Thursday, 15 January 2009

Stimulus that employs the unemployed

On this blog, as well as on several others, there's a strand of opinion supporting fiscal stimulus aimed at investment rather than consumption. Of course investment, depending on the multiplier, leads to a certain amount of consumption anyway. But the argument is that direct government spending should be weighted towards investment, either because there is a deficiency of investment in this phase of most recessions; because there has been underinvestment in the last few years which needs to be made up; or because it's a more "responsible" way to spend public money.

A typical goal in designing an investment program is to create demand for things that can be provided by currently-unemployed people. This encourages unused resources (people) to be brought into use, so the stimulus gets an economic free lunch instead of diverting resources that are already economically productive.

The challenge is that people are unemployed typically because their skills are less useful in the marketplace - i.e. the things they know how to make or do, are not things that people want very much.

So how about this as a way to do it:

Create a range of training goals for unemployed people, based on the skill gaps that they have in comparison with those who are productively employed. Offer free training, and incentivise the recipients by paying them for achieving specific goals or qualifications.

Training could be in a number of different fields - green infrastructure, healthcare, information technology, education, or indeed literacy and other basic skills for those who need them. Ideally the types of training offered should be guided by the market; for example:
  • by a measure of skills shortage (perhaps by comparing salary earned with number of years education required to fill the post; or by taking international benchmarks)
  • better, by involving private companies who would gain from successfully placing the trainees into jobs, proportionate with the salary earned

Training is an efficient good to offer to a large number of people - it has good economies of scale. This is an investment which directly benefits the poorest in society as well as raising the productive capacity of the economy as a whole. And as a stimulus it works well, because it does not act as a deadweight on resources that are in productive use, and the money goes to those who are likely to spend it - increasing the multiplier.

A minor drawback is that low-income people pay less tax, so the amplification effect of marginal income tax (see Paul Krugman's columns this week) will be less. I think that effect is both countered by the reduced propensity to spend and outweighed by the public good that the proposal creates.

A more substantial drawback is that some kinds of training would take a long time to ramp up. However I anticipate there will be some types of course that are ready to go right away. In the UK we have ready-made training courses for home energy assessors; intermediate labour market opportunities for installers of home insulation; and a big vocational/further education infrastructure which - though it is well utilitised at the moment - could undoubtedly take more students. The US, I imagine, will have some similar structures.

I think it would be possible to estimate the direct stimulus value of this program as well as the value of some longer-term secondary effects; any takers for that?

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