Can the Federal Government Really Create Jobs?

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Nicholas Kamm / AFP / Getty

President Barack Obama speaks to job seekers in Allentown, Pa., on Dec. 4, 2009

The Obama Administration is out to create jobs. Let's not get our hopes up.

The day before the Labor Department announced a second month of 10%-plus unemployment last week, the White House hosted a get-together to hear from executives, labor leaders and academics about how the Federal Government can jolt job growth. "We're looking for fresh perspectives," the President said. "I am open to every demonstrably good idea."

That may sound promising, but the truth is, drumming up new jobs on short notice isn't exactly in the government's wheelhouse. In the long term, what the government does and doesn't do is incredibly important to the health of the labor market. Trade policy, corporate tax rates, the structure of health care — these things all have a real impact on economic growth. But Washington's tool kit doesn't work nearly as well in the short run. Right now companies aren't hiring for a very specific reason: there's not as much demand for their products and services. Callous as it may sound, high unemployment at the front end of an economic recovery is perfectly normal.

Of course, for the 15 million people out of work, that's little consolation. So the government is poised to act. Here's a rundown of four sorts of ideas being bandied about, and how much we can realistically expect from each.

Target an Industry and Stimulate Demand
Cash for Clunkers — the program that paid people $4,500 to turn in their old cars and buy new ones — is one of the most demonstrably successful federal efforts at stimulating the economy so far. Over the summer, General Motors and other car companies ramped up production — adding shifts and running plants on overtime — to meet the increase in demand. Now policymakers are talking about Cash for Caulkers, a program that would give homeowners an incentive to better weatherize their houses. The goal would be to create work for a construction industry that still hasn't found its feet in the wake of the real estate bust, while also pushing through a bit of the Administration's green agenda.

Such a targeted type of program has a good shot at doing what it sets out to do. The downside: intervening in the economy in such a precise way is almost by definition not expandable. Cash for Caulkers would give building contractors a boost, but they represent a small slice of the economy. To next help out, say, bakers, policymakers would have to design a brand-new program. Plus, if such a program had an expiration date, we'd feel not just a rise in demand, but a fall later on as well. Car manufacturers and the people who work for them certainly did after the Cash for Clunkers discounts ended.

Pay Companies to Hire People
If we want firms to go out and hire, why not give them an economic incentive to do so? This could be done by flat-out paying companies to hire, or by reducing their share of payroll taxes (the money that gets withheld from workers' paychecks to pay for Social Security and Medicare). Either way, adding a new worker becomes cheaper. We last tried this in the 1970s — the mechanism was a tax credit for hiring — and the results weren't particularly remarkable, though part of that could have had something to do with the structure of the credit.

The goal of this sort of approach is to accelerate the way an economy naturally comes out of recession. Since there has been less demand for goods and services, firms hesitate to add workers. Instead, companies squeeze more productivity out of their current ones. This is a trend we've been seeing. Paying companies to hire would ostensibly push them into the next phase of recovery: adding more employees.

But there are reasons to question how effective and efficient such a program would be. First of all, it is misleading to imply that companies aren't hiring because workers aren't cheap enough. As Dale Mortensen, a professor of economics at Northwestern University, points out, workers are a real bargain right now. Unit labor costs — how much a company has to pay people to produce a unit of whatever it is that the company makes — have been flat or falling for all of 2009. Between the second and third quarters, labor costs dropped at an annual rate of 2.5%. "If you just look at the cost side, this should be a labor boom," says Mortensen.

It is also misleading to imply that companies aren't hiring. They are — about 4 million workers a month. There is always a lot of churn in the American labor market and that doesn't stop during a recession. (We don't particularly feel the hiring right now because companies are letting workers go at a higher rate.) In a best-case scenario — if using tax dollars to subsidize corporate hiring works exactly as it should — we'd wind up paying for 4 million hires a month that we would have otherwise gotten for free.

Hire More People to Work for the Government
Perhaps the easiest way for the government to create jobs is for it to create government jobs. The example quoted most often: the federal Works Progress Administration (WPA), which during the late 1930s employed more than 8 million people. The jobs were project-based and largely in construction — we got a lot of highways and airports out of it — but also occasionally in professional fields such as teaching, nursing and writing.

Do we want the Federal Government deciding which jobs should be created in our economy? In capitalism, the answer to this question in the long term is no. However, in the short term, there is a different economic argument that could plausibly take over.

Coming out of a recession is a tricky thing. Companies feel like it might be time to start ramping production back up, but demand hasn't fully returned, so they hesitate to hire. The conundrum: demand in the U.S. is overwhelmingly consumer-driven and people need to have jobs to feel like it's once again safe to spend money. It's a classic chicken-or-egg problem. Direct hiring by the government could, theoretically, sidestep the impasse. The question then becomes whether such a program creates more economic benefit than it does economic inefficiency by having the government dictate job creation. Consider that one criticism of the WPA was that it prevented people from moving to jobs where they would have been more economically productive — and actually slowed down the post-Depression recovery.

Boost Access to Credit for Growing Businesses
Small businesses — or, to be more precise, young businesses — create a disproportionate share of new jobs. To do that, they need to grow, and to do that, they often need access to credit. While the ability of large firms to borrow has pretty much returned to normal, many smaller firms are still struggling to get the money they need from banks. It's a problem that even Federal Reserve Chairman Ben Bernanke has talked about in recent weeks. The seeming solution: help get small, growing companies loans and the jobs will follow.

The government has already taken a number of steps in this realm, largely through the Small Business Administration. The issue with increasing access to credit, though, is that easy money was one of the main reasons we wound up on the brink of economic calamity in the first place. Taken as a group, new businesses may be job creators, but any sort of average masks the fact that many young companies completely combust. Lending to them is risky, and while it may be desirable to lend more in an attempt to create jobs, there is a flip side to the coin. There is a reason banks right now are hesitating to lend too readily — they've recently learned a lesson about where that can lead.

If it seems like there are few obvious steps for a government looking to create jobs, that's because there are, in fact, few obvious steps. Governmental programs that would have the clearest impact are, by their nature, limited in scale. Broad-based programs come with caveats and knock-on effects.

At the end of the day, the thing the government may be best at doing job creation–wise is sticking to the thing it is in more of a position to control: long-term strategy. With major legislation taking shape on a range of issues, from health care to climate change, it is not at all clear what the business landscape will look like in the coming months and years. "There's a lot of evidence that suggests uncertainty right now is enormous," says John Haltiwanger, a professor of economics at the University of Maryland. "If some of these things were resolved, businesses might be able to get a clearer map of what things will look like in the future." Including, perhaps, how much they'll want to have some new workers on board.