Note: this is a cross-post from The Realignment Project.

Introduction:

Recently, the Senate attempted for the second time to pass a small jobs bill. The American Jobs and Closing Tax Loopholes Act of 2010 – which would provide for an extension of Unemployment Insurance, COBRA health insurance subsidies, $24 billion in aid to states’ Medicaid programs to prevent deficit-driven layoffs, partially paid for through closing loopholes that benefit the wealthy – already passed the House three months ago, but is stalled in the Senate. The fact that the bill failed with 56 senators voting in the affirmative not only sharpens the ironies of the anti-democratic nature of the Senate, but also shows that we’re stuck in the middle of a full-blown austerity craze.

Hence Senator Hatch’s call for the unemployed to be drugs tested - for Unemployment Insurance that they have paid for through years and years of contributions – and even supposedly liberal Senators like Dianne Feinstein suggesting that “people just don’t go back to work at all” if UI eligibility is extended beyond 99 weeks. On the simplest level, this is insanity – there are about thirty million unemployed (including both official and unofficial) and only three million job openings. Drugs tested or not, the 27 million left over don’t have a choice of whether to go back to work.

Unfortunately, to paraphrase Keynes, politics can stay irrational longer than the unemployed can stay solvent. Austerity is in full political swing, and unlikely to improve, except in the improbable scenario that Congress remains Democratic in the midterm elections and the Senate Democratic Caucus follows through on their threats to reform the filibuster. A public policy that can only work in optimal circumstances isn’t worth much, though, and there are still ways to move forward on jobs despite being lumbered by irrational budget-neutral burdens.

Theory:

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

- John Maynard Keynes on classical economics, General Theory

Before we get into the specifics, let’s take a second to understand why we are in the grip of an austerity craze. To begin with, it’s important for us to recognize that the 38 Republicans who voted against this bill likely did so for a multiplicity of reasons that include the fact that it’s good politics for them to prevent Democrats from passing anything that could alleviate – or be seen to alleviate – unemployment levels before the midterm elections – but pragmatic politics doesn’t quite explain all of it. What links them to Joe Lieberman and Ben Nelson, both of whom would lose power should the Democrats lose the Senate, is a shared ideology.

What conservative Republican and conservative Democrats share is an ideological predisposition that prefers austerity to government stimulus. This predisposition has many roots – a stated preference for “rugged individualism” over “nanny-statism,” a philosophical distaste for redistributing resources from those deemed “successful” to those who have less money are less “productive,” a belief in the free market over the public sector, and so forth. The important to understand is that this ideology isn’t passive, it’s not something you stick in your back pocket as a metaphorical membership card – it does work.

And here, the work that it’s doing is similar to what John Maynard Keynes described above – it’s explaining away the cognitive dissonance when people who are individually not monsters are called upon by their beliefs to do something inhumane and irrational. And the thing about ideology is that it doesn’t matter to those who believe that austerity doesn’t work – without spending and jobs, there can be no growth; without growth, revenues will fall, and thus austerity creates future deficits to be austere about. One can always find more Ptolemaic epicyles to explain why what you believe to be right is also true.

Or perhaps I’m being overly credulous about the extent of sincerity in the ranks of austerity cheerleaders. After all, they haven’t bothered to provide explanations for how they intend to hit a moving target, or what will prevent a double-dip recession, or how to avoid the paradox of thrift. It’s certainly the case that wide swathes of the austerity brigade seem to less than serious about say, forgoing tax cuts for the wealthy, or cutting military spending, or agricultural subsidies that help their home states.

Whatever the case, whether it’s ideology or something else, the good news is that there is a way to get around budget-neutral requirements and still create jobs.

Budget-Neutral Jobs:

While we’re toting up intellectual short-comings, I don’t want to leave the center-left out. One problem that we have seen since the beginning of the Obama Administration is, in my opinion, an over-emphasis on fiscal Keynesian solutions to the Great Recession. (For those who don’t study the history of public policy, politics, or economic theory, fiscal Keynesianism was a variant of Keynesian theory that emerged after WWII which tried to make a synthesis between Keynes and neoclassical economics, and emphasized Keynes’ arguments about aggregate demand and aggregate investment. Fiscal Keynesians believed that you could implement Keynesian policies through the “Fisc and the Fed,” namely through adjusting aggregate demand through government spending and aggregate investment through interest rate modulation, without the need for more radical interventions into the free market). Historically, this shouldn’t be surprising – fiscal Keynesianism has always been dominant within more moderate strands of liberalism, and more moderate liberals have tended to outnumber more left-leaning progressives (or “left-liberals” or “labor-liberals”) within the Democratic Party. Hence Christina Romer as head of the Council of Economic Advisors (to say nothing of Goulsbee or Summers), rather than Jared Bernstein. You could even argue that Paul Krugman or Joe Stiglitz are much more orthodox and closer to fiscal Keynesianism than say, L. Randall Wray or James K. Galbraith.

The actions that the Obama Administration has taken to fight the Great Recession – including the stimulus, the first budget, the Fed’s expansion of the money supply and recapitalizations, and so forth – have been pretty much fiscal Keynesian in nature. And they’ve been modestly successful. We’ve stimulated enough to get us out of recession and into modest GDP growth; we’re creating jobs but not enough; we’ve done a lot of traditional easing of the money supply, but the Fed hasn’t really thought outside the box in terms of how it’s trying to expand investment, consumption, and employment.

The virtue of going beyond a fiscal Keynesian approach – tackling the problem from a social Keynesian or institutionalist viewpoint – is that by de-emphasizing a rote equation between aggregate demand and aggregate GDP (the idea that you need to spend X% of GDP to make up for X% decline in demand) and aggregate employment (Okun’s law that you need to raise GDP by 2% to lower unemployment by 1%), you can get a lot more creative with your solutions and find some that don’t necessarily require you to spend in multiples of $140 billion, or that find new ways to get that money rather than straight deficit-spending.

