To Help Address Inequality, Reinvent Fiscal Stimulus

In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy.

In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment.  The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies.

Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct employer of workers and finds that the first two policies are more inflationary and more inequitable than direct job creation:  “pro-investment policies in particular add upward pressure to prices and skew the income distribution toward the capital share of income.”

Jumping off from these results, Tcherneva offers a third way on fiscal policy, beyond austerity and pump priming.  This third approach, building off of Hyman Minsky’s “employer of last resort” and Keynes’s “on-the-spot” employment, aims explicitly and directly at securing full employment by guaranteeing a paying job that serves a public purpose to everyone willing and able to work.  “Relabeling a condition of, say, 5 percent unemployment as ‘full employment’,” writes Tcherneva, “is essentially a rhetorical device adopted by the economics profession to sidestep a problem it has failed to solve.”

Her version of the job guarantee operates at all phases of the business cycle and doesn’t require discretionary fine-tuning; the program expands in recessions and contracts as the private sector recovers.  In other words, it’s designed as the ultimate automatic stabilizer.

One of the sources of resistance to this idea of a “job guarantee” (or of any less ambitious program of direct job creation) is the belief that it would require a massive new bureaucracy.  But Tcherneva has developed a model for the job guarantee that, while mostly funded by the federal government, is run largely through social entrepreneurs and the nonprofit sector.

Read the policy note (“Full Employment through Social Entrepreneurship”) here.  The working paper modeling the price and income distribution effects of different fiscal policies can be found here.