Keynes Is Ignored, Segment 2

Unemployment: Keynes is ignored
1.04 DIFFERENT IDEAS OF FULL EMPLOYMENT are (1) utopian, (2) optimal, and (3) achievable, but not optimal. Some administrations have sought full employment, but have failed to attain it because they did not understand what full employment is. John Maynard Keynes explained how depressions and recessions could be combated, but his countercyclical budgetary policy became thwarted with the emergence of stagflation. (This is discussed in § 3.01 and Addendum 1, § 1.) (Addenda 1 through 3 consist of elementary economics for those unfamiliar with it, arguments, and some very fine points.) (All addenda are at www.jobsaddenda.blogspot.com.)
One idea of full employment is that about 92,000-hours of work (47 years, fifty weeks a year, 40 hours a week) is considered full employment for a lifetime. What makes this the standard for “full”? If in one company the employees and the employer agreed to reduce the workweek to prevent lay-offs, each worker would get less pay (assuming there was no corresponding increase in the hourly rate at the same time) but there would be no layoffs. With all the labor saving devices that we now have, our workers can certainly work less and still maintain a high standard of living. In fact, with all the labor saving devices we have, sharing the work is the best way to eliminate unemployment. While that solution seems obvious, we know that the solutions the government tries are focused on increasing the level of economic activity. Is this because legislators realize that sometimes a seemingly simple solution is a bad one? Here I will try to show that the simple solution is the right one. What is complicated is the reasons for governments not adopting it. These reasons are a fallacious theory and a misinterpretation of empirical data, as will be explained in § 3.02.
Many workers would be displeased with the reduction of their hours of work. If all workers in the nation worked fewer hours the upward pressure on wages might make their total pay per worker greater than they were getting before the reduction in hours worked. (Economists call this situation elasticity of demand. In the 1930’s farm owners destroyed part of their products to try to increase theirincome. Today, OPEC holds back oil.) Still, there would be many who would want the higher hourly rate without the reduction in hours. This would be possible for any one worker only if the enough of the other workers worked only the reduced number of hours. [endnote 6] (The reasons why some workers would feel they were getting less than full employment includes tradition. “If my father was paid for working forty hours a week till age sixty-five, why can’t I?” they might ask.) I call this notion of full employment “utopian full employment” because it is someone’s idea of what he or she wants that may be unobtainable.
In much of the twentieth century the 92,000-hour work life was a standard of a fully employed individual. 92,000-hour for all who want to work is nowhere written in stone. In the actual world, in which people are economically dependent, without artificial stimulation of the economy such an extent of employment depends on the population’s propensity to save equaling its propensity to invest (as explained in Keynesian economics.) There will be a propensity to save mainly because of the uncertainty of the future and a desire to retire, send children to college, or both. If the propensity to invest is less than the propensity to save, consumption and production will go down to the point where savings are no longer possible. [endnote 7] Since we have had unemployment for so long, we know that governmental intervention is needed for there to be achievable full employment. § 2.01 explains why artificial stimulation of the economy is less desirable than reduction of the work life.
Suppose we eliminate artificial stimulation of the economy and we also make all businesses and people compensate the rest of us for any polluting they do. If we then created full employment by other means, such as that proposed in Part 2, that full employment would presumably be optimal. (However, in our interdependent economy we cannot be certain what mix of leisure and work people would choose if they had the choice. See Addendum 3, §1.)
Greater employment levels results in more consumption of goods and services. This is at the expense of less leisure. No one can rightly say that as an invariable rule more consumption is better than more leisure. Artificial stimulation arbitrarily tips the balance in favor of consumption, as well as adding to pollution and reducing limited natural resources.
1.05 A CLASSICAL PARADOX OF ECONOMICS: A labor saving device that appears capable of increasing our well being sometimes results instead in unemployment and hardship. This often happens because the current economic programs take no steps to share employment.
PART TWO: WHAT CAN BE DONE to approach or reach full employment and generally improve the lot of working people?
