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Economist Pavlina Tcherneva of Bard College explains why monetary policy that is directed at finance and not job creation has this effect

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SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries in Baltimore.

The Bureau of Labor Statistics released their September unemployment figures on Wednesday and reported that it fell to 5.9 for the first time since 2008. This is a good thing. But even President Obama admitted in a speech on Thursday in Chicago that these gains made in the economy at large is being experienced more by the wealthy than the ordinary American.

To discuss the recovering economy and who’s really recovering is Dr. Pavlina Tcherneva. Dr. Tcherneva is an assistant professor of economics at Brad College and research associate at the Levy Economics Institute. She conducts research in the field of modern monetary theory and public policy.

Thank you so much for joining us.


PERIES: So explain these new unemployment numbers. What does 5.9 really mean? And who’s included in them?

TCHERNEVA: Well, 5.9 is a decline from our previous highs. We’ve been on a very slow and gradual recovery since the financial collapse of 2008. In 2009, we saw mass job losses of several hundreds of thousands per month. And we basically experienced the highest unemployment rates we have seen in four decades.

So it’s been five years, almost six years, and we have been gradually reducing the unemployment rates. But what is notable for this recovery is that our recovery is the slowest we have ever seen. We have still not recovered all the lost payrolls. And at this current rate, it will take about 80 months to recover the lost payrolls, where in previous recessions it was on the order of 20 to 25 months.

PERIES: You recently created a graph that went fairly viral. Let’s have a look. And can you explain to us what this means?

TCHERNEVA: Yes. The graph that I recently did showed the share of growth the different groups experienced. So if you take average income growth, year after year, if the economy is doing well, average incomes should be rising; in recessions, they will be declining. The question that I wanted to ask was: when the economy grows, who gains? So I looked at the share of growth that is captured by the bottom 90 percent versus the top 10 percent of families. And what that chart shows is that in the entire postwar period, in every expansion, the bottom 90 percent have been capturing a smaller and smaller share of that growth.

But there are some important things to point out. In the golden age of American economy, it was still the case that the bottom 90 percent of families captured the majority of the income growth. And in the ’80s, we had a–you could call it a paradigm shift. The wealthiest 10 percent of households started capturing the vast majority of growth or an increasing share, where in the last two recessions they’ve been capturing the vast majority, and in the last expansion they’ve gotten all of the growth. In fact, incomes for the bottom 90 percent have declined.

PERIES: And how do you explain that? Why is that happening?

TCHERNEVA: Well, there [are] a number of causes. You know, we’ve got to be very careful not to offer one-explanation answers to these complex trends. But there are several things to point out. This is not an accident. There is a specific institutional and policy context that we have to look at. There are institutions at play that help shape markets, shape the way income is earned, and then the way it’s distributed. And then there are policies that either encourage or discourage certain outcomes. So what I like to look at is what I call the policy regimes. How do we grow? What kind of policies do we put in place to bring about recoveries? And then these kinds of policies will then either change the way income is distributed or underwrite the way–the forces, the market forces that are already distributing incomes.

PERIES: Can we take an example of a policy and the implications it has in terms of growth?

TCHERNEVA: Yes. So let’s look at the last period. What have been the measures that we have put in place to deal with this recession? Largely we have attempted to recover by stabilizing balance sheets of the financial sector. The financial sector has recovered first. We have directed enormous measures and support and stimulus to the financial sector. The presumption has been that if finance recovers, then banks will be willing to lend, to offer loans and credit to the real economy, to the real sector, and that will stimulate investment, investment will bring growth, and growth will bring the needed jobs.

If you notice, job creation is sort of at the end of this transmission mechanism. So if policy works to stabilize assets, financial assets first, then clearly the owners of capital are going to benefit from this kind of policy.

PERIES: Can it help if we’d reverse the process and invest in jobs first? Will it then have the same kind of recovery effect?

TCHERNEVA: Well, that is ultimately the conclusion of my research. I basically examine the different policy regimes in the entire postwar era and illustrate the kind of stimulus policies we have put in place. And the overall conclusion is that jobs have always been at the end of transmission mechanism. They have never really been a direct job creation, have never really been a popular measure of macroeconomic stabilization. But if you flip the objective, if you try to create jobs first in a direct manner, then growth will be a byproduct of a job-led recovery. And so in some sense we will be improving the incomes of wage earners first, where growth will then trickle up through the economy and will bring far more stable growth.

