2012 Jobs Program for Ireland

Submission for Budget 2012 Ireland 6.11.2011

Today policymakers are becoming increasingly aware that, while exports are doing well, the domestic economy remains trapped in a cycle of low-growth. As set out below, these problems are essentially due to high unemployment and a lack of spending power in the domestic economy. The economy needs stimulus and the most effective way to do this is to implement an immediate jobs program backed by newly issued, low-yield tax-backed Jobs Bonds. This will provide the financing necessary for such a program without adding to Ireland’s already substantial interest burden. If the newly issued Jobs Bonds have a guaranteed clause that, in the case of default and only in the case of default, they can be used to extinguish tax liabilities within Ireland, this will provide an effective floor below which the value of said bonds  cannot drop. This provides investors with 100% confidence that their investment will always be realised so that a moderate rates of return is acceptable. In addition to this, the bonds could be targeted at Irish savers who would not only have a 100% safe investment for the future in these uncertain times, but would also be partaking in helping bring about a national economic recovery. Large-scale jobs programs have worked many times before to kick start flagging economies. The most famous being the Work Progress Administration (WPA) enacted under Franklin Delano Roosevelt during the Great Depression. A more recent example is the Jefes program which was enacted under the administration of Nestor Kirchner in Argentina after the economic collapse that took place there in 2001. (See: Tcherneva, P. 2005).

The 2012 Jobs Program will focus on green jobs in particular. These are not currently undertaken by either the public or the private sector, so if unemployed workers are channelled into this sector there will be no ‘crowding out effect’. Green jobs are also important if we are to maintain our national natural resources of biodiversity , clean waters, soil fertility and carbon stores etc. Before going into the details of the plan, the causes of the present and persistent unemployment should be laid out clearly.

What went wrong?
As can be seen from the chart below, when the housing bubble began to seriously deflate in 2007, consumer confidence took a sharp hit. As consumers stopped purchasing as many goods and services as they had before, firms cut back on investment and the economy fell into a serious recession (indicated by the grey bars in the chart below). But unlike a typical recession, growth failed to re-establish itself and unemployment continued to climb despite the economy coming out of recession in late 2009. The reasons for this are quite straightforward. During the Celtic Tiger years Irish households took on an inordinate amount of personal debt. As of 2009 Goodbody economist Dermot O’Leary estimated Irish household debt at 176% of GDP, making Irish households some of the most indebted in the world. In 2011 the ERSI released a report that indicates that these levels have probably increased over the past two years. As household spending declined businesses noticed that there was far less demand for their products. This led – and continues to lead – to businesses closing their doors or cutting back on staff which, in turn, increases unemployment and further dampens consumer spending and overall demand. The result is a downward deflationary spiral not unlike what occurred in Japan after their housing and stock markets bubbles burst in 1991. This is not a typical recession. Instead it is similar to what the economist Richard Koo calls a ‘balance sheet recession’. (See: Koo, R. 2009). A balance sheet recession occurs when households take on far too much debt and due to having to repay this debt they become unable to purchase enough goods and services from private firms. This lack of demand for their products leads firms to invest less and lay off workers, which in turn further perpetuates the cycle. The economy then stagnates into a protracted period of extremely slow growth, high unemployment, high budget deficits and intermittent recession.

How do we fix it?
The household sector is not going to increase spending in this environment unless its own income is boosted. With demand falling businesses are not going to increase investment and employment until they see an uptick in sales. This is why supply-side schemes aimed at increasing credit to businesses will not work.  A lack of access to finance is a minor reason for the lack of business investment; the greater cause is uncertainty about the future. Ask any business-owner what their main concern is right now and they’ll tell you that their main concern is a chronic lack of customers. Indeed, Minister for Jobs Richard Bruton recognised this recently when he said that the announcement regarding Aviva layoffs in September 2011 was due to a fall in domestic demand. Again, programs that seek to enhance access to private sector credit will not prove particularly useful in such an environment. At this moment in time, schemes that work to increase purchasing power on the demand-side are a much more promising policy choice. The government’s NewERA infrastructure and investment project is a start in this regard but it does not directly tackle the problem of unemployment. A separate approach is required to deal specifically with the problem of unemployment and deficient demand;-  i.e.  a direct government-funded jobs program.

The 2012 Jobs Program is a targeted jobs scheme that offers jobs to the unemployed at a level of pay commensurate with the minimum wage. This allows Irish people access to income streams that will boost their spending power, help them make debt repayments and boost overall domestic demand. The 2012 Jobs Program will get the economy back on its feet again, after which the workers in the program can transition back into the private sector.

