What do we do about unemployment?

JDN 2457188 EDT 11:21.

Macroeconomics, particularly monetary policy, is primarily concerned with controlling two variables.

The first is inflation: We don’t want prices to rise too fast, or markets will become unstable. This is something we have managed fairly well; other than food and energy prices which are known to be more volatile, prices have grown at a rate between 1.5% and 2.5% per year for the last 10 years; even with food and energy included, inflation has stayed between -1.5% and +5.0%. After recovering from its peak near 15% in 1980, US inflation has stayed between -1.5% and +6.0% ever since. While the optimal rate of inflation is probably between 2.0% and 4.0%, anything above 0.0% and below 10.0% is probably fine, so the only significant failure of US inflation policy was the deflation in 2009.

The second is unemployment: We want enough jobs for everyone who wants to work, and preferably we also wouldn’t have underemployment (people who are only working part-time even though they’d prefer full-time or discouraged workers (people who give up looking for jobs because they can’t find any, and aren’t counted as unemployed because they’re no looking looking for work). There’s also a tendency among economists to want “work incentives” that maximize the number of people who want to work, but I think these are wildly overrated. Work isn’t an end in itself; work is supposed to be creating products and providing services that make human lives better. The benefits of production have to be weighed against the costs of stress, exhaustion, and lost leisure time from working. Given that stress-related illnesses are some of the leading causes of death and disability in the United States, I don’t think that our problem is insufficient work incentives.

Unemployment is a problem that we have definitely not solved. Unemployment has bounced up and down between peaks and valleys, dropping as low as 4.0% and rising as high as 11.0% over the last 60 years. If 2009’s -1.5% deflation concerns you, then its 9.9% unemployment should concern you far more. Indeed, I’m not convinced that 5.0% is an acceptable “natural” rate of unemployment—that’s still millions of people who want work and can’t find it—but most economists would say that it is.

In fact, matters are worse than most people realize. Our unemployment rate has fallen back to a relatively normal 5.5%, as you can see in this graph (the blue line is unemployment, the red line is underemployment):

All_Unemployment

However, our employment rate never recovered from the Second Depression. As you can see in this graph, it fell from 63% to 58%, and has now only risen back to 59%:

Employment

How can unemployment fall without employment rising? The key is understanding how unemployment is calculated: It only counts people in the labor force. If people leave the labor force entirely, by retiring, going back to school, or simply giving up on finding work, they will no longer be counted as unemployed. The unemployment rate only counts people who want work but don’t have it, so as far as I’m concerned that figure should always be nearly zero. (Not quite zero since it takes some time to find a good fit; but maybe 1% at most. Any more than that and there is something wrong with our economic system.)

The optimal employment rate is not as obvious; it certainly isn’t 100%, as some people are too young, too old, or too disabled to be spending their time working. As automation improves, the number of workers necessary to produce any given product decreases, and eventually we may decide as a society that we are making enough products and most of us should be spending more of our time on other things, like spending time with family, creating works of art, or simply having fun. Maybe only a handful of people, the most driven or the most brilliant, will actually decide to work—and they will do because they want to, not because they have to. Indeed, the truly optimal employment rate might well be zero; think of The Culture, where there is no such concept as a “job”; there are things you do because you want to do them, or because they seem worthwhile, but there is none of this “working for pay” nonsense. We are not yet at the level of automation where this would be possible, but we are much closer than I think most people realize. Think about all of the various administrative and bureaucratic tasks that most people do the majority of the time, all the reports, all the meetings; why do they do that? Is it actually because the work is necessary, that the many levels of bureaucracy actually increase efficiency through specialization? Or is it simply because we’ve become so accustomed to the idea that people have to be working all the time in order to justify their existence? Is David Graeber (I reviewed one of his books previously) right that most jobs are actually (and this is a technical term), “bullshit jobs”? Once again, the problem doesn’t seem to be too few work incentives, but if anything too many.

Indeed, there is a basic fact about unemployment that has been hidden from most people. I’d normally say that this is accidental, that it’s too technical or obscure for most people to understand, but no, I think it has been actively concealed, or, since I guess the information has been publicly available, at least discussion of it has been actively avoided. It’s really not at all difficult to understand, yet it will fundamentally change the way you think about our unemployment problem. Here goes:

Since at least 2000 and probably since 1980 there have been more people looking for jobs than there have been jobs available.

The entire narrative of “people are lazy and don’t want to work” or “we need more work incentives” is just totally, totally wrong; people are desperate to find work, and there hasn’t been enough work for them to find since longer than I’ve been alive.

