Fiscal Policies and Full Employment: An Interview with Jared Bernstein

Jared Bernstein is a Senior Fellow at the Center on Budget and Policy Priorities. He served as chief economic advisor to Vice President Biden and executive director of the White House Task Force on the Middle Class from 2009 to 2011. Prior to the White House, he worked at the Economic Policy Institute and the Department of Labor. He holds a PHD in Social Welfare from Columbia University. He is a contributor to MSNBC and CNBC and writes for the New York Times Economix blog as well as his own blog on political economy at www.jaredbersteinblog.com

You’ve written extensively on the need for a national full employment policy. What would be the benefits to workers, especially those on the lower end of the skills and income spectrum, from such a policy?

We have a serious problem with the distribution of economic growth in this country and this has persisted for a long time. One of the reasons you see a divide between productivity of workers and median or low wages is not because, as classical economics would dictate, their marginal product is falling, but because their bargaining power is weak. Among advanced economies, ours has one of the lowest minimum wage and union density, so particularly low and even middle-wage workers have far less bargaining power than in the past.

Low-wage workers’ best friend is a very tight job market. Only during periods with minimal labor market slack do we see employers bidding up wages and benefits to hire and keep the workers they need. Those at the very top of the scale don’t have that problem. Some are in industries like finance where they can seek rents; others benefit from policies that tilt their way, like lower levels of taxation on asset versus wage-based incomes.

Middle and low wages workers, on the other hand, depend on a very tight labor market. Dean Baker and I have a book coming out where we document this phenomenon. We see that an impact of a ten percent decline in unemployment, for example from five to 4.5 percent, is associated with a ten percent increase in the 20^th percentile wage, say from ten to eleven dollars per hour. If you look at the median worker it’s half as large and there’s zero impact for the 90^th percentile. The impact of full employment is economically and statistically significant at the low end but disappears as you approach the top. Folks at the very top of the income scale don’t depend on full employment in the same way low  wage workers do. We find similar results for hours with much larger impact on hours for low-paid workers than the top.

The simplest way to get a broad picture of this is to look at the data from the latter 1990s. In 2000 the average unemployment rate was four percent. We saw employment rates rise for low-wage workers, part of which was due to welfare reform, but most of which was due to economic growth and higher after tax wages. The 20^th percentile wage was rising at the rate of productivity, which hasn’t happened since, and poverty rates were falling sharply reaching their lowest levels on record. The benefits of full unemployment were glaringly obvious when the economy was operating at full employment, and the absence of those benefits now are also obvious as the economy and particularly job market are operating with considerable slack.

What would a national full employment policy actually look like?

There are a number of ways to move towards full employment. You need the Federal Reserve to balance the unemployment and inflation tradeoff in a way which elevates full employment as a goal, which I would argue is current Fed policy. They are letting the data dictate their actions: unemployment is still high while inflation is very low.

At the same time, you need the federal government to apply fiscal policy. Of course, that’s going in the wrong direction right now, though less so here than in Europe. Austerity or fiscal contraction in the face of output gaps is precisely the wrong prescription. You need monetary and fiscal policy pushing in the same direction.

Trade policy, and dollar policy more specifically, is very important in the current context. It is common for U.S. trade officials and Treasury secretaries to say that we need a strong dollar, but though I understand where they’re coming from, in fact we want the currency’s value to be set in foreign exchange markets. Many of our competitors manage their currencies to have an export advantage. That hurts not only our manufacturers but also our broader labor market as we export labor demand. The loss of labor demand consistent with running significant trade deficits for well over a decade now is a related piece of the problem.

Ultimately, we need to think of the government as the employer of last resort, just as it’s widely accepted that the Federal Reserve is the lender of last resort. The absence of an employer of last resort particularly harms low-wage workers, who even when the economy is doing well face recessionary conditions. We have in the US case, putting political realism aside for a moment, the chance to marry a big problem with a big opportunity: large persistent unemployment with the huge amount of work that needs to be done on public goods.

We need direct job creation programs that help put people back to work. I have proposed FAST!, or Fix America’s Schools Today. We are not in the New Deal Era, when you could send a bunch of guys out into the woods to build a dam, but maybe we are talking about subsidizing private employment, as we did with the TANF subsidized job program. This was a very successful job creation program funded by the Recovery Act. Essentially, if the market is failing to provide the quantity of jobs needed by the labor supply, then government needs to step in as an employer of last resort.

