Summers: Stimulus Targets Output, Not Employment

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I noted some time ago that in designing the American Recovery and Reinvestment Act the Obama administration essentially chose to get as much bang-for-their-buck as possible in terms of GDP rather than trying to maximize employment. Alex MacGillis had a good piece over the weekend in the Washington Post that started with the idea of a WPA-style direct employment program and eventually gets into the larger philosophical dispute complete with Lawrence Summers explicitly endorsing the output-over-employment approach:

“I think we got the Recovery Act right,” Larry Summers, the president’s chief economic adviser, said in an interview. “The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

On reflections, I think there are tons of practical problems with anything other than a very limited effort to do something WPAish. But there are alternative ways of doing employment targeting. Ryan Avent points out that European governments, operating in a political context with more of a tradition of active labor market policies, have done more to directly support employment. The Economist did an interesting overview of this action and offers a chart to show it’s largely working:


The question is whether these kind of measures retard needed restructuring in a way that will ultimately create a drag on European economies as we move toward recovery. In a relatively brief or shallow recession, I think Summers would definitely be on the right side of this argument. In a longer recession, though, there’s a case to be made that the loss of job skills and labor market attachment that’s involved in a period of prolonged unemployment will create a bigger drag effect than anything that might be involved in delayed restructuring.