By many measures, the American economy has recovered from the 2008 implosion. The stock market is soaring, housing values in many markets have rebounded and GDP is growing at a healthy rate of more than 4 percent. Compared to Spain and Greece, where debt, mass unemployment and hardship remain widespread following the Eurozone crisis, America looks to be on easy street.
Yet scratch below the surface and you’ll see that the United States still has a considerable economic problem. While the official unemployment rate has fallen to 5.6 percent, the lowest since 2008, the percentage of the adult population participating in the labor market remains far lower than it was at the start of the recession. At least in part, headline unemployment numbers look respectable because millions of Americans have grown so discouraged about their prospects of finding work that they no longer try, and thus are no longer counted among the unemployed. Depending on the measures, only 59 to 63 percent of the working-age population is employed, far below recent historical norms.
Millions who lost their jobs during the recession have found work, but at lower wages and often for fewer hours per week than was the case before the financial collapse. In August, the US Conference of Mayors released data indicating that jobs created during the recovery paid an average of 23 percent less than jobs lost during the recession. That represents an extraordinary collapse in living standards for millions of people. Not surprisingly, according to the latest data, nearly one in six Americans are living below the federal poverty line.
The scale of this ongoing crisis has been largely ignored by the country’s political leaders. For many months, when government spending would have done wonders to stimulate demand, they locked horns over austerity budgets. Now they’re battling over who can take credit for the strong economic data. Even among progressive economists, many of whom were the most vocal critics of the post-crash stimulus bill for its half-hearted and short-lived attempt to create jobs, the focus has shifted to address the challenges posed by stagnant wages and rising inequality.
All this puts the economists at the Levy Economics Institute of Bard College well outside the mainstream policy debate. In 2006 Levy Institute scholars led the way in warning about the crash to come. They were, unfortunately, ignored. Since then, looking to plans adopted recently in other countries as well as in earlier moments of US history, they have generated a series of ambitious ideas about achieving the goal of full employment. It would be a shame, for everyone invested in true economic recovery and long-term stability, to ignore them again.
Nestled in the rolling hills of the Hudson Valley, a couple hours’ drive north of Manhattan, the colonnaded white-stone building of the Levy Institute is the intellectual home of some of the country’s most creative economic thinkers and policy analysts. Their workplace has become a laboratory for developing new ways of measuring and understanding poverty, inequality and economic well-being, as well as new ideas to deal with chronic problems in the way globalized labor markets function.
These days the Levy Institute is headed by Dimitri Papadimitriou, a Greek-born economist with a lively, suntanned face and close-cropped white hair. When Papadimitriou talks about “heterodox economics”—the world of theoretical economists who dissent from many classical economic strictures—his enthusiasm is palpable.
On the issue of employment, the institute has been urging economists to move away from the orthodox view that relatively low but persistent unemployment is somehow inevitable, an indicator that the labor market is healthy and dynamic. Mark Zandi, chief economist at Moody’s Analytics, represented that view perfectly on January 9, when the Labor Department released its latest monthly jobs report. “At the current pace of job growth,” he told the New York Times, “the economy should be closing in on a 5 percent unemployment rate by this time next year, which is consistent with full employment.”
Not everyone shares Zandi’s perspective. “We don’t believe a ‘natural rate’ of unemployment of 5 percent is healthy,” Papadimitriou says. “That’s 7 or 8 million people.”
Perhaps because they come from all over the world and bring with them a range of experiences with different political systems, the Levy Institute economists are less likely to apply universal laws to particular situations than to regard economic conditions in their historical context. Neoclassical economists, says Levy scholar Ajit Zacharias, who is originally from the Indian state of Kerala, believe in a “magical market mechanism, impersonal, divorced from relations of power.” In contrast, he explains, “Our starting point is that US capitalism is a product of history.”
Since the American version of capitalism is a product of a particular time and a specific set of beliefs, there is room, they argue, for policy solutions that challenge prevailing economic models.
Take what happened in Argentina when its economy collapsed in 2001. The country defaulted on its debt, public sector wages and job security were massively reduced overnight and the country’s middle class was eviscerated. Within months, far more than half the population was living below the poverty line.