That is particularly germane if you agree with the idea in poverty policy that able-bodied people should work. I happen to support that idea. In a political economy sense, it’s very tough to defend giving resources to able-bodied people without some conditions around work. But there has got to be a job available. If you ignore the demand side of the equation you’re missing a huge part of the problem.

A lot of people throw their hands up and say it’s not my problem and the Fed should do something or action is constrained by outside forces. They’re wrong; this needs to be a policy variable.

How do you answer economists who argue that full employment of four or five percent is impossible due to globalization and technological change that makes some types of skills redundant?

Nobody knows what the unemployment rate consistent with full employment is. So you have to watch all the relevant dials to know it when you see it. Certainly in the 1990s economists thought NAIRU, the lowest unemployment rate consistent rate with stable prices, was six percent. But Alan Greenspan, who clearly made some serious mistakes on the regulatory front, recognized that accelerated productivity growth enabled the unemployment rate to drop further without accelerating inflation, and it hit four percent in the late 1990s while inflation decelerated. While we may not know the true “full employment” unemployment rate, we are clearly well above it now.

Earlier you talked about how monetary and fiscal policy needed to work together. Could you comment on the aggressive steps to jumpstart demand that the Abe government and the Bank of Japan are experimenting with?

Though there are obviously hiccups on the way, and Japan in particular has some sectors that are not responsive to policy as the textbooks suggest they should be, I think Japan is pointing the way forward. If you read Paul Krugman, his simple and very predictive models of how advanced economies work predict that full bore monetary and fiscal stimulus are needed to get Japan out of its fiscal trap. It does seem to be working. I think the lesson for the US is not just that you need monetary and fiscal stimulus working in the same direction but that they’re complementary.

Monetary stimulus is far less effective if facing fiscal headwinds. It’s like you have set the table but there’s nobody coming to dinner. Monetary policy targets the interest rates, whether the short term rate through the Fed Funds or the long term rate through asset purchases. The cost of borrowing is obviously a key economic variable, but simple IS-LM analysis will tell you it’s not the only story in the mix, especially in the face of weak consumer demand. If you have fiscal policy going the wrong way through cutting spending and lowering incomes, then consumers and investors are not in a position to take advantage of low interest rates. That’s why you constantly hear Bernanke going to Congress and saying “You need to help…I have the interest rates where they need to be but they gain less traction when you impose contractionary fiscal policy.”.

What prospects do you see for any action on measures to boost employment in the current or medium term political climate?

Very little or nothing of what needs to be done will be done in this political climate with the exception of monetary policy, which is largely insulated from the politics. Why is it that the only group in town that’s trying to target the unemployment rate is the Federal Reserve? The politics are horrific right now.

Do you see any better prospects at the state level? What can lower-level governments do to foster employment growth?

If anything good is going to happen it’s at the state level. Some states have done good things, often aided by the federal programs put in place before the politics got so bad. For instance, in Michigan, which obviously has some deep economic problems, there was a part of TARP put in place while I was in the administration which set aside $7.6 billion nationally for areas and neighborhoods that are beset by high levels of foreclosure. Some of that can be used for homeowner relief but some of that can be used for blight removal. Michigan just announced a program to spend $100 million on blight removal.

What can we learn from other countries’ labor market policies?

Some countries have done things right. Australia’s high minimum wage has stimulated demand, but it’s a unique case since it’s an island and very export dependent. I’m not sure that Austan Goolsbee, one of my favorite professors here at The University of Chicago, is a big fan of the minimum wage, but he’s really a great economist. He and I may part ways here and there, but I really like the way he thinks about things, particularly financial market regulation. He can both understand and explain economic concepts very well, which few people can do.

Germany essentially traded productivity growth for employment during the recession in a very interesting way. If you look at their GDP loss it was similar to ours, but their employment was a lot more stable. They kept a lot more people working through public policy, primarily work-sharing, which is something we could learn from. Work-sharing is actually a national option now, signed into law by President Obama, but it’s not well known.

Feature Photo: cc/(Daniel Lobo)