Government

What Political Compromises Could Create Jobs?

In his first New York Times Magazine column, Adam Davidson looked at the challenge of creating jobs with a divided government. To continue the discussion, we asked two economists on different sides of the debate — Dean Baker of the Center for Economic and Policy Research, and John Cochrane of the University of Chicago Booth School of Business — to answer the following question.

With power split between the parties in Washington, no one is likely to get exactly what they want. Are there realistic political compromises that could help create jobs?

Dean Baker's answer is below; to read John Cochrane's answer, click here.

The political deadlock between President Obama and Congress makes it almost impossible for any further job creation bills to be approved before the next election. If Congress were willing, the best solution would be a large stimulus program. Since Congress is not willing, here are some policies that President Obama could pursue on his own to reduce unemployment.

1. Work sharing

This one should be a simple and non-partisan issue. As it stands now, workers who lose their job can get up to 99 weeks of unemployment benefits. These benefits are typically about half of their wages. However if they have their hours reduced, then they get nothing. This effectively makes it better for many workers to get laid off than to have their hours reduced.

Work sharing allows workers to use their unemployment insurance to partially offset a reduction in hours. For example, a worker who has his hours reduced by 20 percent would have 10 percent of his total wages made up by unemployment benefits.

There are already 23 states that have work sharing programs. But many employers and workers don't know the programs exist, and the take up rate is low. President Obama could try to increase the take up rate by both promoting the program and encouraging the Labor Department to be flexible in enforcing the rules for Unemployment Insurance program, so that states can have the ability to be more flexible in their administration of the program. If just 5 percent of layoffs/dismissals can be prevented through work sharing, this would translate into 1.1 million additional jobs by the end of a year.

2. Right to rent

This would allow foreclosed homeowners to stay in their homes as renters paying the market rent for a substantial period of time (e.g. five years) following foreclosure. There are three main benefits to this program. First, it would provide housing security to families facing foreclosure. The rental period should be long enough to allow families to get back and their feet and in many cases for children to finish school.

The second benefit is that it would keep homes occupied by long-term tenants. This would prevent foreclosed properties from sitting vacant and unmaintained and therefore bringing down property values throughout the neighborhood. Finally, by offering rents that may be as little as half the mortgage on a home purchased at bubble-inflated prices, this policy will free up money for other spending.

President Obama can do this unilaterally with the homes under the control of Fannie Mae and Freddie Mac (roughly half of all foreclosures). This may also pressure banks to adopt a similar policy on the foreclosures under their control.

3. Pushing the Fed

The Federal Reserve Board can be more aggressive in boosting the economy. It can adopt stimulative polices that have been mentioned at times by Chairman Bernanke. For example, it could set a cap on a long-term interest rate (e.g. a 1 percent interest rate on five-year Treasury bonds) or it could deliberately target a somewhat higher rate of inflation. The latter would lower real interest rates, boosting investment, and also reduce debt burdens.

President Obama has no direct control over the Fed, but he can seek to promote a public dialogue on Fed policy. Federal Reserve Board policy has enormous impact on the economy. Its policies therefore should be part of the public debate on the economy.

4. Lowering the value of the dollar

The major imbalance facing the country is the trade deficit, which would likely be more than 5 percent of GDP ($750 billion) at full employment. By far the most important influence on the trade deficit is the value of the dollar. An over-valued dollar effectively puts a tariff on our exports and subsidizes our imports.

President Obama should seriously negotiate a lowered value dollar with our major trading partners, most importantly China. This means making concessions (e.g. not pushing for market access for Goldman Sachs) in exchange for a lower valued dollar. If we get the dollar down, this will add millions of relatively high paying manufacturing jobs.

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