Getting Back to Full Employment

by Dean Baker & Jared Bernstein

Cover image

Publisher: CEPR
Copyright: 2013
ISBN: 0-615-91836-0
Format: Kindle
Pages: 116

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Getting Back to Full Employment is more of a policy paper than a book. The authors both work for economic think tanks; one of those, the Center for Economic and Policy research (co-founded by Baker), is the publisher of this book. It's also free on the Kindle, another sign that the purpose is more about educating and convincing the public than about selling a non-fiction analysis.

I found out about this through Paul Krugman, and if you're a regular reader of Krugman's columns and blog, not much here will be a surprise. Baker and Bernstein are advocating what I would call conventional-liberal economic policy by US standards (which means that it's not really that liberal). The short version is that full employment is vital for improving the economic position of the average person, inflation is nowhere near as much of a risk as people claim, and the best economic action the US government can take at present is to aggressively pursue a full employment strategy without worrying excessively about inflation.

If you're at all familiar with this debate, you probably already have an opinion about everything in that summary. I certainly do. If you follow economics at all, this debate has been raging ever since the 2008 financial crisis (and earlier versions of the debate were raging before then). Since I'm a regular Krugman reader, you probably know my opinion: the people who have been crying wolf about the dangers of inflation have been systematically wrong about everything for seven years solid, and it's amazing that anyone is still giving them the time of day. Baker and Bernstein make a similar argument at greater length, and with a more academic tone.

The risk of any policy paper like this is that reactions will be almost entirely decided by one's pre-existing opinion about the political actions that each economic policy implies. If you (like me) have already decided that government intervention in the economy is useful to prevent concentration of wealth in the hands of a few and provide support for the most vulnerable, everything Baker and Bernstein say here is going to sound quite convincing. If you've already decided that government intervention in the economy almost always leads to tears, and that a large government with the ability to take economic action is far more dangerous than any of the effects of economic downturns and unemployment, it would surprise me if Baker and Bernstein will change your mind. In other words, I'm skeptical that policy papers like this accomplish much.

That said, there are a lot of facts and data here, which at least help ground this ongoing argument in more specifics. The authors show you the math: the evidence for moderate inflation not leading to any serious impact for economies, the very strong correlations between low unemployment rates and rising median wages, the theoretical basis for lower bounds on unemployment rates and our extensive past history of assuming that lower bound is much higher than it actually is, and some pointed comparisons to countries like Germany that have taken many of the specific policy recommendations included here and have a far healthier labor market as a result. All the statistics, charts, and discussion of analysis techniques is fairly dry, but I think the data is compelling. Of course, I was already convinced by earlier reading.

There are a few bits here that I hadn't seen before, or at least hadn't internalized. One is a subtle but very important statistical limitation: any uncertainty in measuring the inflation rate will lead to incorrect statistical findings that inflation slows growth. The explanation for this takes several pages and is somewhat technical: the short and somewhat inaccurate version is that growth is measured in inflation-adjusted GDP, so if you get inflation wrong, you magnify the correlation between GDP and inflation. An inaccurately-high measure of inflation rate simultaneously leads to underestimating GDP growth for that country; an inflation rate that's inaccurate on the low side leads to overestimating GDP growth. This is inherent in how this comparison is done, and it's hard to see how to avoid it. It's therefore worth taking any analysis of the growth impact from higher inflation with a grain of salt. (Please note here that we're talking about moderate inflation — the typical rates between 1% and 8% that you see in developed economies.)

Another bit that was new to me was the analysis of the connection between trade deficits and full employment. I typically dismiss any international trade analysis in macroeconomic policy for the US since international trade is a much smaller part of our economy than most people think it is, and because protectionism has been rightfully discarded as a policy approach. But Baker and Bernstein make an interesting argument here about the effects of a strong currency on increasing unemployment; even with the relatively small amount of trade, reducing the deficit would have a noticeable effect. (Increasing the volume of trade but not changing the balance would not.) The authors certainly don't recommend protectionism; they do recommend being willing to let the value of the dollar drop against other currencies as a good way to reduce the deficit, and to be aware that other central banks have intentional policies of propping up the dollar that we're largely ignoring. They also mention that this is a zero-sum game for the world economy as a whole, although I would have preferred a bit more emphasis on that. You can't get very far via beggar-thy-neighbor economic policy. But it's a good reminder that the obsession in some parts with not "devaluing the currency" is economic nonsense and directly hurts employment.

The end of the book discusses a variety of sensible policy recommendations ranging from international currency policy to Germany's work-sharing program where the government subsidies reduction of worker hours the same way that we already subsidize unemployment. They all seemed reasonable to me, although, sadly, I have little faith that the dysfunctional US government will consider any of them seriously, particularly more direct approaches such as government taking on the role of employer of last resort. But they're fun to read about and imagine a US in which the government actually did sensible things like that.

Getting Back to Full Employment is pretty dry, and it's hard to shake the feeling that writing things like this is basically pointless, so I'm not sure I can really recommend it. But if you like reading Krugman's columns and are interested in similar material from different people at a longer length, that's basically what this is.

Rating: 6 out of 10

Reviewed: 2015-09-22

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