There’s No “Skills Shortage”

There are plenty of reasons why higher education in the US needs to change. There are plenty of good reasons why community colleges in particular deserve greater investment. But the American Association of Community Colleges (AACC) gets it wrong when they claim

There is a skills gap in our country, causing employers to have unfilled positions and too
many Americans unable to find family wage supporting jobs.

Wrong. Wrong. Wrong.  This is a zombie economic idea.  It’s enormously disappointing when leaders in higher education can’t even get the basic economic thinking straight.  First, let’s just apply some basic economic thinking to it.  Although there are good heterodox reasons for not thinking of the labor market is not an ordinary market (i.e. it’s institutional, not transaction-based), but let’s roll with the idea since so many purveyors of the “skills shortage” myth act like it is.  The implication is that there are multiple “job markets” and that many, perhaps, most are suffering a “shortage”.

So what’s a “job market”.  A simple definition would identify the nexus of potential workers and potential employers in a specific geographic region in a particular occupation.  For example, “welders in metro Chicago” or “CNC machine operators in SE Michigan” or “software developers in Houston” would be examples. Now if there’s a “shortage” in one of these job markets, it means there are fewer sellers (smaller quantity offered, to be technical) and more buyers demanding a larger quantity at the going market price.  Now what happens in both theory and practice when a market has a persistent shortage? Anybody? Yes, the price rises.  Price goes up to attract more sellers and discourage buyers.  And the price keeps going up until equilibrium between quantity offered for sale and quantity demanded become equal and eliminate the shortage. If there were shortages in job markets we should see wages going up!  We should see companies tripping over themselves to offer more and better benefits.  But we don’t see that do we? Wages are stagnant across the board.  That’s because there really isn’t any widespread “skills shortage”.

What we have is business owners and managers reporting a shortage of highly skilled workers who would be willing to work for below-equilibrium and falling wages.  Remember as a nation we’ve drastically cut back on public funding of education and over the last generation  companies have drastically cut their spending on training and apprenticeships.  Those businesses now expect a free-ride from others.  They want workers to pay for their own education and training without paying the wages needed to make that human capital investment worthwhile.  If there were truly a skills shortage, not only would we see rising wages but we’d also see rising college enrolments as the rising market wage encouraged students to invest.  But we don’t see either rising wages or rising enrolments.  In fact for the last couple (few?) years, enrolments have been declining.

I’m not the only one pointing out how bad this zombie “skills shortage” myth is.  Paul Krugman pointed out recently:

    …this new EPI report is a useful reminder of the extent to which another doctrine that sounds serious retains a grip on discourse — namely, the notion that we have big problems because our work force lacks essential skills.

This is very much a zombie doctrine — that is, a doctrine that should be dead by now, having been repeatedly refuted by evidence, but just keeps on shambling along. EPI presents some very interesting evidence from a survey of manufacturing, but they’re hardly the first to show that the data don’t at all support the skills-shortage hypothesis.

But it’s not just Paul Krugman and progressives saying that the “skills shortage” idea is bunk, its leading conservative economists too, like Ed Lazear in this 2012 paper.   Even the Boston Consulting Group, who we might expect to take push the “skills shortage” idea since business owners like to push the idea, seems constrained to follow the data and their data show that:

So what accounts for the high and lingering unemployment?  The Economic Policy Institute looked at the whole issue and surveyed the literature and research in this January EPI report.

There is a sizeable literature on whether a skills mismatch is a driver of today’s weak jobs recovery, and the strong consensus is that the weak labor market recovery is not due to skills mismatch (or any other structural factors). Instead, it is due to weakness in aggregate demand.

That’s it.  We have a shortage of aggregate demand. We have a shortage of customers who spend. We have a shortage of spending. We don’t have a shortage of skills.

Higher education leaders who position their plans based on the false premise of a skills shortage do themselves and their institutions a dis-service, so we may have a shortage of higher education leaders willing to do their own critical thinking and rely on research instead of parroting politically popular zombie ideas. I can understand the temptation of many higher education leaders to use push the idea because they think it will help them get funding. But that’s a losing strategy. By embracing such zombie ideas, they destroy their own credibility with the faculty, the very people they need to implement the changes they’re advocating.