PERIES: So this trickle-up theory, even among Keynesians, I understand that they haven’t quite followed through, according to your article, in terms of getting to full employment. They’ve sort of implemented half-measures. Can you explain what you meant by that?

TCHERNEVA: Yes. I mean, even in the golden age of America’s economy, we never really had true, genuine Keynesian policies. What we had is what we call pump priming. It’s the exact same mechanism: government tries to increase its expenditures when the private sector reduces its expenditures in rcessions, and thus providing impetus for growth, stimulating GDP growth, demand, and then that growth is supposed to bring jobs. If you read Keynes carefully, you will see that he was not very much in favor of just any kind of government spending. He was very clear about the directionality of government spending. But, indeed, it is the primary objective of fiscal policy is to secure full employment over the long run. And then the primary method of doing that would be via direct means–creating public works in distressed areas, putting the employed to work, and then permitting the economy to recover, and then allowing people to transition into better-paying private sector jobs. So the Keynesian recipe was never really embraced.

We talk about public works very often, but we talk about them as a depression solution. And if we read Keynes very carefully, we see that they were very much a solution to the problem of unemployment over the long run, both in recessions and in relatively prosperous times.

PERIES: And so all of these stimulus programs that were supposed to actually be money that was to be lent by the banks for job creation hasn’t really worked. And why? Why hasn’t it worked?

TCHERNEVA: Well, I mean, in some sense it makes perfect sense. If a bank’s balance sheet has improved, why will a bank land? A bank will lend if there is a creditworthy customer coming in the door. A bank will lend if there is a business that has profitable opportunity that shows a business plan that’s going to earn and produce profit. So when the labor market doesn’t recover, when demand is not stable and strong, when the cash registers aren’t ringing, then banks are not going to be very inclined to lend to households or firms. We know how difficult it is for them to refinance mortgages.

But the two problems here is that, number one, banks may not be willing to lend, because they don’t see strong employment and strong profit opportunities. But number two, households and firms may not be willing to borrow, because they are burdened with an enormous amount of debt, and thus they cannot take any more.

So, again, we seem to be working backwards to solve the problem. Instead of stabilizing incomes, employment, the household sector, and then permitting them to sort of get back on their feet and then resume normal economic activity, we’re trying to stabilize the financial sector, which had to be done in one way or another, but that is not the way to boost growth, much less employment.

PERIES: So, even in a capitalist economy, what you’re saying is they’re trying to adjust the wrong sector to some extent and asking the wrong questions. I mean, if strengthening the financial sector is not the answer, perhaps increasing–the question might be: how do we increase the purchasing power of the general public in order to stimulate the economy? And if you ask that question, you might actually end up with a job-creation program with higher wages.

TCHERNEVA: Certainly. I mean, I do not believe that the way be executed our stimulus was an accident. The incomes of the wealthiest families and households were hit with the collapse of the financial markets. But what is interesting is that their incomes recovered very quickly, and they more than made up the losses that they suffered in 2008. So public sector was very expedient in stabilizing high finance and share prices. We have great performance of the S&P 500, various other indices, and profits have also recovered, but employment, wages have not.

So we have a very fundamental problem of fixing the primary mechanism through which the vast majority of the population earns its income, and that is through labor markets. That is through stable employment at decent pay.

PERIES: And, finally, now that we’re nine years into this economic crisis and recovery, what can be done in order to focus more on employment and the lower 90 percent recovering from this as well?

TCHERNEVA: Well, we have tried virtually everything. We have tried to stabilize the financial sector. We have provided a good number of contracts to firms, also to the private sector, through the Recovery Act. And while the recovery act did agree a great number of things that were positive, less than 1 percent of the Recovery Act went to direct employment and on-the-job training. So I would say that that’s one thing we have not yet tried. We really need to go and do what we successfully did in the ’30s and in the ’40s is create direct employment. This way, we are going to sort of break the vicious cycles of unemployment at the bottom of the income distribution and raise the bottom. One way of changing the distribution of income is to change the way income is earned. So tight labor markets, a full-employment policy over the long run are part and parcel of this package.

