effective job stimulation . . .

From 2009 to 2011, Jared Bernstein was the chief economist and economic adviser to Vice President Joe Biden and executive director of the White House Task Force on the Middle Class. He now is a senior fellow at the Center on Budget and Policy Priorities. According to his blog "On the Economy" his areas of expertise include federal and state economic and fiscal policies, income inequality and mobility, trends in employment and earnings, international comparisons, and the analysis of financial and housing markets. The below excerpt is from his Daddy, Where Do Jobs Come From?

What about fiscal policy? How does that chain work to create jobs and what are the weak links? Well, though economists tend to discuss fiscal policy as a lump, it actually comes in a lot of different flavors and they’re not all created equal in terms of bang-for-buck job creation. Basically, the more indirect they are—the more links in the chain between the policy and job creation—the less effective they are.

Jared BernsteinFor example, for a stimulative tax cut to create a job, a) the recipient must spend, not save, the money from the cut, and b) she must spend it on domestic goods (I mean, of course, that’s what has to happen for the tax cut to create a job here as opposed to in China). Again, if you’re in a deleveraging cycle, step “a” is a problem. Also, if your tax cuts go to wealthy people who are not income constrained in the first place, don’t expect much in terms of job creation.

Other fiscal measures have more reliable job-creation chains. Increasing unemployment benefits or food stamps helps because those folks typically spend the money. And new infrastructure is a pretty direct way to go. Same with state fiscal relief. I remember during the Recovery Act, mayors cancelling planned layoffs the day they received Recovery Act funds.

The punch line is a simple one, but it’s one that seems to have been forgotten amidst our increasing love affair in America with laissez-faire economics: the more direct the policy measure—i.e., the fewer links in the chain between the policy and the job—the better it will work.

I’ve seen these processes at work close up and I’ve come to view this simple insight as a lot more important than I think most economists realize. Even Keynes had relatively little to say about implementation and the relative effectiveness of different types of stimulus. He famously quipped that if the government can’t find something useful for people to do, just pay one group to bury bags of money and another group to dig them up.

Ha-Ha. Very helpful, Sir K. But I actually think the great man was onto something. The most direct way to create jobs, the only surefire way to be sure that stimulus will work, is direct job creation. Everything else, including all the Federal Reserve stuff, involves crossing your fingers and hoping the chain holds. [...]

So, the next time we hit a recession, I’m going to be out there advocating for, if not direct jobs in the public service, something as close to that as we can get, like infrastructure, fiscal relief to states, and subsidized jobs for the disadvantaged.