they must to pay their debts on top of that. No net gain for the economy.

    “Offering more jobs” isn’t a prescription, it’s the result of an entrepreneurial culture. A real job is created when someone has too much work to do by themselves and their existing employees. There are too many riding the wagon–not enough pulling it.

    • balconesfault

      Every government job is supported by taking from those who create wealth. With a few exceptions (S&T investment), wealth is created exclusively in the private sector. “Creating more government jobs” is just the old broken window fallacy; it does nothing to help the overall situation, because you’re still just moving the same amount of value around, not growing.

      Define wealth creation.

    • ottovbvs

      “The Keynesians never seem to read the part where Keynes says you save during the fat times to spend for the lean.”

      Actually we do. And what would you call now? A fat time or a lean time? The problem was during our most recent fat time from 2001-2008 the incumbent president far from saving for the lean times gave away huge tax cuts; started two wars off the books; and introduced huge unfunded new medical programs; thereby throwing away the surpluses he inherited and effectively doubling the debt.

      • sdspringy

        Which sounds strikingly similar to our current President who has not funded the same two wars, or the third or the new boots on the ground mission in Africa.
        And a new unfunded mandated medical program that not only adds to the debt but curtails hiring for any firm with over 50 people, a twofer in Liberal parlance.
        And has continued to pass the same tax cuts the previous administration with some additional payroll tax cuts thrown in for good measure.
        All of which has taken the yearly deficit not up 100%, not 200% but 300% over and above the previous administration. Now that is getting the job done.

        • ottovbvs

          “All of which has taken the yearly deficit not up 100%, not 200% but 300% over and above the previous administration.”

          Springy: you’re such liar and such an inept one. During the last calendar year of Bush’s presidency the deficit was $1.3 trillion…the latest forecast deficit this fiscal year $1.35 trillion! And btw according to the CBO the ACA actually reduces the deficit.
          What had your teacher used to put on your school reports? Springy MUST do better? Or were you just expelled for consistent lying?

        • TerryF98

          Springy you are a complete liar, please stop it.

    • wileedog

      “Every government job is supported by taking from those who create wealth. ”

      And every government employee spends that money back into the economy, perhaps buying the products of those who ‘create wealth’ and fueling expansion.

      In fact what a tax-funded government job does is ensure that extra wealth is circulated back into the system instead of languishing in an off shore bank account – as well as, you know, teaching our kids, putting out our fires and catching our bad guys. That whole society thing that creates a stable environment for wealth creation in the first place.

    • dugfromthearth

      I have to agree with “The Keynesians never seem to read the part where Keynes says you save during the fat times to spend for the lean. They think that printing and spending money will create real jobs.”

      Bush and other Keynesians insisted on cutting taxes and increasing spending during the fat times rather than saving. Until we get Kenysians like Bush out of government we will not have a good economy.

      I say kudos to Arms Merchant for boldly pointing out the problem with Republican administrations borrowing and spending our way to the poor house.

    • bidthesoldiersshoot

      “Four ways out of a debt deflation spiral: Default, nationalization, inflation, and growth.”

      Default and nationalization are out for obvious reasons. With Peak Oil here, growth is out. That leaves inflation and for my money, Bernanke is doing a terrific job.

      “The Keynesians never seem to read the part where Keynes says you save during the fat times to spend for the lean.”

      I think it was the The Republicans what did that. Didn’t they cut taxes in 2001. Fat years, no savings.

      Don’t blame it on the Keynesians.

  • Frumplestiltskin

    AM: With a few exceptions (S&T investment), wealth is created exclusively in the private sector.

    This is so evidently wrong I have no idea how anyone can write it. One of the worlds largest steel companies is Baosteel in China with revenues greater than every US steel company combined. It is also a State owned enterprise owned by the Chinese government. To state that it neither produces wealth nor jobs is absurd, of course it does. I am not claiming that nationalization is the answer, it isn’t, I think a well regulated market economy is more efficient at wealth creation, but to claim it is the only way is simply silly.

    Of course government can create value and wealth, be it of an ancillary or direct way. I don’t understand people who seem to think that government is not run by other human beings, they seem to view it as an alien life form ingesting our vital fluids.

    • Arms Merchant

      Of course in a system of state-run enterprises wealth is being created. It’s just a lamely inefficient way to do it. And of course, the consumers are screwed by a lack of competition.

      Are you really suggesting that the U.S. Federal gov’t follow the Chinese model and compete with businesses, with its enormous advantage of having unlimited capital and power of taxation to pummel the competition?

      My point is that government must rob Peter to pay Paul, and simple circulation of money does not lead to growth.
      http://www.learnliberty.org/content/broken-window-fallacy

  • baw1064

    “A job is a job whether it goes to a private sector or government worker”

    Here’s the updated statistics since the end of the recession in July 2009:

    Private sector employment: +1,599,000
    Public sector employment: -593,000

    Observations:

    1) The problem isn’t the private sector. It’s not doing great, but not at all bad–the growth in private sector jobs would have been much higher if not for the losses in public sector jobs due the stimulative effect.

    2) The public sector isn’t just not stepping in to fill demand, it’s strongly contractionary.

    3) If, as I assume, all the right wingers think there should be more private sector and fewer public sector workers, then what the heck are they complaining about? By that measure, Obama is the best president ever!

  • Bingham

    Mikhail:

    The devil is in the details. What’s your plan for improving employment in the US?

    • bidthesoldiersshoot

      I’d say the devil is in whatever you’re drinking or smoking.

      How do you say “hair of the dog” in Mandarin?

  • bidthesoldiersshoot

    .

  • dgforbes

    To say that “a job is a job whether it goes to a private sector or government worker” is kicking sand in our face. A government sector job is wholly funded by wealth created by the private sector. In other words, it’s redistribution of wealth from Peter to Paul. Of course we need government, but we don’t need more government than we need. It’s in private Peter’s interest to pay for government Paul if Paul gives value for money. It’s not in Peter’s interest to pay for two Pauls or three or four or whatever when one would be sufficient; Paul Two et al is simply a parasite. Leaching ever more money from the Peters to pay for an ever increasing number of Pauls is never going to create growth. All of us know this but politicians who live in the short term have no incentive to care about the longer term consequences. Which is why they’re cynically happy to screw their children and grandchildren to get by today. It’s not just the politicians however. Having a vote is not only a right, it’s a responsibility and people who use use that responsibility selfishly are as culpable as the politicians who woo them.