How will it work?
The program will be funded at a national level and implemented at a local level. People will liaise with organizers who will determine their skill-level and their interests and channel them into job suited to them. Although all the jobs will pay the same wage – which will be given to the employee on a daily basis – we recognise that some of Ireland’s unemployed labour force will be more qualified than others. So, while a relatively unskilled person might be suitable for one job – cleaning graffiti or the eradication of invasive species, for example – a more skilled person might be more suitable for another –day-care or teaching assistant, for example. What jobs are in fact available will be determined at a local level. Employers and community organizers can pitch job ideas to those managing the jobs guarantee program and they can determine whether they are suitable for the program or not.

The 2012 Jobs Program should not subsidise private sector jobs or threaten to undercut unionised public sector jobs. Any jobs that have a set rate of pay or are in the private sector should not be considered for the program. Only those jobs that directly benefit the public purpose and do not infringe on other workers should be considered. Those directing the program should remain in contact with both unions and consumer groups who should have input into such decisions. This makes many green jobs perfect for the program. These jobs are not currently undertaken by either the public or the private sector and so if the program hired unemployed people to work in this sector there would be no ‘crowding out effect’. The extensive academic literature on the jobs guarantee program provides numerous other possible positions that can be filled, including but not limited to: companions for the elderly; public school classroom assistant; safety monitor; neighbourhood cleanup; low-income housing restoration; library assistants; community or cultural historian; musician and event organizer. The rate of pay for employees is set at the minimum wage. This ensures that the program does not draw employees away from minimum wage private sector job and instead picks up the slack left by present high levels of unemployment in the country.

The 2012 Jobs Program is not conceived as a means to replace other social programs such as social welfare. Many people are not able to work and safety nets for these people must be kept in place. It should be noted that a major problem in Ireland’s job market is that many people have been sitting idle for so long that they become almost unemployable. The 2012 Jobs Program will allow people to maintain their skills and hence their employability. Employers will be relieved to find a large pool of workers who would otherwise have been sitting idle for so long that their skills may have dried up.
How much will it cost?
The costs of such a program will be determined by its size. However, if the program is kept to a certain level the costs should not be too great. The easiest way to control costs is to outline a set budget constraint for the program and then employ as many people as possible on this budget rather than setting a target for the amount of people employed. Current Irish GDP is estimated to be €158bn (Source: European Commission Economic Adjustment Programme for Ireland, September 2011). The jobs program should start at a conservative 1.5% of GDP and can be increased from there. This adds up to a total spending allowance of around €2.37bn for the entire program. The program will require equipment, resources and administration. Administrators should be paid more than the workers and so we include their salaries with the costs of equipment and resources. A very rough estimate indicates that around one third of the total budget should be put aside for the costs of administration, equipment and resources. This amounts to 0.5% of GDP or around €790m. The cost of hiring each jobs program worker at the minimum wage (€8.65 an hour) for a thirty-five hour week will be around €15,743 a year. After administration, resources and equipment are paid for it is estimated that there will be a total of €1.58bn available to hire workers. That should facilitate the hiring of approximately 100,362 workers in total. As of September 2011 there were a total of 437,441 people on the live register, collecting either Jobseeker’s Benefit or Jobseeker’s Allowance. The program should be expected to put almost 23% of these people back into full-time employment. Given that unemployment benefits are estimated to cost the state roughly €3.7bn this year we can expect these to fall by a corresponding 23%. This should add up to a net saving of around €851m. When this saving shows up it can be channelled back into the jobs programs to hire yet more people and take more people off social welfare. This cumulative process should ensure that after a year the number hired under the jobs program should be substantially larger than the original estimate of 100,362 workers. As this increased spending power is injected into the economy we also expect tax revenues to rise which will further alleviate the burden on the main government deficit. In this the program will act on the budget ‘counter-cyclically’.

How will we pay for it?
The 2012 Jobs Program will be funded by newly issued tax-backed Jobs Bonds. These bonds will be similar to standard Irish government bonds except that they would have a clause included in them that ensures their yields remain low. This clause states that should the government default on these Jobs bonds the defaulted bonds will be acceptable to extinguish Irish tax liabilities. We anticipate that the Irish government would not actually default on these bonds and so the tax-backing of the bonds would only be in place to assure investors of their value. With such a guarantee in place investors can be 100% certain that the bonds will always be ‘money good’ or ‘liquid’ and so will be willing to accept yields on these bonds far below current yields on Irish government bonds. The Irish government will agree to pay these bonds back as they fall due out of general government spending and in this they will resemble standard Irish government bonds. The bonds not expire for perhaps 8-10 years as this will give the economy time to recover before repayments have to be met. Ideally, the bonds would be backed by EU law. This way investors would be sure that, in the case of a default, the Irish state would not default on their obligation to take them in tax payment as any case of non-payment of tax liabilities while holding a bond would have to be settled in the European courts.

