No More Fiscal Policy Bank Shots

Michael Stephens | May 25, 2012

A little while back the Wall Street Journal observed that if there were as many people employed by government today as there were in the last month of George W. Bush’s tenure, the unemployment rate would be around 7.1 percent.  Job creation policy, in other words, can sometimes be quite simple.  Step One:  stop firing so many people.

Reuters’ Edward Hadas picks up Pavlina Tcherneva’s research on the reorientation of fiscal policy and points us in the direction of a Step Two:  offer a job to anyone who wants to work but can’t find paid employment.  Tcherneva’s research reveals that the standard way of doing fiscal stimulus,  trying to boost economic growth with traditional pump-priming and hoping that the jobs follow, has it backwards.  Instead of the traditional “trickle-down Keynesian” approach, Tcherneva suggests that targeting the unemployed with direct job creation policies that run throughout the business cycle would be far more efficient. Tcherneva envisions a direct job creation program that would function as a more effective automatic stabilizer, expanding in recessions and contracting in booms.

She argues that this “bottom up” approach is not only closer to what Keynes actually advocated, but that it is also more likely to bring us back to full employment—while being less inflationary and more equitable.  Although expanding government payrolls for projects fulfilling various public purposes would be one way of accomplishing this, Tcherneva advocates using social enterpreneurs and the nonprofit sector to offer jobs to all those willing and able to work (with funding provided by government).

From the standpoint of an ongoing debate about counterfactuals and whether the Federal Reserve would have allowed a more aggressive fiscal stimulus to take effect, one intriguing aspect of Tcherneva’s research stems from her finding that direct employment policies tend to be less inflationary, suggesting that reorienting fiscal policy in this direction might be able to get us closer to full employment before triggering a reaction from the Fed.

The article Hadas cites from the Review of Social Economy is behind a paywall but Tcherneva’s previous working papers on this topic can be downloaded here.  Her newest working paper is here.


One Response to “No More Fiscal Policy Bank Shots”

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  1. Comment by Tyler HealeyMay 30, 2012 at 4:22 pm   Reply

    I have trouble supporting JG because it would be such a massive endeavor. The last massive endeavor taken by our federal government was the invasion and occupation of Iraq.

    Also, philosophically, I disagree with MMT on what is an acceptable unemployment rate. I believe an unemployment rate somewhere under four percent is acceptable. If it keeps falling until it’s under one percent, great. In fact, I would be ecstatic about that.

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