Fire bell of unemployment

Yet without government intervention, we may well have high unemployment and social discord for years. How did this disaster happen? Probably the most important reasons for the failure to rescue the unemployed are intellectual, rather than purely political. First, there is a lack of scientific proof that government spending – fiscal stimulus – will do much to remedy unemployment. Second, there is a lack of appreciation of the human impact and social consequences of high, long-term joblessness.

To see how divided economists are about the effects of fiscal stimulus, ask them to gauge the “multiplier” effect – the response of the broader economy to a dollar spent by the government. In September, the Journal of Economic Literature published several surveys of the literature on the subject; those surveys came up with so many different answers that it’s hard to show with certainty that stimulus even works.

One of those surveys, by Jonathan Parker of Northwestern University, said that, in general, academic studies of multipliers “almost entirely ignore the state of the economy.” Most studies fail to give credible estimates of the effects of such stimulus in a period of abysmal confidence and near-zero interest rates.

We are in such a situation now – for the first time since the Great Depression. It may be ruinous to assume that the situation is hopeless and that we should thus do nothing for the unemployed. Richard Kahn, the man who invented the mathematical theory of the multiplier in a 1931 article, later said that it was a mistake to think of fiscal stimulus only in mechanistic terms.

Government action, he suggested, affects public confidence in ways that his model did not fully capture. But economists have generally run with his mathematical model, or fundamental variations on it, and ignored his caveat. We have to close the government deficit eventually, but that can be done with tax increases and solid programs to create jobs.

It was within the supercommittee’s scope to devise a plan to accomplish this in a stimulative way. The contractionary effects of tax increases could have been offset by some expenditure increases that would stimulate the economy and help provide jobs. But that didn’t happen. I’ve written before that this kind of plan, termed a “balanced-budget stimulus,” ought to work.

It was estimated that the cost of such a program would be about $150 billion a year, around 1 percent of gross domestic product. The program would be well worth the expense.

The American Jobs Act proposed by President Barack Obama in September includes subsidies in the form of re-employment services, wage insurance, work-sharing benefits and self-employment assistance. Stephen A.

Wandner of the Urban Institute and the W.E. Upjohn Institute for Employment Research testified before the Senate Finance Committee this month and offered a number of other ideas that have been successful on an experimental basis.