2.01 TYPES OF METHODS for approaching or reaching full employment and generally improving the lot of working people can be roughly categorized as those that increase the demand for what they supply (by expanding the economy) and those that decrease its supply (by encouraging early retirement, reducing the workweek, creating more holidays or similar methods.) The latter category is more effective, as industry and farm owners have understood throughout most of the past century and as OPEC has demonstrated in the latter part of that century. (Farm owners, being too great in number to form an effective alliance to restrict supply, have relied on government to assist them in this goal.) In addition to being more likely to achieve the aim, it achieves it in a better way.
The better way to change the oversupply of labor is the way we changed the oversupply of agriculture. The government pays farmers not to grow crops. If the government makes substantial payments to people to retire early we wouldn’t have constant unemployment. Without something like that instead of artificially stimulating the economy, we have the economy running like the poorly irrigated field of § 1.01. When we artificially stimulate the economy because people are out of work, the extra moneys pumped in frequently do not go to create jobs for the unemployed, and, to the extent it doesn’t, its effects are bad. If the roses in your garden lack water, water them, not the tulips. If we follow the plans submitted here we wouldn’t have the pressure to accept pollution. Currently we allow polluters to foul up our environment, without being held accountable, because fair restrictions would add to unemployment. Also, inflation increases when the government artificially stimulates the economy.
Generally, there are sound economic principles that say that restriction of supply by government (or by restrictive agreements) is bad for the general economy. Since these apply to the supply of commodities, not labor, for reasons I’11 explain in Part Three, they don’t apply to the suggestions that follow.
Therefore, the best way to get full employment is to reduce the supply of labor. The best way to reduce the supply of labor is to reduce the standard work life.
2.02 SPECIFIC PROPOSALS: The government should make substantial payments to people who refrain from working past age sixty -- or fifty-nine, or whatever is necessary. We can give a 100% tax credit for contributions to IRA’s up to $5,000, withdrawable only on retirement, of course. This can give workers ownership of retirement funds independent of changes to Social Security. If, in a revenue neutral law, it is coupled with appropriate tax increasing measures it would not increase the deficit. The IRA law always disfavored the poor in two ways. It favored savers while the poor are unlikely to save and it gave a deduction, which is more valuable to those in higher brackets. A 100% IRA credit would give all workers a choice as to a limited amount of money: pay that amount to the United States in taxes or invest it in an IRA for your retirement. . [endnote 8] Although some say tax cuts should go primarily to the non-rich, the conservatives’ excuse for having tax cuts go primarily to the rich is that the rich invest their savings, thus strengthening the economy. Nevertheless, some of their investments go into tax haven countries and, of course, some go into increased consumption of luxuries, including birthday bashes in the Mediterranean. The moneys of the 100% credit IRA’s would be invested by the trustees. Furthermore, the credit IRA plan would reduce unemployment under any of three theories, namely, that investment increases employment, that it would encourage early retirement for some workers, thus reducing unemployment, and that consumption reduces unemployment, (the increased consumption comes mainly at retirement when the retiree withdraws the funds that would belong to the government if the credit did not exist, but it also comes earlier to the extent that a worker spends more because the IRA savings makes the worker feel safe enough about future financial security.)
Also we can pay large amounts from the general revenues into the Social Security system to enable full benefits at an early age and to increase general benefits. This also would encourage those eligible for retirement to retire. (This would be politically more feasible than many of the proposals that follow, since older people generally vote in grater numbers, proportionally, than unemployed or underemployed people.)
Thus, paying workers not to work would eliminate the oversupply of labor and benefit the suppliers of labor just as paying farm owners not to grow crops effectively helped them.
Another advantage of early retirement is that it’s harder to work when one is older. . [endnote 9]
There are other ways to reduce the standard work life. We can supplement encouraging early retirement with reducing the standard workweek well below forty hours. And if the limit (before mandatory premium pay kicks in) is changed from time to time in response to changes in unemployment, a relatively flexible economic response is possible. But the effectiveness of shortening the “maximum workweek” is limited by other factors. Fixed costs, such as health insurance benefits, are involved in every worker that is hired, whatever the workweek is. This encourages employers to prefer paying premium time rather than hiring more people. Government can pay an employer’s cost increase resulting from hiring extra employees to do the job previously done by fewer employees. (Universal health care paid for by the government is an alternative to that.) Also, we can encourage late entry into the work force. Also, we can have a small increment of Social Security benefits paid to retirees who do not earn more than a given amount, with a fraction of that increase based on a sliding scale of earnings, said scale being similar to the old law that applied to retirees under 72 years old. (See Addendum 2, § 1.)
