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By Ronald Fink
A second stimulus package need not increase the federal deficit and is necessary to reduce high levels of unemployment, according to a paper published this month by the Levy Economics Institute of Bard College.
The paper, by Dimitri Papadimitriou, the president of the institute, and Greg Hannsgen, a research scholar, noted that government spending on jobs programs would be offset by cuts in unemployment insurance. The authors argued that the government should act as an employer of last resort in light of the lack of job openings in the private sector.
Critics of government intervention contend that it would increase the deficit, fueling inflation, without creating many jobs. They often cite research showing that similar programs put into place during the 1930s under the Roosevelt administration's so-called New Deal increased prices and deterred investment by the private sector.
But the authors of the Levy Institute paper dispute such a conclusion. "A permanent employer-of-last-resort program would provide cost-effective and noninflationary insurance against unemployment and allow the government to cut spending on some other safety-net programs," Papadimitriou and Hannsgen wrote.
The paper, entitled "Lessons from the New Deal: Did the New Deal Prolong or Worsen the Great Depression?", also takes on criticism of the work programs of the '30s. The spending "probably did not slow economic growth or worsen the unemployment problem from 1933 through 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere," the authors wrote.
In contrast, Levy Institute scholars contend that the historical record shows that the New Deal provided "effective medicine for the Depression," but that "fiscal policy was not sufficiently countercyclical to conquer mass unemployment."
Papadimitriou and Hannsgen draw a distinct historical parallel with the current economic environment. Though unemployment has not reached the level of 25 percent of the labor force that it did at the start of the '30s, they noted that that the government's broadest measure of joblessness-which includes part-time workers who want or are looking for full-time work and those unemployed for at least six months who have given up looking for jobs-is now at 17 percent. "It is next to impossible" to find work when there are six job seekers per opening, as recent research has found, they said.
What's more, the authors said, two years after the start of the recession, "renewed and sustained economic growth can hardly be taken for granted," with some economists doubting any recovery will be vigorous enough to bring joblessness down.
Yet Papadimitriou and Hannsgen fear that Washington seems reluctant to pursue further stimulus measures because of the ongoing and rancorous debate over health-care reform.
"Congress, the White House, pundits, and the press are riveted on the all-important health care debate, but we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand," the authors wrote.
While they contend that a jobs program based on restoring the nation's infrastructure would be the most effective means of stimulating the economy, others are calling for spending aimed at alternative energy. On his website, Interfluidity, last Monday, Steve Waldman wrote that sizable government loan guarantees to "green energy" companies "would lead in short order to a bunch of entrepreneurs founding companies on just a shoestring of equity."
Waldman acknowledged that the capital could be misallocated, but judged the risk worth taking in light of the lack of investment by the private sector, which he characterized as paralyzed by a lack of good information about the economy's direction.
"I think it probable that government stimulus will substitute for market-generated information in the near term," Waldman wrote, "as chastened capital market participants are more conscious of the hazards of certainty than policymakers are."
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