Update on Current Situation – October Jobs Report and 3rd Qtr GDP

Two of the more important (U.S.) economic measures were reported in last week and half.  Yesterday the October jobs report came in.  The week before we got the flash report on 3rd quarter GDP.  Both measures were better than feared, not quite as good as consensus expectations of many forecasters, and overall still a disappointment.  First let’s look at the numbers and then I’ll comment. CalculatedRisk, as usual, reports the facts on the jobs report:

From the BLS:

Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The unemployment rate declined to 9.0% (red line).

The Labor Force Participation Rate was unchanged 64.2% in October (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population.

The Employment-Population ratio increased to 58.4% in October (black line).

Note: the household survey showed another strong gain in jobs, and that is why the unemployment rate could decline with few payroll jobs added – and the employment population ratio increase.

Percent Job Losses During Recessions

The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Now we reach back to October 27 and CalculatedRisk again:

From the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “advance” estimate released by the Bureau of Economic Analysis.

The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment.

The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q2 at 2.5% annualized was below trend growth (around 3%) – and very weak for a recovery, especially with all the slack in the system.

So what’s happening.  Nothing much, really.  That’s the problem.  The economy is effectively going sideways.  Yes, we continue to grow, but the rate of growth is so slow that we aren’t really seeing any improvement in conditions.  For all of 2011 we have grown at a rate below the long-term historic trend of 3.0%.  We are struggling to keep up with population growth and not really doing anything to “put people back to work”.  hat’s not a recovery.  That’s society throwing 5% of our workforce off the bus 3 years ago and saying “so long” forever.  It should be unacceptable, especially when it’s possible to do much better.

Stimulus Requires More Than Taking Your Foot Off the Brakes

Last week I discussed how I think the President’s jobs proposal, the American Jobs Act, will be less than stimulating.  I updated it here.  I based my analysis on what economists call “back of the envelope” calculations – quick simple estimates of the key variables using rounded numbers.  Now the folks at Goldman Sachs research have put the proposal through their more sophisticated and complex econometric models.  And they come to … roughly the same conclusion.  Paul Krugman at the NY Times observes:

Goldman Sachs (no link) has a nice chart showing just how much fiscal policy has been a drag on the economy since the second half of last year, and also shows that the Obama jobs plan, even if enacted in full, would only be enough to put it in neutral:

Just worth bearing in mind.

The graph (the line) shows the effect that total government fiscal policy, including federal, state, and local, has had / will have on GDP growth rate.  In 2009, Q1-Q3, governments were having a very positive effect on GDP growth, adding up to 2.5 percentage points to the GDP growth rate.  By 2009 Q4, though, this stimulus effort had deteriorated and was starting to have a negative effect, slowing GDP.  Initially this was because state and local spending cuts were overwhelming the federal increases in spending.  But the 2009 stimulus bill ran it’s course and the feds joined the austerity party and started cutting spending along with state and locals in late 2010.  In 2011, our problems have been the austerity programs, the spending cuts at state, local, and federal level. Government has had it’s foot on the brakes trying to slow an already weak economy.  It’s worked. The economy is coming to a halt.

Unfortunately, the proposed jobs program isn’t really much of a stimulus. It’s too weak. It’s too small. And it’s focused too much on tax cuts that won’t be spent instead of spending.  The blue line above shows the likely effects.  Even if passed (a near impossibility given the Republican majority in the House), it will only reverse the contractionary effects of spending cuts without adding any new stimulus to grow GDP further.

Stimulus is supposed to be about speeding up GDP growth – hitting the accelerator.  Simply taking your foot of the brakes isn’t the same thing as hitting the gas.


Where Are or Were The Jobs?

With the all the alleged concern in Washington now from both parties about job creation, there’s something that’s missing in much of the debate: facts.  So let’s take a look at some.  I really like graphics like the one below.  They’re complex and take quite some time to read and fully absorb what’s there, but they pack a lot of information into a small space.  They’re info-dense.

We hear from the left a lot of talk about “good” vs. “bad” jobs.  Often what they are referring to is the relative wage level of the jobs.  In general, manufacturing and government jobs are “good” because they tend to have slightly higher than average wages*.  Education and health services jobs are a mixed bag with a lot of variation.  Doctors, nurses, and admins do very well.  Home health aides and assisted living workers not so much.  Teachers are either good or bad depending on the state. Leisure and hospitality are generally panned as below-average.

From the right we hear claims that heavily unionized sectors like motor vehicles, parts and manufacturing are holding down growth and killing jobs.  We also hear political conservatives claiming that excessive growth of the government sector has somehow prevented the private sector from adding jobs.