How will the program be administered?

The most effective and efficient way to administer the project is to emulate the successful Jefes jobs program that was implemented in Argentina after the 2001 financial crisis. The Jefes program operated on a decentralised model that would fund the program at a federal level while allowing municipal governments to direct the programs through grassroots organisations and NGOs.  In their study of the program economists Randall Wray and Pavlina Tcherneva outlined how such a structure worked in Argentina:

“One of the most distinguishing features of the program’s institutional design is its decentralized model of administration. The Argentinean federal government provides the funding, general guidelines for the execution of work projects, and some auxiliary services for managing the program. Such services include maintaining a national registry of program beneficiaries, as well as databases that track all projects that have been proposed, approved, denied and completed. Note that all these databases are publicly available, thereby increasing transparency and reducing corruption.3

The actual administration of the program, however, is primarily executed by the municipal governments. The municipalities are responsible for assessing the pressing needs and available resources of their communities and for evaluating the projects proposed by the local non-profits or NGOs. For those project that have been approved, the municipality contacts program beneficiaries informing them of the availability, time, and place of work. (Tcherneva, P. & Wray, R. 2005. p.9)

This structure allowed the national government to take a ‘hand off’ approach to the program. Instead of micromanaging the project, they largely restricted their authority to controlling the budgets allowed to municipalities. Not only did this limit administrative costs and ensure that the program did not become overly bureaucratic, but Tcherneva and Wray also stress how it empowered community groups and other organisations who, until then, had little access to funding with which to undertake much needed social projects.

“[O]ne of the most interesting results of the Jefes program is that it demonstrates that a decentralized program can be used to increase political participation and foster grass-roots democracy among groups that had traditionally been marginalized. (Tcherneva, P. & Wray, R. 2005, P.8)

In Ireland, such a decentralised model could be funded by the national government – using the newly issued tax-backed jobs bonds – and implemented at a local government level. The national government could set budget constraints for the local governments based on either a per capita basis or in relation to local unemployment rates. The local governments could then channel funds to already existing organisations – such as NGOs, grassroots community groups or charities – who could in turn use the funds to start up much needed projects and employ workers. If these organisations sought to expand their operations and required additional management staff they could then apply to the local government for an increase in funding. Local governments could also encourage the unemployed to form new organisations.

When can the program be implemented?

With a little organisation and planning the 2012 Jobs Program could be put in place very quickly and could help the Irish economy move toward sustainable recovery. Because it is funded independently of the government budget the program can be enacted at any time. Since the program is decentralised and relies on already existing institutions in order to function it should prove remarkably quick to implement.

Moving into 2012 we need a new vision for the Irish economy. The 2012 Jobs Program promises that to the Irish people. Let’s get unemployment down by enacting the 2012 Jobs Program now.

Key Points:

(1)   The 2012 Jobs Program will seek to reduce unemployment by up to 24%

(2)   The 2012 Jobs Program will target areas not catered for by the economy until now

(3)   The 2012 Jobs Program will provide stimulus to get the domestic economy moving again

(4)   By taking people off social welfare the 2012 Jobs Program will save money on welfare expenditure

(5)   The 2012 Jobs Program will help the government meet its budget targets in the long run by increasing overall GDP growth and tax revenues

References:

Job Guarantee

‘The art of job creation: Promises and problems of the Argentinean experience.’ Pavlina R. Tcherneva. 2005.

‘Employer of last resort program: A case study of Argentina’s Jefes de Hogar program.’ Pavlina R. Tcherneva and Randall Wray. 2005.

‘The holy grail of macroeconomics.’ Richard C. Koo. 2009.

Tax backed bonds

Economist Marshall Auerback “Are We Approaching the End Game for the Euro” http://neweconomicperspectives.blogspot.com/2011/08/are-we-approaching-endgame-for-euro.html

Economist Warren Mosler  “The Mosler Plan for Greece”

http://moslereconomics.com/2011/06/29/the-mosler-plan-for-greece/