Making More Jobs in Our Economy -- The Secret Sauce

The invisible hand that Adam Smith said would guide competitive economies to socially desirable outcomes seems to have lost several fingers.
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The latest Labor Department figures show the economy is stuck at eight percent unemployment. The New York Times says this is clear evidence that the government needs to engage in more government spending. This is the Obama Administration's view as well. Mitt Romney favors lower taxes and less government regulation to get the economy rolling.

As the first economist to run for President (see and, it behooves me to provide my own prescription for restarting the economy. It's different, in very large part, from what the President and Governor are recommending, although some of what each recommends makes sense.

But let's start with the basics. Our economy's productive capacity is greater than it was before our Great Slump began. We have more labor and more and better machines, factories, residential structures, office buildings and other capital available to produce goods and services. We're just not using all the available labor and capital. The invisible hand that Adam Smith said would guide competitive economies to socially desirable outcomes seems to have lost several fingers.

Some economists believe the problem involves either firms setting their prices too high or workers demanding wages that are too high. In the former case, customers demand fewer goods and services leading firms to demand (hire) fewer workers. In the later case, the workers price themselves out of the market. This is the traditional Keynesian model (developed by disciples of John Maynard Keynes), for which I, frankly, don't see strong evidence. Keynes, himself, voiced skepticism about this interpretation of his views.

Another set of economists think our Great Slump reflects a productivity/technology shock -- a sudden and prolonged decline in our capacity to produce output. This view is also very hard to credit. None of our production knowhow suddenly disappeared in the Fall of 2008 and Winter and Spring of 2009 when companies were firing over one half million workers per month.

The only plausible explanation for such massive rapid-fire job destruction is a collective shift in business and consumer confidence. The specter of so many large financial firms failing, being purchased in shotgun weddings, or being nationalized killed what Keynes called "animal spirits." Our leaders panicked as well and started warning of another Great Depression. Relative to its peak in 2007, the stock market lost half its value by mid 2009. This plus the collapse in housing prices helped flip our economy to its current bad equilibrium.

Today we have plenty of people who would be hired if the firms who would do the hiring were confident they could sell the output generated by these new hires. If a firm, call it firm A, hires workers, at a significant fixed cost, it needs to have some assurance it can sell the goods and services its new hires produce. But if firm A thinks no other firm is increasing its hiring, it can't be assured of finding customers (demanders) to buy its extra production (supply). So firm A doesn't hire. This means that the demand for other firms' products by the workers firm A would have hired never gets registered in the market.

The same story applies for firms B, C, D, etc. Firms don't hire because they think no one else is hiring. This is what economists call a coordination failure. Coordination failures can't necessarily be fixed with tax cuts or hiring subsidies or making larger transfer payments to the public. These moves may worsen expectations about the future because everyone may think, "Gee, the economy must really be bad if the government is going to these lengths to stimulate hiring."

What's needed to fix our country's coordination failure is coordinated collective action to hire, invest and lend. And the person in the best position to help encourage and orchestrate this coordinated hiring and investment by firms and lending by banks is the president. The president needs to be the country's jobs cheerleader in a way that goes far beyond anything we've seen to date. The president has a bully pulpit. He needs to make Hire, Hire, Hire the nation's mantra and he needs to urge those with jobs to assist their employers in making new hires. This may mean taking a smaller pay hike, accepting pay in the form of stock or even taking a pay cut.

Every worker needs to be asking his employer, "What are you doing to increase your employment of those who desperately need jobs?" And every employer needs to be asking his employees, "What can you do to help me hire those who desperately need jobs?"

In the early 1960s, President Kennedy successfully talked steel manufacturers out of raising prices because he was properly worried that their doing so would spark inflation. He realized that raising prices can also involve a coordination failure in which one firm raises its prices because it thinks its competitors as well as other firms in the marketplace are raising their prices.

We need a President who can solicit and coordinate (not mandate) increased collective hiring so that all firms will see that everyone else is hiring, and thus there will be extra demand for the extra output they produce. This, of course, is more challenging in a world economy in which firm A may be selling products to people in different countries. But what's needed then is to get other leaders on board with this collective hiring initiative.

The Germans coordinated their hiring behavior via meetings of industry and unions and, as a result, Germany is experiencing much lower unemployment than are we. We need to learn from Germany's example. Our economy won't necessarily right itself on its own. The Great Depression taught us that bad economic times can last a very long time.

We also need to understand why the economy isn't working. Our textbook economic models presume markets always clear because they assume there are magical market makers who, at zero cost, will match demand to the available supply. In the real world, market-making is costly and, with the wrong set of expectations, can lead everyone to sit on his very visible hands.

As President, on day one, I'd gather the top 1,000 CEOs in a large room. Day two I'd start meeting with mid-sized employers. In these meetings, I wouldn't lock the doors, but I'd have NFL players standing at each exit! I'd talk with the CEOs about why the economy isn't moving -- why we have more than 23 million people out of work or short on work. But the main thing I'd discuss is the massive coordination failure we face and the need for each of them to increase their employment by five percent. I'd stress that they need to do this the starting the next day -- that there would be no coercion, no intimidation, no tax breaks and no subsidies to do this -- that this would be a voluntary, collective, simultaneous hiring by all large and mid-sized employers who would, if they acted together, discover they had new customers to justify their additional hiring, namely the 23.7 million Americans who are now jobless or underemployed.

This is not rocket science. The evidence for coordination failure fairly screams at us. When Lehman Brothers collapsed, American companies coordinated on bad times and proceeded to fire 450,000 U.S. workers, month in and month out, on average, for the next 19 months. We need now to reverse this process. We can each sit on our hands and watch things get worse. Collectively, we can stand up, hire together, and make a difference.

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