Note: this is a cross-post from The Realignment Project.

Introduction:

Even under the relatively optimistic economic forecast included in the 2011 Federal Budget, unemployment will remain at the 9.8% rate through the end of this year, dropping to 8.9% in 2011 and 7.9% in 2012.  In other words, after four years since the first stimulus, unemployment will remain at recessionary levels. To be fair, the passage of a jobs bill – and the promised efforts to pass further stimulative elements (aid to states, highway money, public works, etc.) – lends some slight hope that this catastrophe might be averted.

However, as we’ve seen with the jobs bill, it’s incredibly hard and slow to get even the smallest elements of a jobs bill through Congress; this makes it highly unlikely that sufficient actions will be taken to bring down the unemployment. However, I do think that it is possible to push through more aggressive jobs measures at the state level in heavily Democratic states that aren’t hamstrung by the Senate’s rules and the Blue Dog Caucus. As I’ve discussed in my 50-State Keynesianism and Job Insurance series, I believe that it’s possible to reform state governments to be successful anti-recession institutions, complementing Congressional action.

Today, I’ll take California and New York as two heavily Democratic states that are also large enough to have a significant impact on the national economy.

Job Creation at the State Level:

As I’ve discussed in previous segments,  it costs roughly $35 billion to create 1 million jobs,  assuming a modest living wage of $24,000 (enough to keep a family of four out of poverty) and 30% non-labor costs (a conservative estimate based on the WPA’s historical 20% non-labor costs). Interestingly, my estimate (which I’ve taken some flak for in the past as too low) was recently echoed by no less than three economists: Alan Blinder of Princeton, Kevin Hassett of the American Enterprise Institute, and Larry Mishel of the Economic Policy Institute. When you see economists from the AEI (a very right-wing think tank) and the EPI (a very left-wing think tank) agreeing on how much it would cost to directly create jobs, that’s a pretty good indication that your numbers are on the right track.

For the Federal government, $35 billion is a relatively trivial sum. For state governments, it’s much harder to raise those kind of sums on a much smaller tax base and without the power to deficit spend. On the other hand, state governments only have to wrestle with a portion of the overall unemployment burden. For example, California has a total of 2.125 million unemployed workers; New York has only 700,000. This means that state governments can make a significant dent in unemployment with a smaller number of jobs, and thus a smaller outlay.

California:

California’s 2.125 million unemployed workers give it an unemployment rate of 12.1%. A one-million strong jobs program would cut that rate roughly in half at a cost of $35 billion dollars. In the face of declining revenues and a budget deficit of $20 billion, at first glance it would seem impossible for the state to afford that kind of jobs program.

However, as I’ve explained in previous segments, there are two ways in which such a program could be brought back down into the realm of the possible. To begin with, a jobs program established as a system of social insurance funded by a payroll tax could generate significant new revenues, thus decreasing the overall “hit” to the General Fund. For example, a monthly premium of 1% of payroll split between workers and employers (or its equivalent from a different source of revenue) levied on the 16 million workers currently employed (assuming an median weekly earnings of $748) would raise about $5.7 billion a year – which is a substantial sum that could create a $35 billion reserve in six years, such that future interventions could be self-financed. For the present, the second step is for the new California Works Administration to take out a loan for $35 billion to bring down the up-front costs of hiring a million workers, either from the Fed (see here) or from a state reserve bank (see here), using the premium revenues to pay it back in a little over five years.

A longer loan term or partial state funding could allow the CWA to pay back its loan and build up a reserve. A ten year loan, for example, would allow the CWA to pay back the original loan while also banking $22 billion towards its reserves; a partial contribution from the state general fund could accelerate both the rate of repayment and the rate of savings.

New York:

New York’s 721,000 unemployed workers give it an unemployment rate of 8.8%. Notably, this means that New York’s jobs measures are much less onerous. A 360,000-strong jobs program would cut New York’s unemployment rate in half, and would cost a relatively modest sum of $12.6 billion. This is still a tough lift for a state that’s also facing declining revenues and a budget deficit of $8.2 billion, but as we can see from the California example, there are ways to deal with this.

The same monthly premium as above would net New York $2.7 billion a year, enough to create a $12.6 billion reserve in roughly four and a half years. If the New York Works Administration could take out a loan to spread out the $12.6 billion up-front costs of running the program, they would be able to pay back the loan in three and a half years. Similarly, a longer loan term or partial state funding would allow the NYWA to both pay back the loan and build up a reserve.

Results of State-Level Job Creation:

Even if the state government was able to reduce its overall costs in the fashion described above, a wary state politician might ask what the benefits of such a radical departure from conventional economic policy might bring them. Luckily, the benefits of a robust jobs program are sufficiently impressive that I think they could persuade ambivalent legislators.

