How to Pay for the Jobs Bill

Around 1935, President Roosevelt, faced with the depth of the Great Depression, created a Jobs and Social Security Program to stabilize the American economy. He introduced some bold new initiatives:

Social Security
Public Works Administration
Federal Deposit Insurance Corporation
Rural Electrification Administration
Tennessee Valley Authority
Civilian Conservation Corps
Agricultural Adjustment Administration

to name a few.

Was this Socialism? The start of the nanny state? Soviet-style State Central Planning? There is much revisionist history about this, but the truth is the programs were hugely successful and transformed America into a world superpower. We were in a horrible depression: 20+% unemployment (see graph on right), bread lines, national pessimism about the future and the rise of the Communist Party in America which may have had more than 200,000 card carrying members.

The Roosevelt programs reversed the downward spiral and eventually resulted in an economic gusher, full of vigor and Free Enterprise. All this while we had the rise of the Labor Movement providing decent wages and benefits for our workers, and a phenomenal rise in the American Middle Class. The Great Depression was thus reversed, and once reversed American businesses and the capitalist system prospered to make us a world leader in economic, moral and military power. How did Roosevelt pay for all this and what is the lesson for us as we find ourselves in a similar situation?

First, we need a direct job creation program by the Government. Cutting marginal taxes, gutting environmental and safety rules, or eliminating social programs is not the answer. We have a demand implosion and boosting supply will not work. Ah, you say another big government program. How will you pay for this when we have this huge debt program? I am emphatically for responsible borrowing and living within our means, but unfortunately, we didn’t do that when we needed to and when the economy was bloating up during the Bush era, and now we are forced to deficit spend to avert a disaster.

Here’s how you pay for this. President Obama should present this analysis to the Nation when he explains how we’ll pay for his jobs proposal.

Each $1 billion per year spent by the government  for direct jobs creation results in 14,000 jobs. We have 2,000,000 construction workers looking for jobs while in 2007 The American Society of Civil Engineers estimated that $1.7 trillion was  required merely to stabilize the condition of core infrastructure. If all the needs are factored in—including new water supplies, a modernized continental rail system, a modernized electricity supply, and so on, the costs then add up to $8-9 trillion.

So say we spend $500 billion over five years ($100 billion/year) to create just a fraction of the much needed infrastructure and other (research, innovation, enterprise, education and retraining) projects. Here’s how the numbers shape out:

Expenditures
Expenditure over five years: $520 billion, including 20 billion in interest payment.

Direct jobs created for 5 years: 1.4 million (at 14,000 per $billion)

Direct Receipts and Returns
Tax Revenues (at $5000 per job/year):       $35 billion
Unemployment and Welfare Payments Saved ($20,000 per person employed):   $140 billion

So we’ll get $175 billion out of $520 billion back over five years in direct revenues.

Indirect Receipts
The 1.4 million new workers will spend the money they earn and feed it back into the economy and further job creation. This is called the Velocity of Money. If the velocity of money is a very conservative 2 times, it would be like the $100 billion we injected will result in $100 billion further boost. (During the Great Depression the velocity was estimated to be above 3.5 times. It goes up during bad economic times.) The chart on the right shows the current velocity to be above 2. This means another 1.4 million jobs and government receipts of another $175 billion!

So we now have paid for $350 billion of the $520 billion we spent ($175 billion times 2). But wait there are other benefits.

What about the infrastructure we built with the 1.4 million newly employed construction workers and others. Isn’t that a return to the tax payer? How to measure this return on our investment? It’s a bit more hazy. I would say that for each dollar spent by government let us assume they only produce 70 cents worth of infrastructure – the rest goes in inefficiency, government waste, decisional delays etc. So we get $500 billion times 0.70 or $350 billion worth of infrastructure.

We have more than paid for the $500 billion jobs investment! Also jobs created: 2.8 million.

When the economy recovers, as it did in 1940 for Roosevelt, we must go back to serious debt reduction. We have to keep taxes at a rational level – the Clinton era low but sensible levels will do. Also we have to reduce government spending then and bank the growth dividend from our job creation bill.

There are many other secondary benefits of this kind of spending by government. We reduce house foreclosures, reduce social instability and restore our credibility in being able to pay our huge debt.

If we seriously wish to pursue this line of reasoning and agree that our situation with jobs needs drastic action then I would advocate building a separate Agency (or even several Agencies) for jobs creation a la Roosevelt and give it the mandate to get us out of this economic crisis. This is completely contrary to the prevailing mood, but the prevailing mood is a politically manipulated ideological construct. Hopefully we can muster the strength to rise above it.

Mr. Obama, do you have the persuasive powers?