A short new book by Robert Pollin, Back to Full Employment (Boston Review Books/MIT Press), offers some much-needed clarity as we head into the election season with unemployment still hovering unacceptably at over 8 percent.
Pollin directs the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst, has collaborated on research with progressive economists like Dean Baker, and is previously the coauthor of A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States (2008).
The value of Pollin's book is that it guides policymakers toward nudging the unemployment level down to around 4 percent, which was achieved at the end of the Clinton presidency and ought to be achievable again in the near future without any radical measures. The book demonstrates how much policymakers are leaving off the table, how even relatively small changes can accomplish the desired objective.
The subject is particularly frustrating for liberals to talk about, because the solutions are out there, but not the political clarity or will. Pollin offers both short and long term proposals to fix the deficit in thought. None of his ideas are earthshakingly new, yet together they add up to a persuasive blueprint for action.
It's important to get some negative ideas out of the way first. Immigration and globalization by themselves are not the culprits to blame for high unemployment. Pollin notes that studies have shown that in cities with the highest proportion of immigrants, wage levels and job opportunities are not negatively affected for native-born workers. This is because immigration, while it raises the supply of labor, also increases the demand for goods and services.
Similarly, it would be misplaced to demand an increase in U.S. employment levels at the cost of increasing unemployment in developing countries. For now, developing economies do need to rely on exports to rich countries, though this can change in the future. In the Clinton years, immigration was high as was the trade deficit, yet unemployment was at near-historic lows. Of course, the prosperity of the Clinton years was also fueled in part by a stock market bubble, which was to have its more devastating encore in the real estate bubble of the Bush years, so it is this kind of instability, fueled by lack of productive investment opportunities, that we need to address.
Pollin notes that Marx, Keynes, and Kalecki each in their own ways noted that a high reserve army of the unemployed is something preferred by the capitalist class, to drive wages and other demands by labor downward. Yet examples from the Western democracies have shown that this concern of capitalists is exaggerated and can even lead to too much inequality, which in turn can lead to the collapse of the whole economy, if this irrational fear is not checked. Sweden, for many decades, managed to keep inflation low and employment high, while the U.S., over the last three decades, has generally given in to Milton Friedman's market fundamentalism, with consequences for all to see.
What Pollin is really talking about is a set of prejudices that have been propagandized to the level of truth, to the extent that politicians are unable to pursue more objective policies. A range of inflexible trade-offs has become solidified in the public mind, for example the idea that current levels of budget deficits are calamitous. They're not, and with some tinkering, they can be brought down dramatically. Besides, higher employment itself is the best reducer of deficits, as it both brings in more tax revenues and reduces demand on government outlays.
What can be done in the short term? Pollin notes that banks and nonfinancial corporations are currently sitting on excess amounts of liquid reserves -- $3.6 trillion, to be precise. If they deployed about $1.4 trillion from this amount in the real economy, that would mean a massive surge in employment -- Pollin estimates to the tune of almost 20 million jobs! Pollin proposes that government take a carrot and stick approach toward banks when it comes to reserves. Currently, banks are excessively restrictive in loaning money to small businesses, the opposite tendency from what was prevalent during the financial bubble.
Debt forgiveness, too, according to Pollin, must be a part of the short-term solution, and it should alleviate conditions for the 11 million homeowners currently underwater. Though Pollin doesn't mention this, I would add massive student debt forgiveness into the policy mix as well.
Economists generally agree that the Obama stimulus was not adequate to counter the decline in investment and spending caused by the Wall Street crash. There is still time to enact substantive stimulus, though the case has never been successfully made by the Obama administration that deficits under further stimulus would be easily manageable. Such, in fact, is the case, although it is also true that deficits in the range of nearly 10 percent of GDP over the long run are not sustainable. But the cost of borrowing for government is so low at the moment--despite public misperception -- that not to take advantage of massive stimulus seems utter folly.
For the longer term, Pollin makes the interesting point that the U.S. has always had an industrial policy of sorts. It's just that we don't call it that, because of all the negative connotations it conjures up in the public mind, but in fact it's been pretty effective. It's conducted mostly under the auspices of the Pentagon and has given us major technological advances, including the Internet. Why not rationalize and make transparent this semi-hidden, semi-accountable industrial policy, and turn it to more productive purposes?
This connects too to the idea of return on investment, and here Pollin makes the clear-cut case that investments in education and health care yield higher returns than investments in the military and security industries. The job multiplier effects are far greater in the case of the first two, as is also true of investments in green industries.
It is a matter of shifting priorities, and overcoming irrational prejudices about deficits, currency, trade, immigration, globalization, inflation, and the living wage, among other issues, that make rational policy discussion almost impossible. The data do not back up the paranoid story being told by the other side; the numbers are on the side of progressives, though they have done a terrible job of selling their ideas. A small tax on financial transactions, for example -- one of the longer-range proposals Pollin emphasizes, as do many economists -- falls well within the range of mainstream thinking, is not by any means radical reengineering, yet it would have measurable impact on employment by bringing down deficits over the longer term.
Dodd-Frank, the Obama administration's financial regulation bill, was much watered down, and Wall Street lobbyists may yet do significant damage to it in the implementation phase. Yet it's possible to put real teeth in it -- such as its restrictions on "proprietary trading" by investment banks like Goldman Sachs -- all of which adds up to a financial system that doesn't skew quite so obscenely toward the interests of the very wealthy, depriving the economy of the air in which decent living standards can be maintained and opportunity once again aligns with effort.
In the 1960s, Milton Friedman proposed a "natural rate of unemployment," which has since become dogma. What is the natural rate of unemployment anyway, and why can't it be shifted down? How much truth is there to the famous Phillips curve, which proposes irreconcilable tension between inflation and employment? And what about Robert Barro's hypothesis of perfectly rational, mechanistically calculating economic actors, who make all government intervention useless because they discount the future tax impact of any activism in their current spending and investment decisions? Are people really that calculating?
Pollin's short book, connecting different variables in a persuasive way, makes the urgent case for returning decent jobs back to the center stage of policymaking. Real wages have fallen compared to where they were 40 years ago, while productivity has more than doubled. If we are to look for the real reasons for this unfairness -- the profits, after all, are ending up in someone's pockets -- we have to do better than blame defenseless immigrants or poorer countries trying to catch up.
The amazing thing is how mainstream and non-radical these ideas are, how strictly they fit into the liberal-capitalist paradigm, yet how significant their implementation would be. Something far less than a major overhaul would put us back on the path of fairness and therefore stability and higher employment.
Anis Shivani's debut novel, Karachi Raj, is forthcoming in 2013. His other books are My Tranquil War and Other Poems (Sept. 2012), The Fifth Lash and Other Stories (Nov. 2012), Against the Workshop: Provocations, Polemics, Controversies (2011), and Anatolia and Other Stories (2009). He is writing a new novel, Abruzzi, 1936, and a new book of criticism.