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Pushing Unemployment Down

About the Author

Heidi Garrett-Peltier
Heidi Garrett-Peltier is assistant research professor at the Political Economy Research Institute (PERI).
Robert Pollin
Robert Pollin, professor of economics and co-director of the Political Economy Research Institute (PERI), is the author...

Also by the Author

Spending the same money on education, or clean energy, would bring many more jobs—among other benefits.

Also by the Author

The underdogs may have enough in the tank to surprise us again next year.

Spending the same money on education, or clean energy, would bring many more jobs—among other benefits.

As of January there were 7.6 million people unemployed in a labor force of 154 million, producing an official unemployment rate of 4.9 percent. This was a significant increase over the 4.5 percent unemployment rate in mid-2007, and thus one important sign of a weakening economy. Unemployment is likely to keep rising as the economic slowdown continues.

In our current context, what would be the overall job effects of transferring the entire 2007 Iraq War budget of $138 billion into healthcare, education, energy conservation and infrastructure investments? If we assume that all else would remain equal in the labor market, a net increase (i.e., the total expansion of jobs in public investments minus the reduction in military jobs) in the range of 1 million jobs would therefore reduce the total number of unemployed people to around 6.6 million. The unemployment rate would fall to about 4.3 percent.

This is still an unacceptably high unemployment rate. But if the public-investment-directed spending shift out of Iraq were combined with a stimulus package of roughly the same size as the Iraq War budget--i.e., in the range of the Bush Administration's $150 billion stimulus--the overall impact would be a strong program to fight recession and create decent jobs.

In particular, through this combination of a spending shift out of Iraq and a stimulus program focused on public investment, there is a good chance that unemployment would fall below 4 percent. When unemployment fell below 4 percent in the late 1960s and late 1990s, the high demand for workers led to rising wages and benefits, in particular at the low end of the job market. Poverty fell as a result. Near full employment in the late '60s also brought better working conditions and less job discrimination against minorities.

Of course, we cannot assume that everything about the labor market would stay unchanged after a huge job expansion in healthcare, education, energy conservation and infrastructure investments, while jobs connected with the military contracted. There would no doubt be skill shortages in some areas and labor gluts in others. There would also probably be an increase in inflation that would have to be managed carefully.

These concerns are real. But it is still true that large-scale job creation within the United States is possible as an outgrowth of ending the Iraq War, reallocating the entire Iraq budget to important domestic public investment projects and fighting the recession with further increases in public investments.

What if the Iraq War budget is transferred only partially to domestic public investments? Let's assume, optimistically, that a new Administration takes serious initiatives to end the Iraq War immediately after coming into office next January. This new Administration would almost certainly not have the wherewithal to shut down operations within one year. And even if it could completely end the war within a year, the government should still commit significant funds to war reparations for the Iraqi people.

The job expansion within the United States will decline to the extent that spending of any sort continues in Iraq rather than being transferred into domestic public investments. But even if the net transfer of funds is, say, $100 billion rather than $138 billion, several hundred thousand new domestic jobs would still be created. There is also no reason that the domestic public investment expansion has to mirror the decrease in the Iraq War budget. Any stimulus program initiated over the next few months--either a Bush-style program or one focused on public investment--would entail spending beyond the current Iraq budget levels.

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