A Wake Up Call on Jobs

President Obama has announced a White House Jobs Summit for next
month. At least that's the beginning of recognition that the
unemployment rate is unacceptable. The measured rate is now 10.2
percent, but if you count people who have given up or who are
involuntarily working part time, the real rate is over 17 percent.

This spells political catastrophe for Democrats in the 2010 mid-term
election, as foreshadowed by the recent losses in the New Jersey and
Virginia governors' races. But Obama's top economic advisers, such as
Larry Summers, don't seem to get it. They continue to resist the idea
of a second stimulus package.

"I think we got the Recovery Act right," Summers recently told the Washington Post's
Alec MacGillis, adding, "We always recognized that America's problems
were not created in a week or a month or a year and that they were not
going to be solved quickly. We designed the Recovery Act to ramp up
over time, through 2010, and to make sure that the investments we made
were important for the country's future."

And other senior Obama officials such as White House Chief of Staff
Rahm Emanuel and Office of Management and Budget Chief Peter Orszag are
more concerned with cutting the deficit than spending more money to
reduce joblessness. According to theWall Street Journal,
Orszag is sympathetic to the idea of a commission to cap government
spending and Emanuel is floating the idea of spending some of the money
that has been repaid from TARP bank bailouts on deficit reduction.

But this is putting the cart before the horse. We need larger
deficits now, in order to get a real recovery going, so that a healthy
economy will allow us to pay down public debt later. Specifically, we
need to focus on three big things:

State and Local Fiscal Relief. You often hear that
outlays on public infrastructure are not a good source of stimulus
because they take too long to plan. But emergency revenue sharing to
states and localities takes effect almost instantly because it prevents
cuts in existing programs and layoffs of existing workers. Today,
states and localities are not only cutting back outlays because their
constitutions require balanced budgets; they are raising taxes, usually
regressive taxes. According to the Center on Budget and Policy Priorities,
the three year state fiscal gap 2010-2012, will be at least $470
billion. So more than half of the federal stimulus is undermined by
state and local belt tightening.

Accelerated Spending on Public Works. The Roosevelt
administration, in an era before computers, got a lot of public works
spending going in less than a year. There are massive unmet needs in
public infrastructure. The Obama administration needs a short term and
a long term strategy. Projects such as school repair and expansion,
which can get underway in a few months, should get fast-tracked funding
commitments right away. Longer term needs, such as smart electrical
grids and modernization of water and sewer systems, expanded mass
transit, and green energy, should be targeted for funding in 2011, so
that plans can get on the drawing boards now.

Wage Subsidies. It is fashionable among American
conservatives to make fun of the "rigidity" of European labor markets.
But Germany today has a flexible and creative program of wage
subsidies. The result is that the German unemployment rate has pealed
at around 8 percent while ours has crashed through 10 percent. German
companies suffering a downturn because of recession can get wage
subsidies for their workers. Workers can also be put on reduced working
time (kurzarbeit) and the German unemployment office will make
up most of the loss in their take-home pay. According to the German
government, a worker cut to 40 percent of his or her normal hours will
end up with about 85 percent of usual take-home pay. Today, some 1.4
million German workers have been able to keep their jobs and most of
their earnings thanks to the kurzarbeit plan. German firms
keep their workers connected to the company, workers hold on to their
jobs, and there are also incentives for workers on reduced time to use
their spare hours to get additional training.

All told, we need additional federal spending in the range of at
least $500 billion. But won't this increase the deficit? Yes it will,
and that is the whole point. We are in a classic downward spiral of
reduced household income and wealth, and a weakened financial sector.
Many businesses face reduced consumer demand, compounded by a
reluctance of banks to advance to any but the most blue chip borrowers.

In this climate, GDP growth can turn positive but companies are
reluctant to hire. Full recovery will not resume spontaneously based on
household or business demand, and the only source of increased demand
to break the cycle is the government.

One of the most widespread and mistaken assumptions is that this
bleak future is just baked into the cake. Because of the legacy of the
financial collapse, and the limits of deficit spending, supposedly, we
are just stuck with it. You hear that in testimony from Federal Reserve
Chairman Bernanke, and it is repeated mindlessly by the media.

This fatalism is just plain wrong, and history's great
counter-example is World War II. In 1939, unemployment was stuck around
16 percent. GDP growth after 1933 was solid -- 6 to 10 percent a year
with the exception of 1937 -- but the wounded economy was just not
generating net jobs. Many expert commentators of that era concluded
that there was something about the maturity of capitalism, or the
replacement of human workers by machines, that consigned the economy to
a chronic structurally high, rate of unemployment.

Then World War II broke out. The US government borrowed huge sums to
recapitalize US industry and re-employ and retrain US worker in war
production, to employ 12 million men and women in the armed forces, and
to invest massively in science and technology to develop advanced
weapons and substitutes for materials in short supply. The unemployment
rate dropped to 2 percent by 1943. Deficits were enormous, as high as
29 percent of GDP in 1942 (this year they will be about 10 percent) but
the economy grew at 12 percent a year for the four years of the war,
and the high unemployment of the 1930s never returned.

The deficit hawks of that era worried that the very large national
debt would be a millstone around the economy. At the end of 1945, the
debt was 122 percent of GDP, compared to about 55 percent today, but of
course the end of 1945 was the beginning of the 25 year postwar boom --
the longest sustained boom in US history. GDP grew at 3.8 percent a
year. The average deficit was about 1.1 percent, and with the economy
growing much faster than the debt, the debt to GDP ratio declined to
about 30 percent by the 1970s. So, we can grow our way out of debt --
but we need to get a real recovery going first.

If past Obama White House Summits are any guide, this one will
invite a broad cross section of people: trade unionists and deficit
hawks, investment bankers and labor economists, industrialists and
Republicans; and everyone will speak of the importance of their pet
project for job creation. That's not good enough. This is not a moment
for another White House gab fest. It's a time for progressive
leadership.