Also, we can change unemployment laws to cover unpaid sabbaticals. After ten years of employment a worker who is unemployed should be allowed to draw benefits for nine months without seeking employment. The worker should even be allowed to take a leave of absence or quit to get the sabbatical. Increasing the number of national holidays and expanding child labor laws are also good. Tax laws could encourage either parent of a two-parent family with a young child or children to stay home to mind the offspring.
The federal government can be the employer of last resort, at least for a limited number of hours a week. People could work enough hours so that they would net a little more than the welfare benefits of the state with the most liberal benefits. The hours offered would vary with the number of their dependents. The wage rate could be more than the minimum wage rate. . [endnote 10] Special oversight of these workforces would be needed to assure that no work done is work previously done by regular workers. Opportunity for promotion to supervisory and administrative positions shouldexist.
Do not reduce minimum wages for the young. Do not toughen welfare requirements. These things are costly to the government but unemployment is costlier to our people. We can also reduce unemployment by alleviating the bad effects of outsourcing. See § 6.02
Whether jobs are lost to people abroad or machines anywhere, unemployment is economically inefficient and psychologically devastating. The policy suggested here obviates an incentive for micro-management: like a progressive tax table it gives no politician the power to decide between youths of Harlem, unemployed coal workers in West Virginia, and migrant workers in California. Government is not too big when public servants are not too powerful.
2.03 CAN WE AFFORD TO FINANCE THE CHANGES suggested here? We can’t afford not to. Raising the rate of income taxes on part of the upper brackets can finance the 100% credit suggested in § 2.02. The top rate used to be 70%. That rate was reduced to 31%. [endnote 11] . (See Addendum 2, §2.) We can certainly increase it from the present rate to balance the IRA credit and still have an overall effect that would not be a raise in taxes. [endnote 12] (See Addendum 2, §3.)
2.04 WHEN WILL YOU LEARN, CHARLIE BROWN? You keep expecting Lucy not to pull the football away as you try to kick it. But all that happens is you fall on your prat and you are frustrated and humiliated. Because our government never learns, millions of Americans are fruitlessly looking for jobs, through no fault of their own. Many keep looking until they give up. Then they are no longer counted as looking. Hooray!? Many are also frustrated and humiliated. (See §6.01.) Unemployment persists through the years. When will you learn, U. S. Government

ENDNOTES

6 It’s like the story of the grape farmers who agreed to have a party for which each would pour a keg of wine into a communal vat. When highly watered wine came out, one farmer complained that if the others had put in pure wine his water would not have been noticed.
7 Investment is defined to include inventory, including inventory that is higher than economical. Excessive inventory can come first, followed by decreases in production.
8 Actually, it would be better if the government turned the money over to the IRA trustee named by the worker. Enforcement would be very much sounder and workers would be relieved of the chore of actually making payments.
9 Even traveling to work is a chore. Forgetfulness impedes efficiency. In jobs that are physical, performance would be down for most older workers. Enabling older workers to retire in comfort would therefore have social advantages in addition to the alleviation of unemployment. The hope is that if society in effect tells people you are entitled to retirement pay now because you’ve worked when younger, or even just because we honor older people, then there will not be the frustration of the unemployed.
10Minimum wage floors are kept low to enable some businesses to survive. Businesses now paying such low wages would find they should allow their employees to work part-time, thus allowing them to work part-time for the government.
11 But it has a limitation to never make the average tax more than 28% of taxable income.
12For many years now we’ve been amending the Internal Revenue Code in a way intended to make the increase in taxes of some people balance the decrease of others. Reagan and George H.W. Bush went along with this. In 1992 George H.W. Bush said that a tax bill that includes a raise of the tax rate was ipso facto a raise in taxes even if the total revenue effect was neutral. This contention of his makes no sense.

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