FDR offered lesson in coordinating labor market

Guest Column: Laurence Kotlikoff
If a deadly virus struck our country, scientists at the Centers for Disease Control and Prevention would diagnose the problem, inform the public, and then prescribe a cure. If only this were true for our economic illness. More

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OPINION

FDR offered lesson in coordinating labor market

Guest Column: Laurence Kotlikoff
Posted 12/5/11

If a deadly virus struck our country, scientists at the Centers for Disease Control and Prevention would diagnose the problem, inform the public, and then prescribe a cure. If only this were true for our economic illness.

Neither President Barack Obama nor the disloyal opposition has explained what really ails the economy. But this hasn’t stopped them from applying highly expensive and generally ineffective elixirs.

Finger-pointing is no substitute for an actual diagnosis. Instead, let’s examine the patient to see what’s wrong.

At first glance, our economy looks much the same as in 2007. The factories, equipment, houses and apartment buildings are all still here or have been replaced with newer versions. The same holds for our work force, and our technology has improved.

So our economy hasn’t lost its productive capacity, its real wealth. We’re just not using it fully. In other words, potential supply exceeds effective demand, leaving 29 million Americans either out of work or working less than desired.

Where are all the missing customers, whose demand could justify hiring these 29 million? The answer is these same 29 million Americans. They are the missing customers. If they were working full time, their demand could support their extra supply of goods and services.

So why aren’t these folks fully employed? After all, free markets shouldn’t let supply exceed demand.

Unfortunately, real-world markets don’t operate by the textbook.

In bad times, people and companies lose their incentive to search. The perceived returns from looking for jobs or customers are too low, because everyone thinks no one is searching for them or their products. The result is the market failure we see, with 29 million people fully or partially out of work.

What really worked in 1939 was Uncle Sam’s coordinating the labor market by demanding that millions of Americans start supplying their labor to the military, albeit at a very low wage.

We can do the same today, without war, by coordinating a collective increase in labor demand to meet the excess supply.

Here’s an idea that’s less crazy than it sounds: Let’s have the government allocate 20 of its more than 10,000 square miles of public land to build a charter city. We can call it Romerton after New York University economist Paul Romer, who is organizing a charter city for Honduras.

Former President Franklin Delano Roosevelt was right that fear is our greatest enemy. We need bold, coordinated actions that restore faith in our economic future. •


Laurence Kotlikoff is a professor of economics at Boston University and a Bloomberg View columnist.

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