We also hear from the left that it’s lack of demand that is keeping unemployment high.  The right like to claim the unemployment is structural – we have the wrong workforce with the wrong skills.

But what’s really happened?  How have the different policies of Bush and Obama (to the degree they’re different – they aren’t as different as some think) affected the employment picture?  Let’s look a this graph from David Altig, Senior VP at the Atlanta Federal Reserve Bank as posted at macroblog.  It helps to click and enlarge the graph in a new window/tab.

Click to Enlarge

First, let’s examine how the graph is structured.  As always, it’s important to make sure we understand a graph’s axes first.  Horizontally, we have the average monthly change in employment in percentage between Dec. 2001 and Oct. 2007.  This period covers all of the non-recession portion of the G.W. Bush administration.  Industries to the reader’s right grew strongly and thrived under the Bush administration’s policies.  Industries to the reader’s left shrunk. No growth is the zero or mid-line. Next, the vertical axis shows a similar measure, average monthly percent increase in employment, but it’s for the period of July 2009 through Aug. 2011.  This is the non-recessionary months of the Obama administration.  Industries located high up grew under the Obama recovery. Industries low on the scale shrunk and cut jobs during Obama’s recovery.  There’s no tricks here of cherry-picking time periods – both axes cover only the “recovery” portion of each president’s respective time in office.

So looking overall, we have the four quadrants.  The upper right shows industries that have added jobs under both presidents’ recoveries. The lower left are industries that have been cutting jobs under both presidents. Upper left would be winners under Obama but not Bush. Lower right are those sectors that have been cutting employment under Obama but were big growth sectors under Bush.  Finally, the size of each bubble indicates the relative importance of the industry in terms of jobs.

So what can we conclude?  First there are few items that aren’t so surprising.

  • Under Bush, a lot of the employment growth involved construction and financial activities.  Not surprising. This is the Wall Street driven housing and mortgage bubble. Frankly we don’t need that big of construction sector, at least not if it’s focused on housing as it was.  We have too much housing already.  We do have needs for more construction of infrastructure and to the degree that housing construction workers are either in the wrong location or don’t have the skills for infrastructure construction (I don’t know – it’s not my expertise), then the low employment growth under Obama here represents a  structural unemployment problem.  But notice that industry isn’t that big.  Also, we probably don’t want to have Financial Activities come back as big as they were before.
  • The big winners under Bush were Education and Health Services and Professional/Business Services.  In education and health, health dominated.  Not surprising, health care spending has been growing and the population is becoming older and/or sicker.   The growth in professional/business services is probably not really very productive stuff.  A very, very large part of the increase in that area was the huge increase in security personnel and related-security contracting that has arisen from an increasing paranoid insecure society since 9/11.
But there are some items here which are surprising, or at least surprising if you’re believe the normal political rhetoric.
  • First, it was Bush who grew government employment.  Under Obama, government employment has been negative since the recession ended. Shrinking government employment is clearly the single largest drag on the economy. That’s not ideology or belief talking. It’s facts and data.
  • Second, the big reason why the Bush recovery was such a slow recovery for employment, considering the 2001 recession was mild, is that throughout the Bush administration manufacturing shrunk dramatically.  This was the result of globalization policies that provided incentives for U.S. manufacturing firms to locate production overseas or to buy from overseas manufacturers instead of making their own.  Fast growing companies like Apple and other computer companies prefer to design it themselves but to contract with foreign firms for manufacture. Obama has not turned the corner on manufacturing employment, but he has stopped the bleeding. For the U.S. to recover, this sector needs to have positive growth.  Given it’s size, it’s not necessary to rise to the top in percentage terms, but it needs to be positive which it isn’t now.
  • “Manufacturing” does not mean “autos”.  Manufacturing is much worse than Motor Vehicles and Parts.  Too often when politicians talk “manufacturing” they conjure a stereotypical image of auto manufacturing.  In reality, motor vehicles and parts, while not being a source of growth under either, has essentially held it’s own as neutral.
  • The Information industry is the one industry that has shrunk under both recoveries, although it’s not that large.  This largely represents true sectoral, innovation-driven change as the World Wide Web changes information technology.
Finally, let’s see what this graph says about the controversy over is unemployment structural (in which case we need training and incentives to work) or is it a lack of aggregate demand (in which case we need more stimulus spending).  I think the graph is relatively clear in this regard.  We have three very, very large sectors where there is no increase in employment under the current recovery: Manufacturing, Retail Trade, and Wholesale Trade.  These are the three that represent basic total spending.  Retail and wholesale trade are driven by total consumer spending. Period. Retail and wholesale also are very flexible without widespread specialized skills requirements.  When demand exists, they hire. When demand doesn’t exist they don’t hire and may layoff.  To me, the data indicates it’s clearly a lack of demand story that is hurting jobs in this so-called recovery. Reducing government employment right now, like this graph shows is being done, has repercussions in stopping employment growth in retail, wholesale, and manufacturing.