California:

In California, the direct result of the jobs program would be a sudden fall in unemployment from 12.1% to 6%, a massive sea-change in the labor market. Indirectly, the wages of suddenly employed workers would be instantly spent on consumer goods (unemployed workers having a very very high “marginal propensity to consume” ) – injecting $24 billion into the economy. Using a standard Keynesian multiplier effect of 2.0, that should result in a total stimulus of $48 billion (or 2.59% of California’s GDP).

At the same time, one of the things that’s often forgotten when debating the virtues of public job creation is that American workers’ labor is valuable – the average worker in California produces $119,000 a year in goods and services. One million average California workers could produce up to $119 billion a year in goods and services;  a return of up to 340% on the original investment.  In addition to lowering the unemployment rate and boosting consumption, California’s job program could boost the state’s GDP growth rate by 6.4 percentage points.

New York:

In New York, the numbers tell a similar story. Unemployment would suddenly fall from 8.8% to 4.4% – getting close to full employment. $8.75 billion in wages would be dumped into consumer spending, with a multiplier effect that works out to $17.5 billion worth of stimulus (or 1.8% of New York’s GDP).

Since the average New York worker produces $132,000 a year in goods and services, 360,000 newly employed workers could create as much as $47.52 billion a year in goods and services – a return of up to 377% on the original investment. That works out to a boost of 5 percentage points to the state’s GDP growth rate.

In both cases, the up-front cost of running a jobs program would be off-set by the economic impact of the program on the state’s revenues. Unemployed people who get jobs through a Job Insurance project would pay the same Job Insurance premium as any other worker, lowering the ultimate cost of the program by $240 million a year for California and $86.4 million for New York. The added consumer spending would result in an increase in sales tax revenue: California would see an increase of $4 billion a year and New York an increase of $700 million a year. Additional revenue would flow in the form of increased corporate income tax from retailers and other businesses who receive the custom of newly hired workers, as well as increased property taxes from more valuable businesses and increased individual income taxes from new hires and increased hours from businesses who expand to meet increased consumer demand. Moreover, the production created by the state’s jobs program could also have a positive effect on the state’s budgets in a variety of ways.

On a final note, the hardest benefit to quantify is the impact of jobs programs on what Keynes called “animal spirits” or what today we could call economic behavioral psychology. When unemployment is high, people hold back from spending and investing, even if the government tries to make up the difference because people are extremely risk averse to losing their job or taking a loss in their investments and unemployment is extremely visible in the economy – layoffs make the front page, businesses see their customer base drying up and their orders from other businesses dwindling, and individual workers and consumers see people in their communities lose their jobs and their homes. The reverse is true for sudden spikes in employment – when all of the sudden newspaper headlines blare “1 million new jobs created!” and businesses see newly-hired workers bringing their paychecks to make all the purchases that had to be put off when they were unemployed, suppliers see their orders shoot up as inventory stocks decline, and individual workers and consumers see their neighbors going off to work, that’s something that really grabs people’s attention and should have a significant impact on consumer spending and investment.

Conclusion:

The practical politics of actually doing this are more difficult than theory would allow. In the case of California, we have a Republican governor who would veto a job insurance bill in a second. Luckily, because the premiums for a social insurance program are most definitely fees not taxes, a job insurance bill could be passed with a simple majority – bypassing the insanity of California’s 2/3rds rule for raising revenues. We still need to elect a Democratic governor in 2010 (and put pressure on Jerry Brown to not veto the bill when he gets nominated), but that means that a jobs insurance bill could be passed in early 2011.

In the case of New York, we have a temporary crisis of leadership. David Paterson is unlikely to last much longer, and even if he does, his credibility has been so damaged by recent scandal that it’s unclear that he could muster any support for the legislation. On the other hand, New York has the advantage of a majority-vote system in the state legislature and an activist Working Families Party that has had success in similar ventures. In 2009, the Working Families Party successfully pressured the state legislature into balancing the budget through progressive taxation rather than regressive budget cuts – even though Governor Paterson was initially opposed to such a strategy. Likewise, the Working Families Party was able to push through a green jobs bill later that year – showing that the muscle is there for jobs programs.

In the end, Democrats have little choice in the matter. Enacting cuts-only budgets and refusing to raise taxes isn’t going to bring about recovery, and will only alienate their political base without assuaging a fundamentally opposed Tea Party fringe and a Republican Party that’s eager to have it both ways by denouncing Democrats no matter what they do. Given that Democrats are going to be attacked by the right for spending and taxing anyway, we might as well do what we believe to be right – and leverage the positive economic impact of jobs programs by framing the election as between the party of jobs and economic recovery and the party of austerity.