The Private Sector Needs a Public Jobs Stimulus

The following was originally published at Working America's "Main Street" blog. [1]

What do I mean? Specifically, the U.S. private sector currently needs substantial, publicly-funded direct job-creation programs in order to get private employers to hire again on the scale needed to significantly reduce unemployment and promote a robust economic recovery.

It’s an argument that I don’t think has been made, at least not adequately, to help advance the debate in favor of large-scale stimulus to create jobs.

Part of the problem is the almost religious belief that the private sector, and only the private sector, can be the engine of job creation. As James Kwak [2] wrote recently, in a somewhat different context:

… the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology.

And the problem is exacerbated by policy makers who ostensibly grasp the need to do more to boost a weak and faltering economy, but undercut that message with utterances to the effect that ‘we’ve done enough’ and ‘government can only do so much’, as Treasury Secretary Tim Geithner did recently. [3] Now, Mr. Geithner is a smart man, who we’d hope doesn’t believe in magic [4]. And he’s right, of course, that private investment is needed. But the fact is, it’s not happening [5].

Private businesses don’t hire more workers unless they need to or perceive they need to. And what is it that creates that need? Principally, an increase in demand for goods and services — and labor. There are certainly other important factors as well, including the flow of credit and incentives driven by competition. But none of those elements are working in favor of rates of private sector job growth that are anywhere near what’s needed to bring down unemployment in any meaningful measure.

Under anything approaching normal economic conditions, we could reasonably expect the private sector to generate a sustained growth rate without substantial new public stimulus. But we don’t have anything approaching normal economic conditions. Nearly 15 million workers are officially unemployed; record levels of long-term unemployment; severely depressed demand; huge excesses of productive capacity; reduced competition for goods, services and labor. And, as even conservative economist John Makin [6] of the American Enterprise Institute wrote recently, a banking system that’s dysfunctional in the face of a rising threat of deflation.

In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses.

We’ve been stuck in this kind of economic debacle before, of course, during the Great Depression. And so we know the kinds of things that can be done to rapidly bring down unemployment and generate growth that then leads the private sector into a recovery, that in turn allows fiscal deficits to be reduced.

After lambasting Geithner for what he calls the Treasury Secretary’s “Hoover impersonation”, Harold Evans [7] supplies a worthy analysis and then reminds us:

In the ’30s, Keynes recognized the risks so paralyzing Public Works Administration Chief Harold Ickes, who rightly worried that a quick public works program invited waste, inefficiency, and corruption. (Of the $3.3 billion authorized, Ickes had invested only $110 million in the first year.) With a hard winter coming in 1933-34, Keynes urged Ickes to balance those risks: “He must get across the crevasses before it is dark.”

Given some of Ickes’ money by an impatient FDR, Harry Hopkins pledged that his Civil Works Administration would put 2 million people to work within 10 days and 2 million more by end of two weeks afterward.

Impossible! He had no blueprints, no staff. So he did it. He hired private contractors who built more than 450 airfields, built or improved half a million miles of city streets and feeder roads, scores of miles of sewers, hundreds of parks and swimming pools. Hopkins subsequently took charge of the Works Progress Administration, a rival to Ickes agency, with a then-massive budget of $5 billion.

His energy and vision left an enduring legacy—650 miles of roads, 78,000 bridges including the mammoth bridges spanning the San Francisco Bay, the Florida Keys, and New York’s East and Harlem Rivers, a host of levees, floodways and dams to harness the Mississippi, the Hoover Dam, the massive Grand Coulee and Bonneville Dams, the electrified Penn railroad, some 40,000 new schools and 2,500 new hospitals. There is not a city in the United States that does not have a landmark of those years.

Altogether Hopkins created more than 8 million jobs; the equivalent today would be more than 20 million jobs.

Large-scale public investments that directly create jobs — and lots of them — are what is needed now to generate the increased demand for goods, services and labor that will stimulate private sector growth, investment and employment.

The private sector needs a public jobs stimulus.

I’ll be coming back to this point from different angles in upcoming posts. But for now we need to ask: without it, what will happen? Paul Krugman warns [8] of permanently high unemployment. His post [8], which is brief and worth reading in its entirety, concludes:

The point is that while policy makers may think they’re being prudent and appropriately cautious in their responses to unemployment, there’s a good chance that they’re prudenting and cautiousing us into a long-term jobs catastrophe.

The author is the winner of the 2010 CREDO Mobile/Netroots Nation award for Blog Activist of the Year