Businesses (and Micro) Refute the Logic of Jobs Tax Credits

I wrote a few days ago about how I found the President’s American Jobs Act proposal to be less than stimulating and I updated my assessment yesterday.

Much of the proposal involves a lot of complex tax credit ideas that are supposed to provide the incentives for businesses to hire.  The idea is that if a $5000 or so tax credit is dangled in front of businesses, they’ll decide to part with some of the cash they are sitting on and hire.  It’s a dubious idea.  But it’s straight out of the conservative-thinking playbook. See this post for an explanation of the economic theories and thinking behind different types of jobs proposal. The conservative view and theories emphasive the supply-side. They posit that all can be fixed by providing greater financial incentives to businesses and that any form of tax is a disincentive.  The fact that President Obama has embraced these types of proposals is additional evidence, that contrary to the accusations that he’s a socialist or liberal, he is, in fact, quite conservative in his views.  He simply isn’t as conservative as the far-conservative/liberatarian wing of the Republican party would like.

There’s little historical evidence to suggest that tax credits for new hiring is a powerful incentive.  What I’ve always found interesting is that the economists and conservatives who propose these ideas claim that the theory underlying it is based on microeconomics – the idea that firms want to maximize profits.  But, in fact, it ignores basic microeconomic thinking about where profits come from.  Profits come from first selling something.  It makes no difference what your taxes are if you aren’t selling enough.  This is another reason why I think the idea of tax credits for new hiring will be a weak and relatively ineffective way of stimulating employment. It’s an expensive way to not get much results.  What really we need is an economy that spends more money.

To bolster my case, we can read about the reaction from many businesspeople in the New York Times:

The dismal state of the economy is the main reason many companies are reluctant to hire workers, and few executives are saying that President Obama’s jobs plan — while welcome — will change their minds any time soon.

That sentiment was echoed across numerous industries by executives in companies big and small on Friday….[M]any employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.

Companies are focused on jittery consumer confidence, an unstable stock market, perceived obstacles to business expansion like government regulation and, above all, swings in demand for their products.

“You still need to have the business need to hire,” said Jeffery Braverman, owner of Nutsonline, an e-commerce company in Cranford, N.J., that sells nuts and dried fruit. While a $4,000 credit could offset the cost of the company’s lowest-cost health insurance plan, he said, it would not spur him to hire someone. “Business demand is what drives hiring,” he said.

On the other hand, creating lots of tax credits and tax code complexity will create some additional jobs and hours worked in one particular sector:  tax accountants and laywers.

UPDATE on President Obama’s Jobs Proposal – Better, But Still Weak

First an update on a post I made a few days ago. When I commented last Monday on President Obama’s jobs proposal, I was less than excited. Having read more detail of the proposal, I should correct some statements I made.  I incorrectly left the impression that the payroll tax (Social Security/Medicare tax) cut that the President was proposing was only an extension of the present year cut that is scheduled to expire December 31, 2011.

In fact, the President is proposing not only a 1 year extension of this year’s temporary payroll tax cut, but an increase in the size of that tax cut.  Estimates are that for a median household income of near $50,000, it would result in a $1,500 reduction in payroll taxes compared to not having any payroll tax cut at all. However, the existing, this-year only, payroll tax cut had already cut payroll taxes by up to $500 per household.  So of the claimed $1,500 tax cut for next year for the median household, $500 is an extension of this year’s situation and  $1000 is new stimulus.  Today’s economy is weak even with the existing temporary $500 tax cut, so extending that cut won’t improve things. It will only prevent things from deteriorating further.  In my world, simply agreeing to not put on the brakes is not the same thing as actually hitting the accelerator.