You can see this on the following graph, which is of what’s called the “Beveridge curve”; the horizontal axis is the unemployment rate, while the vertical axis is the rate of job vacancies. The red line across the diagonal is the point at which the two are even, and there are as many people looking for jobs as there are jobs to fill. Notice how the graph is always below the line. There have always been more unemployed people than jobs for them to fill, and at the worst of the Second Depression the ratio was 5 to 1.

Beveridge_curve_2

Personally I believe that we should be substantially above the line, and in a truly thriving economy there should be employers desperately trying to find employees and willing to pay them whatever it takes. You shouldn’t have to send out 20 job applications to get hired; 20 companies should have to send offers to you. For the economy does not exist to serve corporations; it exists to serve people.

I can see two basic ways to solve this problem: You can either create more jobs, or you can get people to stop looking for work. That may be sort of obvious, but I think people usually forget the second option.

We definitely do talk a lot about “job creation”, though usually in a totally nonsensical way—somehow “Job Creator” has come to be a euphemism for “rich person”. In fact the best way to create jobs is to put money into the hands of people who will spend it. The more people spend their money, the more it flows through the economy and the more wealth we end up with overall. High rates of spending—high marginal propensity to consumecan multiply the value of a dollar many times over.

But there’s also something to be said for getting people to stop looking for work—the key is do it in the right way. They shouldn’t stop looking because they give up; they should stop looking because they don’t need to work. People should have their basic needs met even if they aren’t working for an employer; human beings have rights and dignity beyond their productivity in the market. Employers should have to make you a better offer than “you’ll be homeless if you don’t do this”.

Both of these goals can be accomplished simultaneously by one simple policy: Basic income.

It’s really amazing how many problems can be solved by a basic income; it’s more or less the amazing wonder policy that solves all the world’s economic problems simultaneously. Poverty? Gone. Unemployment? Decimated. Inequality? Contained. (The pilot studies of basic income in India have been successful beyond all but the wildest dreams; they eliminate poverty, improve health, increase entrepreneurial activity, even reduce gender inequality.) The one major problem basic income doesn’t solve is government debt (indeed it likely increases it, at least in the short run), but as I’ve already talked about, that problem is not nearly as bad as most people fear.

And once again I think I should head off accusations that advocating a basic income makes me some sort of far-left Communist radical; Friedrich Hayek supported a basic income.

Basic income would help with unemployment in a third way as well; one of the major reasons unemployment is so harmful is that people who are unemployed can’t provide for themselves or their families. So a basic income would reduce the number of people looking for jobs, increase the number of jobs available, and also make being unemployed less painful, all in one fell swoop. I doubt it would solve the problem of unemployment entirely, but I think it would make an enormous difference.

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4 thoughts on “What do we do about unemployment?

  1. I can’t tell you how it’s great to see young kids getting involved in how the world works and coming up with opinions and solutions to local/world/economic issues. So now with that said, try and imagine the entire world’s problems may have been greater and more frequent back in 1850 than they are today. Now if they were, your grandfather as a young man was unaware of them. There were no radios, TV’s, or
    telephones. Isolated in the country, there was no newspaper, not even a magazine. All the troubles of
    mankind, so far as he knew, were those which fell within a distance he could walk or ride horseback; In
    brief, your grandfather had no socioeconomic problems except grandfather-size ones.

    Today there is hardly a economic crisis or a social mess on the face of the earth that isn’t immediately brought to our attention or emblazoned in glaring headline News! And unless one isn’t immune to this by now, he may incline toward the untenable belief that every ill of mankind is his problem. Thus misled, he is
    an easy victim of the fallacious notion that the solution of all of these is his “social responsibility.”

    True, all of us as an individual does in fact have a social responsibility. However, we should know what
    that responsibility is, and what it is not, else we will work against rather than in harmony with the rest
    of society. The grandfather-size problem, as it turns out, is about the maximum size any of us is able to
    cope with. When we get it into our heads that unemployment, basic income, and other people’s problems are our responsibility to solve, we “rise” to a level of utter incompetence. However good our intention, our meddling makes matters worse rather than better.

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    • You’re certainly right about the effect of mass media on our perception. It is largely due to the effect of mass media, combined with the availability heuristic, which makes people think that the world is getting worse even as all the data clearly shows that it is getting better.

      But I think it’s worth thinking about why the world is getting better. Is it because of some natural march of time, something that will happen automatically if we simply go on living out our lives in the same narrow way, trying to get by, paying our suburban mortgages and not worrying about what’s going on in Boston or St. Louis, much less Syria or Ghana? NO. I can hardly say that emphatically enough, no, it is not. Why is the world getting better? Because public consciousness is getting better. Because people are finally aware of the problems in the world, and they are trying to do something about them.