Social Policy Through Social Insurance:

For long-time readers of The Realignment Project, this proposal is less surprising – establishing a jobs program as a social insurance program (i.e, Job Insurance) has certain advantages over bog-standard stimulus. The first is that, by directly creating jobs, you actually get more bang for your buck in terms of job creation than you do with traditional stimulus:

Even the best forms of traditional stimulus top out at 1.15 million jobs per $100 billion spent. But direct job creation does even better, creating 2.85 million jobs per $100 billion spent – and that doesn’t even count the jobs created through the multiplier effect of newly-employed workers spending their wages. The second policy difference is that, as a social insurance fund, the program generates its own revenues - and if you structure the premiums in a progressive fashion, backload the premiums but frontload the jobs, and/or use the premium revenue as collateral for a loan from the central bank, you can have a budget-neutral financing structure that doesn’t pull demand out of a recovering economy.

And while I’ve been banging on the drum especially hard in the case of Jobs Insurance, it’s true that other forms of social insurance can also serve as budget-neutral sources of job creation. One of the effects of universal health care, for example, is an increase in hiring in the medical services sector – hence, estimates that the passage of the Affordable Choices Act will lead to 250,000-400,000 new jobs per year (although given the back-loaded nature of the bill, those jobs will probably start arriving only in 2014). There are other forms of Social Insurance that could be explored in the meantime – rebuilding Unemployment Insurance would probably boost employment in the retail, transportation, manufacturing, and services sectors; improving Social Security would likely create many home health aide and elder care positions; creating a Child (Care) Insurance or universal Child Allowance system would likewise lead to more employment in child care and the like.

Progressivize Taxes:

One jobs-creation option that gets mentioned frequently in debates is the payroll tax holiday, which would eliminate FICA taxes for workers and employers – thus putting more money in consumers pockets, making it cheaper to hire workers, and freeing up money for more staff and investment. What I find surprising is that more people haven’t hit on the idea of permanently progressivizing the payroll tax as an option. Progressivization provides solutions for many of the drawbacks of a payroll tax holiday: first, because progressivization can be either revenue-neutral or even revenue-positive (since you can increase payroll taxes on the wealthy to compensate for lower taxes on lower-income folks)  it doesn’t blow a massive hole in Social Security’s finances, thus preventing the rather large expense to the budget of a holiday. It’s much easier to sell “free” than “expensive. Second, progressivization has the advantage of allowing you to deal with job creation and inequality at the same time, redistributing significant levels of income while creating a dis-incentive to runaway executive compensation. Third, by emphasizing a permanent transition to a higher-employment political economy, you avoid the problem of a short-term substitution effect.

The same procedure can be done for other forms of taxation. State and local sales taxes, for example, discourage consumption and punish the poorest. A system of sales tax credits for people within 125-150% of poverty paid for by a surcharge on luxuries would both repair a major source of regressive taxation in America, and provide an important boost to consumer spending that could again be either budget-neutral or positive. Just as the progressivization of the payroll tax has advantages over a payroll tax holiday, a progressivixation of the sales tax would be preferable to a sales tax holiday.

Labor Market Policy:

One of the things we have seen in this Great Recession is that labor market policies have made a huge difference in outcomes. For example, Germany (which saw unemployment rise from 7% to only 9% at the peak of its recession, and drop to 7.7% this June) which has a robust labor market policy that pays employers to cut hours rather than layoff workers while making up the difference in salary to workers,  has experienced a much milder recession than many other countries. Obviously, such a system would require significant startup funds – although I imagine some money could be transferred from Unemployment Insurance in future recessions – but there are other models of labor market policy that don’t require heavy government spending.

For example, a labor market policy regime modeled on the pre-liberalization Swedish system could include Job Insurance as described above, the establishment of Labor Market Boards (responsible for monitoring labor market supply and demand, operating the U.S Employment Service to direct unemployed workers into either public employment or private employment,  drawing up a yearly “shelf” of projects for Job Insurance projects, and managing reserve funds), an Investment Reserve Fund (a tax on profits is levied on corporations, but waived if the corporation puts its money in a sequestered account in the central bank. This rate is then modulated counter-cyclically (increased during economic booms, and decreased in recessions), and Employment-Related Subsidies (including a German work-share program, a stockpiling subsidy that provides a subsidy for a 20% increase in inventory for corporations to cushion against the effects of a sudden decrease in consumer demand, while smoothing out the “dead cat bounce” in factory orders that normally happens in recessions; a Training Subsidy that provides grants for employers to send their workers to school or training programs when demand is slack, rather than laying them off), and recruitment subsidies (essentially a permanent version of Obama’s new jobs tax credit)).

Most of these could be instituted now in a gradual fashion, using the funds from corporate profits that have recovered far faster than employment levels to provide subsidies for increasing employment. More importantly, having them around will make our economy better prepared for the next economic downturn, sparing us much future pain.

Conclusion:

After thrice voting against the jobs bill, Olympia Snowe apparently is now seeking to “demonstrate her concern about Americans who remain out of work“  by calling on Democrats to put forward an even-smaller bill that just includes unemployment insurance extension. Joe Lieberman and Ben Nelson  et al. claim that their sole concern is ensuring that the jobs bill be completely budget-neutral (while opposing tax loophole closures that might cover the cost).

So let’s call their bluff. Let’s send a budget-neutral jobs bill to Congress that is millions of jobs strong and remove any possible excuse for not passing this, and then we can see which of our representatives are truly serious about “a responsible recovery.”