But, the proposal does contain perhaps $1000 worth of tax cut stimulus to nearly all working households. That’s perhaps $150 billion of pure, new stimulus to economy.  It’s more than I estimated on Monday, so the plan will likely have some more stimulative effects than I thought.  But how much?  Let’s do a quick “back of the envelope” type calculation.  The proposal puts $150 billion in consumers’ hands that wouldn’t have been there without it.  But for this money to generate jobs, people have to spend the money.  Simply saving the money or paying down debt won’t cut it.  That improves individual household balance sheets but it doesn’t cause any firm out there to go “oh, more business! I need to hire people!”  In normal times like the 1960’s or 1970’s people would have spent 85-90% of the tax cut.  But these aren’t normal times. We live in high debt, high debt payments, and scared-of-the-future times.  More people save in these kind of times. (paying down debt is economically the same as savings – think of your debt as a negative balance in a savings account).  Let’s assume that people spend 2/3 of the money.  Both history and theory indicate that people save more of a tax cut when they know it’s temporary, but let’s be generous/optimistic and say 2/3 gets spent.  That’s $100 billion in new spending.

Now when it gets spent, it generates business demand and jobs.  Those people get paid and then they go spend the money again – the circular flow of money in the economy.  How much?  That’s a huge controversy in empirical macroeconomics.  This is the question of what the spending multiplier is.  Estimates vary widely, although often the studies are heavily biased by ideology to begin with.  Let’s be modestly optimistic and say the multiplier is 1.5 – 2.0.  This is a relatively high estimate given recent studies as far as I know, but let’s run with it.  That means that after some months, this initial $150 billion in tax cuts becomes $100 billion in new, initial spending which ultimately increases total spending by $150-$200 billion.  Total spending is another way of saying GDP.  This puts it in the range of 1.0% to 1.5% of GDP.

There’s a rule of thumb about the relationship between changes in GDP to changes in unemployment rate. It’s called Okun’s Law.  It’s not a law so much as a statistical regularity. There are many versions, but let’s use a real simple one: each 2 percentage point change in GDP equates to a 1 percentage point change in the unemployment rate.  So if we have GDP growth increasing by 1.5% points, we can count on unemployment rate going down by 0.75 to 1.0% points.

We’re currently over 9% unemployment rate and stuck there.  I’m not real excited about a proposal that aims to reduce the unemployment rate from over 9% to maybe 8%.  We know 4-5% unemployment is possible.  We did it in 2006 even with the slow-growth policies of the Bush administration.  We did better than that under Clinton. In the 1960’s we were even below 4%.   Why are we settling for tepid responses and setting goals of only getting to 8% unemployment and then calling this “bold”?  I don’t know.  But then maybe I’m just a grumpy old man.

Politics and Job-Creation Policies – Disagreements and The Theories Behind Them

Blogging time has been in short supply lately.  To compound things, I’ve had a bunch of inter-woven ideas bouncing around in my head that I want to explain, but  I’ve been struggling to figure out how to do it.  I’ve been stuck in the “can’t explain this until I explain that which in turn needs this explained” circle.  Uggh.  So I’m going to just start taking a shot at it and write some posts that all relate one way or other.

What I want to talk about is why there’s so much disagreement among economists about policies, particularly when it comes to macroeconomic policies.

Few people, regardless of political ideology, dispute the idea that the U.S. economy needs to create more jobs.  It’s obvious to nearly all that persistent unemployment rates over 9% and an economy that month after month fails to create enough net new jobs to keep pace with population growth is problem in need of solution. Likewise, few dispute the idea that the solution will rely upon some sort of policy change.  Even the far-right wing, conservative economists and Austrian school economists argue for policy change. Virtually nobody argues that current policies are ideal.  The issue, then, is how to change policy.  In what direction should policy change so that the government can encourage job creation?

Like many things in political economy, there’s a range or spectrum of recommendations.  I personally don’t like the simple “right vs. left-wing” or “conservative vs. liberal progressive”* terminology. I think things are more complex and positions are richer than that.  But, for purposes of exposition here, I’ll go with it today.

If there are n politicians, there are probably at least n+1 different specific proposals of what to do to change policy to encourage job creation.  But today I’m not looking at specific proposals. Today I want to look at patterns, types, or categories of proposals.  I’m interested in the essence of the logic and economic models/ideas behind the proposals, the thinking that leads people to believe they’ll work.

