The Limits of Pump Priming

Here’s one fairly standard reading of our economic policy challenge:  the economy needs more pump priming, the federal government has more than enough fiscal space to provide it, but for political reasons it won’t be forthcoming.  (If you needed further evidence of that last proposition, take a look at the latest House Republican job creation offering:  repealing a law designed to prevent tax evasion by federal contractors, paid for by kicking some seniors off of Medicaid.  Take a moment to gape at the boundary-probing cynicism.  This is the legislative equivalent of planting a giant foam middle finger on the White House lawn.)  So as far as aggregate demand goes, in other words, there’s little reason to think that the federal government will step into the breach (and as things stand, we expect the government to be withdrawing demand from this economy).  But a new one-pager by Pavlina Tcherneva (“Beyond Pump Priming“) suggests that the above reading of the situation is … too optimistic.

Even if the AJA, or some other form of aggregate demand injection is passed, there are serious limitations to relying too heavily on an approach that boils down to boosting growth and hoping for the right employment side effects.  Featuring a rather stark graph portraying the ratcheting up of long-term unemployment over the last several decades, the piece argues that there are shortcomings to relying too exclusively on pump priming (which is largely what the AJA is, aside from a small amount of infrastructure).

The alternative is to take dead aim at the employment outcomes we need—to directly target the unemployed.  Tcherneva explains why, instead of just trying to fill the demand gap for output, we ought to focus on closing the demand gap for labor, through public works and job guarantee programs that directly employ the unemployed.  Among the benefits of the latter approach are an ability to focus on particularly distressed regions of the country.

Read the one-pager here.