Faced with civic unrest, the government scouted around for creative ways to get jobs and money into devastated communities. First, it unlinked the dollar from the peso, thus allowing the government to fund public spending. Then it started the Jefes program, a public works plan that encouraged community organizations, especially in poor neighborhoods, to create their own jobs programs. Using the new, devalued pesos and these direct hiring measures, the government helped to stimulate employment during the worst of the economic crisis.
Not all the Jefes projects were run well, but Jan Kregel, an economist at the Levy Institute who studied the program extensively, says they generated “non-market, enclave economies,” providing jobs in soup kitchens, nurseries, urban gardens, construction and other community-improvement projects.
Argentina’s experiment came to be seen by many progressive economists as a template for how to stabilize the economy in the midst of an employment collapse. Kregel and his Levy Institute colleagues see the Jefes as the heir to New Deal employment programs in the United States, as well as to policies that many European economies adopted to promote employment in the postwar period.
During those years, Sweden launched programs to keep people employed or in school, and Italy operated the rail networks as the de facto employer of last resort. As a result, for several years both countries came close to eliminating unemployment. The Netherlands and many other countries used targeted employment and training strategies to move workers from moribund industries into up-and-coming new sectors.
More recently, New Zealand has adapted this model to help unemployed young men in its cities. In India, the central government has released small amounts of money to local authorities in agricultural communities in an attempt to tackle chronic unemployment in rural areas.
Over the past few years, Papadimitriou has been advising the populist leftist Greek party Syriza, which emerged as a powerhouse in the wake of the country’s economic catastrophe, and which won 36 percent of the vote (nearly 9 percent more than its nearest rival) in the January 25 general election. In the months leading up to the election, Papadimitriou traveled to Greece every few months to consult with party leaders, bringing Levy Institute studies analyzing how much it would cost to create jobs at either the pre-recession minimum wage or the new, reduced, minimum. Now that Syriza leader Alexis Tsipras has been sworn in as prime minister, it is likely that Papadimitriou’s recommendations will inform the government’s negotiations with Greece’s creditors.
In the Levy Institute’s April 2014 report, Responding to the Unemployment Challenge: A Job Guarantee Proposal for Greece, Papadimitriou and his colleagues wrote that “to mobilize Greece’s severely underemployed labor potential and confront the social and economic dangers of persistent unemployment, we propose the immediate implementation of a direct public benefit job creation program.” It would cost between 1 and 3 percent of the crippled country’s GDP, they calculated, and would have large magnifier effects on employment and consumer spending. The election results suggest that a large segment of Greece’s electorate, still facing nearly 26 percent unemployment and an economy one-quarter smaller than it was in 2008, want their leaders to push just such an anti-austerity agenda.
The Levy Institute was founded in 1986 by investment banker Leon Levy to memorialize the work of his father, Jerome—a physicist by training, a garment wholesaler by profession and an amateur economist by inclination. After World War I, Jerome Levy developed a theory indicating that investment drives profit, which was written more in the style of a physicist than an economist. In the history of economics, the theory is little more than a footnote.
Better known, and more representative of the institute’s scholarship, is the work of Hyman Minsky. A longtime professor at the University of California, Berkeley, and Washington University in St. Louis, Minsky spent the four decades after World War II rewriting long-assumed laws of supply and demand, radically reformulating ideas about how capital, investment and profit are interrelated.
Minsky’s ideas were similar to those of the Polish economist Michal Kalecki and Piero Sraffa, an Italian-born economist at Cambridge University’s Trinity College. Sraffa and Kalecki challenged the idea that there were ironclad rational relationships between supply and demand, and that profit was determined by marginal rates of return on investment.
When it came to labor, according to these theorists, there was simply no guarantee that the markets, left to their own devices, would reach equilibrium points generating stable full employment. Without government agencies to train workers and help them relocate into areas of economic growth, they argued, you could end up with very high rates of long-term unemployment as well as a pent-up demand for workers.
Minsky wrote of “financial fragility” and of the tendency of advanced economies to end up in situations of unstable equilibrium, primed for crisis and episodic collapse. Such situations were marked by unrealized demand for labor as well as an over-supply of labor that private markets wouldn’t be able to fully absorb. In other words, unemployment is a normal and highly destabilizing condition of modern market economies.
