Is The Phony War Ending?

It’s not clear whether the recent bad economic numbers signal an ominous trend or a blip in a generally anemic recovery. But they have focused opinion-makers attention on a signal fact: the US economy, while improved from the near catastrophic state of the winter of 2008-09, remains mired in its deepest and most protracted period of joblessness since the Great Depression. And yet the national political debate has focused on more or less massive government retrenchment — i.e., draining demand and jobs from the economy. By almost any economic standard this is craziness — a national experiment on par with those old stories — half comic, half tragic — of doctors hastening a patient off this mortal coil by debating how many bleeding treatments to administer to their seriously but not fatally ill charge.But now quickening attention are two facts.

Fact one, the new economic figures.

Fact two, the calendar. It’s June 2011. By conventional — and in this one case probably accurate — wisdom economic realities need at least three months to percolate into the nation’s political consciousness. And economic policy takes six months to a year to translate into demonstrable outcomes in growth, employment and so forth. All of which means the window is closing if jobs are actually going to get onto the policy, as opposed to the rhetorical, agenda for 2012. President Obama has a profound political interest in getting it on the agenda; his Republican opponents have an equally focused interest in keeping it off.

Former FCC Commissioner Reed Hundt reports in from the policy trenches in DC …

Not a moment too soon, Washington is percolating plans to spur employment. That’s because only something done in the next couple of months is likely to produce meaningful results by September 2012. That is approximately when the election outcome will be definitively shaped.

The economists, as always, prefer “invisible hand” solutions: approaches that don’t involve government doing anything as much as declining to do something. The example du jour is the thought of cutting employer contributions to payroll taxes. Without a tax, it’s argued, anyone always buys more of whatever was taxed. So if employees are not taxed, employers will buy (pay) more of them.

The economists, as always, are not as right as they need to be to address the dreadfully large problem of work in America.

There are plenty of really low-priced workers in America. The young and the old and minorities — categories in which unemployment is acutely high — will take jobs for very low pay. They will take jobs for much less money than the middle-aged and higher educated people will do. They will take far less in pay than would be saved by the payroll tax cut. Yet there’s little work for them.

Reducing payroll taxes is a supply side solution to a demand side problem.

Next the economists will want to eliminate minimum wage requirements. Oh, you can already find that bad idea on their blogs.

Then they will want to eliminate employer-provided health care insurance. Oh, we already missed that chance.

The payroll tax is not the best designed of all taxes. As Al Gore long argued, it should be replaced with a carbon tax. Even now, it would make very good sense to eliminate the payroll tax and replace it with a carbon tax that funded social security in a lockbox arrangement, where neither SS nor the carbon tax could be altered by a feckless Congress. The carbon tax could start off at a very low rate and creep up over time as the need for more funding of Social Security grows in a couple of decades due to the aging of the population.

But for immediate purposes it would make sense for our policymakers to keep firm hold of the following truth: there’s not enough demand for things — goods and services — in our economy. That’s the reason there’s not enough work for the people who want and need to work.

What the policymakers need to do is pretty simple, and has been not too complicated for far too long. They need to identify the parts of every segment of the economy that ought to be replaced and repaired, and the new segments that ought to be created.

We need about 200 gigawatts of very old and very dirty electricity generation capacity to be replaced by pretty much anything new that can be built in a hurry: natural gas, solar, wind. A green bank offering low cost, long term finance, coupled with a big temporary boost in depreciation, would be enough to cause the owners of the dirty old facilities to replace them with the new facilities. For those who are able to admit of scientific truth, I would add the bonus fact that this move alone would reduce carbon emissions in the United States by somewhere between three to five percent. That’s really big. The extra capital expenditure from this move alone would amount to about $100 to $200 billion, all of which would come from private investors and none of which would come from federal appropriations. Roughly every billion leads to about ten thousand job-years. Generally economists cannot predict with precision the translation of spending to jobs, but when whole sectors are transformed it’s often the case that the new jobs are greater in number and higher in pay, because they require higher skill sets and lead to more corollary opportunities for productive work. (Think of the apps writers that the iPhone created work for, as an illustration.)

We need, as Larry Summers said in a speech recently, to improve the quality and not the quantity of our commercial and residential housing stock. The barriers to opening the market for energy efficiency improvements are of three sorts: finance, regulatory, and technological. Solutions exist for all three. Connecticut, just two nights ago, passed a state law creating a Green Bank and an expedited regulatory regime that will address two of these barriers. The technological solutions are offered by various, fairly small firms. If the Connecticut law were replicated in 49 other states, these small firms would grow big in a hurry. There is no federal counterpart to the regulatory apparatus in Connecticut: neither the Department of Energy nor FERC have the powers of the regulators at the state level. But the federal government could create special drawing rights on the Treasury for state green banks under a program called Energy Independence Trust advocated by the group I lead called the Coalition for Green Capital. This would require no new federal appropriation.

I could go on. Sector by sector ideas abound. Economists, please go micro. Policymakers, please be builders and not naysayers. People, demand action.