If We Don't Solve the Jobs Crisis We May End Up With Our Streets in Flames and Society Dysfunctional

Unless our policy makers can make job creation the top priority, the mass riots and burning streets of Europe may be coming soon to a neighborhood near you.

Employers added fewer jobs than was forecast in October, which has lots of folks scratching their heads over what to do about it.

In response to the latest unemployment figures, our nation’s central bank, the Federal Reserve, has again begun talking about additional stimulus measures, such as the purchases of mortgage backed securities (MBS) or a bond-buying program known as “QE3”. But neither of these measures worked before, so why should we expect more success this time?

The Fed’s policies are akin to putting a Band-Aid on a massive bleeding wound. Right now, the US economy is crushed by massive private indebtedness and sluggish job growth. What we really need are policies designed to promote job growth, so that people can service their debts and become open to spending again. Admittedly, the Fed isn’t the only problem. Our whole constellation of policy makers – the Fed, Congress, the Treasury and the White House – keep obsessing about the faux “costs” of the growing budget deficit, rather than the real costs of long term unemployment. And if they don’t give up this flawed economic thinking, then the burning streets and mass riots happening in Europe may soon be coming to a neighborhood near you.

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The Fed’s Misguided Focus

Let’s start with the Fed. Ben Bernanke is a noted Great Depression scholar who ought to know a thing or two about unemployment crises. But when he looks at Japan’s long-term unemployment problem, for example, he unfortunately learns the wrong lessons. In 1999, Bernanke dubbedJapan’s struggling economy“a case of self-induced paralysis” that could only be solved through cutting government spending and deficit reduction. In reality, too much government spending hasn’t been Japan’s problem, but rather stop-start spending that seesawed the economy between hopeful improvement and harmful austerity measures that took money out of the hands of consumers. The great mistake in Japan has been the failure to jump-start its weak economy by putting people back to work.

In the US, the Fed has cut interest rates aggressively, and while this has marginally helped to reduce borrowing costs, it has also robbed savers, such as pensioners, of income from the resultant lower interest rates.

Along with the Treasury, the Fed has provided a plethora of “alphabet soup” programs – TARP, TALF, HAMP, “QE” and, most recently, “Operation Twist,” a maneuver in which the central bank concentrates its purchases on long term bonds in order to bring these down and thereby (in theory) lower borrowing costs. Trillions of dollars were offered up in the form of hidden financial guarantees and subsidies to Wall Street. In effect, the banks got risk-free money with which to speculate (in things like energy and food, which also diminished Main Street’s discretionary spending power).

In the case of the two installments of quantitative easing (“QE1” and “QE2”), the Fed bought trillions of assets from the banking system for the ostensible purpose of encouraging banks to make more low cost loans to consumers. How’s that working out for you so far?

Meanwhile, in the real world, unemployment remains stuck at 9%, and underemployment of 16% - hardly boom-time conditions. And now, realizing it's done about all it can do, the Fed admits that monetary policy can't do it all –which is exactly what Bernanke should have learned by looking at Japan.

Where do jobs come from?

At the same time, the Federal Reserve, like the President, Congress, the Treasury Secretary, and a slew of mainstream economists (most of whom completely missed the 2008 crisis) all disparage the one thing that could work – namely a large-scale jobs program. They all maintain the mistaken belief that the government's focus should be reducing the deficit instead of unemployment. Trying to reduce the deficit will never work because in times of economic decline, what are called “automatic stabilizers” kick in to keep the economy from going into free fall -- things like unemployment benefits or food stamps. A government can’t make these kinds of payments without increasing its deficit in the short-term. And that’s as it should be, because what you’re trying to do is get some money into the hands of consumers, whose purchases begin to help the economy adjust itself. But this reality, which a Great Depression scholar should certainly know, has been obscured by several decades of fantasy economics promoted by conservatives. That this kind of thinking persists is perhaps the greatest obstacle we face in boosting the economy.

The United States is in a much better position to deal with its economic problems than a country like Greece because it has its own currency. When you have your own currency, and don’t operate under the constraint of a gold standard, you can actually respond to a collapse in the demand for goods and services by increasing government spending on job creation. This has been done many times in history, with positive results, such as FDR’s Works Progress Administration (WPA). It has been 80 years since the Great Depression, and fortunately, it would now take exceptionally poor policy responses for even the current severe recession to deteriorate into a depression. But misguided and overly tight fiscal policies have unfortunately prolonged the restoration of output and employment.

The head of the International Labour Organisation (ILO) recently stated the obvious: “Employment creation has to become a top macroeconomic priority.”

Bottom line: consumers have to have money in their pockets. If it doesn’t come from private sector growth, then it has to come through government spending. We often hear that businesses create jobs. But in reality, sales and demand are the main source of jobs. No matter how cheap labor is, firms will not employ if they do not have sales for the production. Restaurants won’t hire another employee if the tables sit empty. That is a fundamental reason why John Maynard Keynes and others opposed wage cutting as a way of stimulating employment.

Right now, we’re in a state of emergency. The country’s economic output is still below levels reached in 2007. We need 15 million more jobs just to replace what was lost in the last 3 years. Employment remains stagnant, but we are told to tighten our belts and stop "living beyond our means." We are squeezed, and squeezed again. We hear talk about "unsustainable entitlement programs," such as Social Security and Medicare as if these programs had something do to with the collapse in the US economy. They didn’t. The collapse occurred because the private credit bubble burst and households and firms began the long journey that will be necessary to restore the health of their balance sheets. It collapsed because the demand for goods and services was being driven by credit growth instead of real wages growth. That was always going to be an unsustainable growth path. Which can only mean one thing – there has to be more public spending – which should be targeted at maximizing the growth of decent and stable jobs.

What’s at Stake

The losses involved in enduring this persistent unemployment are so large that such interventions should be a priority. The majority of advanced nations are currently paralyzed by the political impasses and/or vehement pursuit of fiscal austerity. There is such a divide between what is needed and what is being done that it beggars belief.

Decades from now, historians may well wonder how we got so badly trapped into flawed economic thinking that the very things caused the problem in the first place are now being touted as the solution. Somehow we have got to remember the lesson that maximizing employment and output in each period of economic crisis has been a necessary condition for long-term growth.

Many of our young people will enter adult life having never worked and having never gained any productive skills or experience. If we don’t start thinking differently, we may end up with our streets in flames and our society dysfunctional. In trying to avoid becoming the next Greece, we ironically risk precisely that.

Marshall Auerback is a market analyst and commentator.