Right now let’s say there are 4 different categories or generalized views, ranging from what might be called extreme right-wing or libertarian views through conservative views through mildly progressive views and finally a more radical or activist progressive view.  Let’s look at each one, the types of policies advocated and some comments on the economic thinking behind them.  I’ll offer my views afterward.

First, let’s take what we can call the far-conservative view or libertarian (economic libertarian, not necessarily social libertarian).  In the U.S. today, this is represented by the Tea Party positions.  The view here is that it’s  government interference with the free market, private property, and private wealth that causes unemployment in the first place.  Therefore, what’s needed, they argue, is for minimal government with minimalist taxes and as little regulation as possible.  They argue that only the private economy creates jobs at all and that the government cannot by it’s nature create any jobs.  Their proposals will typically take the form of calls for tax cuts, government spending cuts, and repeal of regulations. They will oppose any government programs they see as “welfare” or “redistributionist” such as Social Security or Medicare. Their rhetoric will typically include phrases about “unleashing the private sector”.  In terms of economic theory, supporters of this view find support from what we call Austrian-school economists and the more strict Neo-classical macroeconomists (think University of Chicago school).   These schools of macroeconomics in many ways aren’t about macroeconomics at all.  The theories are heavily based on microeconomics, in particular, the models of pure utility-maximizing rational people interacting in unrestricted markets.  Much of this view in macroeconomics has been called rational expectations schoolefficient markets theory and real business cycle theory.

Next is a the conservative view.  Until the last few years, the milder conservative view was what was espoused mostly by Republican candidates such as both Bushes and Reagan.  In more recent years the Republicans (in general) have moved further toward the far-conservative/libertarian view.  The conservative view is likewise grounded in traditional microeconomic-based neoclassical models.  In many ways, the conservative view is very similar in thinking to the far-conservative libertarian.  They both derive their conclusions from a reliance and embrace of pure-utility maximizing rational micro models of markets.  Both will tend to advocate tax cuts, especially for high-income earners and for corporations. The idea is that high-income earners and corporations would normally create enough new jobs but that taxes discourage them from creating jobs by making business and investment look unprofitable.  The assumption is that if you eliminate or reduce the taxes, investment will naturally look profitable and attractive.  Private sector investment spending will then drive growth in the economy.  This view has also been called supply-side economics. The conservative view typically relies upon rational expectations, efficient markets, and real business cycle theory also, but it also takes a lot from the monetarist views of Milton Friedman and his disciples.

The major point of disagreement between regular conservatives and the far-conservative/libertarian views is really in the area of monetary policy.  Far-conservatives or libertarians dislike central banks (seen as government agencies) and often call for a return to some form of commodity-based money such as gold.  The regular conservative view instead believes that an independent central bank, like the U.S. Federal Reserve Bank, if it follows anti-inflation policies, can usually manage monetary policy and interest rates to encourage growth when needed.  In effect, far-conservative/libertarians believe that no type of government or central bank actions can achieve high employment and high growth by policies.  In effect, recessions are simply events we have to live through -they can only be made worse, not better by government policy.  Regular conservative-types favor using monetary policy, in particular interest rates, to manage the economy. And, if monetary policy is ineffective, then they advocate using tax cuts to stimulate the economy.  They have a strong bias against government spending, or at least spending that is used to stimulate the economy (spending for military and wars is usually OK though).

Next we move to views that owe a greater heritage to John Maynard Keynes, though Keynes is far from the only theorist contributing to the views.  We’ll call the next group of policy recommendations Keynesian.  Not surprisingly, this view owes a lot to Keynes.  But Keynesian theory and models have evolved a lot since Keynes’ time.  Some historians of economic thought have argued that, were he alive today, Keynes might not agree with what much of what today’s “Keynesians” argue.  Nonetheless, standard Keynesian models/theories differ from classical/neo-classical/supply-side theories (the ones that conservatives like) in that it focuses on aggregates in the economy like total demand and total spending.  Keynesian models also try to explain why in aggregate, the total economy doesn’t always behave as if it were a simply made of purely rational micro-markets.  Keynesian theory allows for more situations where markets don’t behave rationally all of the time.  Even more significantly, Keynesian theory observes that if we simply assume the economy is the sum of whatever happens in a bunch of micro-markets, we can commit the fallacy of composition.  Keynesian theory points out the cases where the paradox of thrift takes over or when monetary policy is not likely to be effective.