So I think the direct measures, direct employment measures, are really the one thing that we have not yet tried. There are many examples around the world that we can study and we can learn from, and we know that there are very expedient ways of stabilizing incomes, employment, and profit expectations.

PERIES: Pavlina, one last question to you. Most economists consider 5.5 percent unemployment as a good one. Why is that?

TCHERNEVA: Okay. So this is what is called as the natural unemployment rate, or the NAIRU. There is a long history of why we’ve called 5.5 percent the natural unemployment rate. But the bottom line is that conventional policies do not work to produce tight labor markets. Even in the golden age we saw a steady rise in long-term unemployment. So what economists tend to argue is that conventional measures are not terribly effective in bringing about low levels of unemployment. So we relabeled a problem as the natural rate of unemployment. And that, to me, is simply a failure of the profession to design, devise the kind of policies that produce that full employment. And because we’re doing this backward way to get growth, to get jobs from growth, of course jobs, stimulus policies never trickle down far enough in the form of jobs for all.

If we flip the objectives, if we direct our efforts to the unemployed and employ them by direct measures, then the unemployment rate that we can achieve would be much lower than what is conventionally seen. And we’ve seen examples around the world where that has happened. So, really, the natural rate is just failure of dealing with the jobs problems in a serious manner.

PERIES: And where is there economic policy to achieve full employment? What did you mean there?

TCHERNEVA: Well, I mean, direct employment, we had direct job creation programs in the New Deal that created 13 million jobs.

PERIES: No, yeah, sorry, Pavlina. I’m referring here to full-employment policies. You said there are places in the world that has full-employment policies. Where is it?

TCHERNEVA: They have–well, we have the Nordic countries, which have had tight full employment, low unemployment rates for many I decades before liberalizing their markets. So the way, for example, the Swedish corporatist model worked is that government will negotiate with industry, with unions, whenever industry needs to lay off workers to either preserve some of the jobs or to absorb the newly laid-off workers in public projects until the private sector recovers. So there’ve been episodes around the world in different countries that have maintained tight labor markets with the various direct measures.

PERIES: Pavlina, thank you so much for joining us today.

TCHERNEVA: It’s my pleasure. Thank you for having me.

PERIES: And thank you for joining us on The Real News Network.


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Pavlina R. Tcherneva is an assistant professor of economics at Bard College. She previously taught at Franklin and Marshall College and the University of Missouri-Kansas City. During 2000-06, she served as the associate director for economic analysis at the Center for Full Employment and Price Stability, where she remains a senior research associate. In the summer of 2006, she was a visiting scholar at the University of Cambridge Centre for Economic and Public Policy, and since July 2007 she has been a research associate at the Levy Institute.

Tcherneva conducts research in the fields of modern monetary theory and public policy, and has collaborated with policymakers from Argentina, Bulgaria, China, Turkey, and the United States on developing and evaluating various job-creation programs. Her current research examines the nexus between monetary and fiscal policies under sovereign currency regimes and the macroeconomic merits of alternative stabilization programs. She has also examined the role, nature, and relative effectiveness of the Federal Reserve's alternative monetary policies and the American Recovery and Reinvestment Act during the Great Recession.

Tcherneva is a two-time recipient of a grant from the Institute for New Economic Thinking for her research on the impact of alternative fiscal policies on unemployment, income distribution, and public goods provisioning. Her work has appeared in the Review of Social Economy, Journal of Post Keynesian Economics, International Journal of Political Economy, and Rutgers Journal of Law and Urban Policy, among other journals, and she is the co-editor of Full Employment and Price Stability: The Macroeconomic Vision of William S. Vickrey (Elgar, 2004). In January 2013 she received the Helen Potter Prize, awarded annually by the Association for Social Economics to the author of the best article in the previous year's Review of Social Economy.

She holds a BA in mathematics and economics from Gettysburg College and an MA and a Ph.D. in economics from the University of Missouri-Kansas City.