How to Invest in U.S. Employment

With the U.S. economy struggling and unemployment above 9 percent, President Barack Obama will outline new measures to create jobs and jumpstart the economy in a speech to Congress (NYT) on September 8. Labor economist Gary Burtless of the Brookings Institution says investment from both the private and public sectors is vital to generating employment. One way that the government can develop employment remedies, Burtless says, is by "increasing its budget for infrastructure investments, either through direct employment of workers, or, indirectly, by hiring private-sector companies with expanded public budgets."

What is the employment landscape in the United States?

Unemployment has a direct effect on the well being of Americans because it reduces the amount that we produce and, consequently, reduces our living standards. High rates of unemployment reduce the bargaining power of labor unions and of unorganized workers, and the consequence is that their wages increase more slowly than they would if the unemployment rate were considerably lower. Employees are getting a smaller share of the output produced by the nation’s private firms than they were getting before the recession began. That reflects the weaker bargaining position of workers; it reflects the fact that employers don’t have to give such big pay increases. They can ask their workers to pay for a larger proportion of the cost of the health benefits that they receive and a larger proportion of the costs of the pension benefits they receive.

How does unemployment affect U.S. economic leadership?

There’s no doubt that the United States enjoyed robust growth during the 1990s and, indeed, had low unemployment rates. Especially by the end of the decade, that enhanced the prestige of the United States. The rest of the world could look with envy at the United States and think, "They have an administration and a Congress that are enacting sensible macro-economic policies; they have a central bank that seems to know what it is doing." People thought it easy to get a job; people were enjoying pay increases from one year to the next; the poverty rate in the United States was declining; and the living standards of middle class Americans were improving.

How does U.S. unemployment weigh on the global economy?

From the early 1980s onward, the United States exerted influence on the world economy because it was a big net importer. We were sort of the "consumer of last resort" for much of the world’s economy, certainly for East Asia, but also to Europe and the developing world. In East Asia, the net exports that they sent to the United States helped these countries grow fast and maintain relatively low rates of unemployment.

When the United States becomes a less robust country, when the assets that the United States can sell to finance its trade deficits lose a little of their luster in the world, then [other countries] have to look elsewhere to boost their net exports. Given the growth model that many countries, especially in East Asia, followed for many years, a weaker American economy represents a challenge for those countries.

What do President Obama and Congress need to do to make a dent in unemployment?

There are three broad ideas: one has to do with giving incentives for private businesses to invest sooner rather than later; the second is giving businesses incentives to add to production by adding to the ranks of their payrolls; and the third is the government increasing its budget for infrastructure investments, either through direct employment of workers, or, indirectly, by boosting public budgets for infrastructure projects. I suspect that most of the additional equipment purchases and capital purchases will also give rise to additional business for firms here that produce those things [supplies for bolstering and building infrastructure such as highways, airports, school buildings, and telecommunications grids].

What kind of jobs do you mean in terms of "direct employment"?

The teaching core of the United States is now shrinking at about 150,000 [teachers] per year. But giving financing to school districts, so that they could maintain their teaching core [and, as part of investing in education infrastructure, updating and building schools], would seem to be one thing that you could do. That’s direct government action to deal with unemployment. States and localities are spending less and they’re shrinking their work forces because they don’t have enough money to keep people employed. It’s been a major drag over the last fourteen months or so, offsetting a third or half of private-sector job growth. Instead of the government even being neutral, it actually has been a drag on employment growth.

What do you mean by "indirect employment"?

Two of the hardest-hit industries in the United States are construction and heavy manufacturing. Those are two that took very big hits in terms of unemployment--factory shutdowns in the case of manufacturing, elimination of shifts. Public infrastructure would be a heavy user of construction firms and heavy manufacturing, capital goods industries. Now, maybe the government can directly employ some of the people doing construction. But a more reasonable thing for a country like the United States is to hire private-sector companies [for public infrastructure projects] but with expanded public budgets for that purpose.

The net increase in government spending for investment has been very small relative to the immense drop in investment in [infrastructure projects] that the private sector has seen today, compared to 2007 [pre-financial crisis]. So, there is a lot of room for the government to increase its investment in infrastructure, capital equipment--to replace some of the missing demand that has come from the collapse of investment by private households and American businesses.

What kind of tax incentives might generate employment?

We would prefer that private companies feel it’s worthwhile to make investments now, that it’s worthwhile to add to their payrolls now, rather than sometime in the future. The way you can influence their incentives to make investments now is to change the tax treatment of investments that take place over the next couple years. The idea is that you want to make it less expensive for businesses to invest their dollars by more lightly taxing the incomes that they are going to earn on that investment. But you also want to make clear that these are temporary measures, that the regular tax regime is going to come back into place; that encourages businesses to want to do the investment sooner, rather than later. The idea isn’t that you’re trying to make the U.S. economy more capital intensive. It’s so that we can put to work businesses and factories that produce capital goods, and that are currently shut down or only operating at half speed. That’s what we want to do on the investment/tax credit side.

And then there’s hiring subsidies. One proposal I have suggested goes along these lines: For every employer that increases the net number of people on their payroll starting next January 1--without cutting the wages of their payroll next year--we would forgive the company its obligation to make payroll tax contributions of that increase in employment. So, if they are employing one hundred people this year, and they increase the number of people to one hundred and five next year, we won’t change the payroll tax on that increase; they won’t have to pay 7.5 percent [per-person] social security and Medicare contributions for that increase in their payrolls. That is much more targeted on boosting employment than is giving everybody in the United States a general 2 percent forgiveness on their payroll taxes.

The administration has also talked about possible bilateral trade agreements. Is that an effective employment generator?

I don’t think that they’re going to add very much to the ranks of employed workers here in the United States. To some degree, freer trade will take away some employment opportunities in the United States, because it will make it cheaper to import stuff from Panama, or Costa Rica, or Korea, or Colombia. [Editor’s note: The United States has pending bilateral trade deals with Panama, Colombia, and South Korea.] The trade agreements are with relatively small countries. I was not a big believer that the trade agreements with far bigger partners [when NAFTA was passed]--Mexico and Canada--were huge producers of jobs in the United States. The main benefit to the United States from a narrow economic point of view was that the jobs that would be done here in the United States would be jobs in which we have a comparative advantage and in which we are more productive. And so it would lift the income of Americans. The claim that there was a huge effect on the number of jobs in the United States was not credible to me. The effects on employment are likely to be even smaller than those of our trade agreements with Canada and Mexico.

As the incoming chairman of the Council of Economic Advisors, what will Alan Krueger’s role be in shaping U.S. economic policy?

The crucial function served by a chairman of the Council on Economic Advisors is that he can communicate the wisdom of the economics profession to the political actors in the administration, and most especially, the president of the United States. It is not to be a fount of great new ideas, it is primarily to give even-handed, dispassionate, honest analysis, with the help of a very capable staff that reflects the insights that economics can bring to bear on the nation’s problems. Krueger commands the respect of his peers in the economics profession.