Despite the allegations of many critics, standard Keynesian theory allows for monetary policy to be effective.  But typically standard Keynesian theory says that when the crisis is big or when interest rates are very, very low, then only fiscal policy, increased deficits, will do the job.  Those deficits could be created by either tax cuts or increases in government spending. But, they won’t be equally effective in creating jobs. Basically what’s needed is more spending (demand for goods) in the economy. People need to be motivated to spend more money.  Tax cuts provide money for households and firms to spend, but they do so weakly.  First, people might not spend all the tax cut – they might save some.  Increased savings won’t increase total demand and therefore won’t create the need for new jobs. Further, firms will only spend if they expect future increases in demand.  They won’t spend and invest just because they have more cash in their hands.  Since we have no assurance that a tax cut will result in enough new spending in the economy, Keynesians are more likely to argue for increased government spending because government spending directly creates demand for goods and services.  Contrary to critics’ claims, Keynesian policies are not based upon any ideological desire for socialism or government control.

So what do Keynesian policy proposals for creating more jobs look like?  Increased government spending is the answer.  In particular, while any spending will help, the most desirable forms of spending are public goods, things like infrastructure and schools, and also on social safety nets, things like unemployment compensation, social security, and Medicare. If a proposal calls for more infrastructure spending or extensions/increases in unemployment compensation, it is clearly inspired by theories/models with Keynesian roots.

Finally, there’s proposals that are inspired by the most progressive branches of modern macroeconomics.  Let’s call these proposals the Progressive proposals. Proposals in this area would involve would build upon the ideas of Keynesian group, but go further.  The spending would be greater and on a larger scale. Proposals in this area would call for programs where the government doesn’t just fund projects and buy goods, it actually creates programs that directly hire the unemployed.  Typically such programs are proposed to be temporary or designed in a way to only hire when the private sector won’t (see Bill Mitchell & Randy Wray’s Jobs Guarantee proposals).  These are not socialist or communist proposals.  That’s a whole different thing.  Often Progressive jobs-creation proposals include having the government initiate and fund large-scale infrastructure projects during periods of high unemployment.   This group, which has little popular voice among modern U.S. politicians, is inspired by what’s called Post-Keynesian and Modern Monetary Theories.   In many ways, the original Keynesian proposals for dealing with unemployment are closer to this group than to what we call Keynesian today.  Today’s Keynesians are actually pretty conservative when compared to historical policies.

So there we have it.  Four schools of thought and proposals for how to create jobs in the economy.

Despite the labels attached and misused by politicians, the reality is that the political discussion and policy recommendations of today, the ones with supporters in Congress or the White House, are actually quite conservative.  Franklin Roosevelt and the New Deal in the 1930’s was actually rather Progressive.  In the 1950’s, 60’s, and 70’s, the dominant thinking in Washington was Keynesian.  In fact  a”centrist” politically in that era would have still been somewhat Keynesian on our scale above.  In the 1980’s though today, the “center” of mainstream politics has increasingly moved towards conservative thinking.  Today, for example, President Obama is actually pretty conservative.  He is certainly more conservative than the Republican Richard Nixon was in the 1970’s.

Let’s look at the latest proposal from the Obama administration for stimulating the economy to create jobs. It’s actually quite conservative and it’s not very Keynesian at all.  In fact, of the proposed $447 billion effort, less than 1/4 involves more spending for infrastructure or unemployment benefits.  That’s less than 1/4 of the proposal is basic Keynesian.  Instead, it’s overwhelmingly focused on tax cuts and business tax credits/incentives.  These are the policy proposals of a conservative.  Even the original 2009 “stimulus bill” was heavily oriented towards tax cuts and tax incentives.  Despite what critics said, less than half of it was traditional Keynesian stimulus. It’s a sign of how the U.S. political dialogue has shifted towards the conservative/far-conservative end that the Obama proposals have been challenged as “Keynesian” and Obama himself accused of being “socialist”.

* The word “liberal” is particularly problematic. The positions argued by today’s “conservatives” in the U.S. are in fact the positions that were historically identified as “liberal” going back to the 1800’s.  In the 1800’s “liberal” meant anti-government and pro-free market.  Yet, thanks to the power of talk radio and Republican presidential campaigns since the 1980’s, the word liberal has come to be used an epithet to describe opponents of conservatism.  I’ll stick with progressive to label this more left-wing end of the political spectrum to avoid the emotional taint that liberal carries these days.