      Yes, some people are better positioned than others to have a significant impact. The President of the United States can obviously do a great deal more than the average truck driver. But that doesn’t mean those who aren’t in power can or should simply sit back and watch; Presidents are elected by votes, which can be gathered by campaigns, which are funded by donations, which in fact often come from truck drivers’ unions. And I can make a similar argument with almost any profession you care to name; basically no matter what your job is, there is something you can do, though it may be fairly small, to work toward global justice. And no, this “meddling” does not make the world worse; it is precisely the thing that makes the world better.

      But in fact in my case, it isn’t that small at all. I’m working to become an economist, and most people may not realize this, but economists are among the most powerful people on Earth. Nations rise and fall upon the advice of economists from the IMF and the World Bank. International treaties are structured based upon the work of economists. The trillion-dollar monetary policy of the Federal Reserve is entirely the work of economists. The civil unrest in Southern Europe is due to extreme austerity policy, designed by economists. If I can get even a fraction of my ideas into the mainstream of economic discourse, that will have an effect upon millions of lives. If I can ever take on a major leadership role at an institution like the Federal Reserve or the World Bank, my power over global justice will be no less than that of the Prime Minister of the United Kingdom or the President of France, and likely comparable to the President of the United States himself. Of course, I can’t guarantee that any of this will happen; but it’s a lot more likely to happen if I keep trying than if I give up and try to live in comfortable and ignorant Epicureanism.

      As John Maynard Keynes said in his magnum opus, The General Theory of Employment, Interest, and Money:

      The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

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  2. I like the idea of GMI/BIG, but at a glance, I don’t think the studies in India are very strong evidence, since it appears (again, at a glance) that they are not being funded by the people who they are being given too, which is what would have to happen ultimately with a full roll-out of GMI.

    Please correct if I am wrong…

    Do they compare to other ways of injecting this amount of cash into the community?

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    • You’ve actually hit on the only major objection to basic income that I think is worth taking seriously: How do we pay for all this?

      And of course you are absolutely right that for a small pilot study, funding isn’t nearly so hard to obtain, and can come from donations or general funds—but to really roll out a basic income program on a national scale, you need to restructure your whole fiscal policy.

      To cover the US policy that makes the most sense to me of $12,000 per adult and $4,000 per child, that’s 227 million * $12,000 + 100 million * $4,000 = $3.1 trillion per year. This is almost exactly the total amount of all US federal spending we currently have, and while a substantial proportion could be cut, at least half of that spending would still be necessary; so I think realistically we’re talking about a 50% increase in US federal spending. To avoid ballooning the budget deficit, that means raising taxes a comparable amount; so an extra $1.5 trillion in taxes would be about a 10-percentage-point average increase in tax payments. Since you’re getting that $12,000, you should end up with more in your pocket overall as long as your annual income is less than $120,000.

      India is a more difficult proposition, since they currently spend $686 billion per year on a population of 1.27 billion. Their total GDP is only $2.3 trillion. Realistically the basic income would probably have to be much smaller, something more like $300 per adult and $150 per child per year. Adjusting for purchasing power that’s more like $1,050 and $525, which is still not a very large amount of money—but it is definitely enough to raise you above the UN poverty level. About 40% of India’s population is children (yes, really), so that’s a total amount of 500 million * $150 + 760 million * $300 = $303 billion, increasing India’s government spending by, again, about 50%. This amounts to about a 13-percentage-point increase in taxes, which means the breakeven point is now an income of $2300 nominally, or $8,000 PPP. That doesn’t sound like much to us, but actually that puts about 60% of India’s population below the breakeven line.

      One reason to be optimistic is to look at the Keynesian multiplier: A typical tax cut has a multiplier of only about 1.0, meaning the amount of economic growth created is only as large as the tax cut itself, while typical welfare spending such as food stamps is more like 1.7, meaning you get back 70% more into the economy than the amount you actually take from the government budget. Unfortunately I don’t know of any good studies on the Keynesian multiplier of basic income spending, but my somewhat-educated guess is that it would be comparable to general welfare spending, maybe a bit less; so something like 1.4 or 1.5 seems plausible. If this is right, then raising taxes to provide for a basic income should create a modest net increase in economic growth (proportional to the difference between the multipliers). Thus the tax rates required wouldn’t be quite as high as they’d seem at first.

      Of course, this is all purely theoretical; the only way to really know what will happen when we implement a basic income on a large scale is to actually implement it on a large scale. I think either the US or Europe should take the lead, because we are in a better condition to recover if something goes wrong. Starting with India is tempting because it would help more people right away, but the risk is also higher if it doesn’t work. I’m really looking forward to Switzerland passing this referendum to implement a basic income: http://www.businessinsider.com/heres-how-switzerlands-basic-income-initiative-works-2013-11

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