Keynes had written of the failure to achieve full employment as one of the main faults of capitalism, and had proposed a system of “socialized investment” to hire the unemployed. Unlike other economists, who believed Keynes was calling for government spending in any form, Minsky believed he was urging government to invest in the creation of public works jobs.
In a modern economy, Minsky argued, the state should serve as an “employer of last resort,” offering a universal job guarantee and generating what economists now term a “buffer stock” against chronic uncertainty in the labor market. And it should do so not just during severe downturns such as the Great Depression—when New Deal labor programs created millions of jobs—but on a regular basis. Absent that, it was improbable that a rising tide would lift all boats. Instead, islands of deep deprivation would always remain.
For Minsky, there was no “natural rate” of unemployment; it was simply a convenient fiction. Like Kalecki, he argued that profit was determined not by the marginal rate on investment returns but simply by the amount of capital circulating. Raise that rate, including through deficit spending, and you increase aggregate profits. Invest more in things like employment programs, and you create virtuous circles. Don’t do it, and you’re setting the inherently unstable modern economy up for the sort of crash that occurred in 2008.
When the Levy Institute was founded, it rapidly became a magnet for Minsky acolytes—and, in the later years of his life, for Minsky himself. Year after year they churned out reports on poverty, inequality and other issues vital to the political and economic discourse. Since 2008, they have put a particular emphasis on employment strategies.
“You can’t keep people unemployed for a long period of time,” Papadimitriou argues, “because that unemployment becomes structural, and it’s very difficult to reintegrate them into the labor force.”
In the postwar decades, the ideas of Minsky, Sraffa and other radical economists helped shape the labor strategies of many Western democracies. Out of those ideas came the industrial policies that allowed European economies to recover. Income policies that tied wage increases to productivity increases in specific industries helped smooth the market by channeling workers into high-end sectors where productivity was increasing.
Later, after inflationary pressures took hold in the 1970s, these controls went out of fashion in many countries. At the same time, economists came to accept as “normal” unemployment rates that in earlier decades would have been viewed as harbingers of political crisis. More than a generation later, we are living with the consequences of that shift.
Looking to Minsky as their guide, the Levy Institute economists hope to alter this reality. Many of their recent efforts have addressed unemployment crises in the world’s hardest-hit economies. How much it would cost to create over 500,000 jobs in Greece? The team estimates a net cost of about 3 billion euros—after savings in other social spending, increases in tax revenues and expansions in the GDP related to the new jobs. Given the scale of Greece’s obligations to the European Central Bank, the European Commission and the IMF, this is not much more than a drop in the bucket.
With a bit of creative politicking, Papadimitriou argues, it ought to be possible to allocate at least some of the country’s structural adjustment funds to a viable public works program. But if Germany balks, he adds, Greece could use a parallel currency to fund such jobs and use as scrip in stores. The Syriza-led government is clearly interested in the idea of a public employment program, and has appointed Levy Institute scholar Rania Antonopoulos to the post of Deputy Minister of Labor and Social Solidarity, where she will be tasked with creating 300,000 jobs.
In a series of papers written over the past few years, Levy Institute scholar Pavlina Tcherneva has outlined an American version of the job guarantee. The program would give federal grants to local nonprofits working on environmental cleanups and sustainable development projects like urban gardens, farmers’ markets and locally run grocery stores. Tcherneva’s goals are similar to those of UMass Amherst professor and Political Economy Research Institute economist Bob Pollin, who has developed a detailed model for a program that would simultaneously tackle the jobs crisis and kick-start the green economy.
The Levy Institute scholars argue that a job guarantee program of this sort would necessarily bring the ranks of the unemployed into local conversations about what sorts of jobs are needed and what sorts of investments would be socially beneficial. A community-based public service program enabled by the Comprehensive Employment and Training Act was implemented briefly, and on a very small scale, during the Carter Administration. Not surprisingly, it withered during the Reagan presidency. It is past time, the Levy Institute argues, for a revival.
“It would be hard to find a politician progressive enough to consider such a program in the US,” says Papadimitriou resignedly. But, he insists, there are creative ways out of the nation’s chronic unemployment problem. For Papadimitriou, the labor crisis is an unnecessary consequence of misguided politics. We know how to do better. We just need the will to do it.