The Job of Jobs

By Michael Kinsley

Reading the economics stories in the newspapers these days can be baffling. On one hand, headlines tell us that the Clinton Administration is beavering away at putting people to work: jobs programs, job-training programs, welfare- reform programs that require recipients to take a job. And, indeed, the Administration brags that it is ahead of schedule on Clinton's promise to add 8 million new jobs by the end of his first term.

On the other hand, headlines -- sometimes in the same day's newspaper -- tell us that the Federal Reserve is raising interest rates out of fear that the economy is creating too many new jobs too fast. And the Clinton Administration has supported these Fed moves. According to Bob Woodward's new book, The Agenda, Fed chairman Alan Greenspan has become Bill Clinton's virtual economic tutor.

So what is the point of all this self-contradictory government effort on our behalf? Are more jobs a good thing or a bad thing? And how can the government be on both sides of that question simultaneously? Why create a job if this just hastens the moment when the Fed will say that's one job too many? Why retrain an unemployed worker if there's some government-imposed limit on total employment anyway? Is every welfare mother who takes a job supposed to take it away from someone else so the total of workers doesn't increase?

The bafflement goes beyond the controversy over whether the Fed is doing the right thing at this particular time. Isn't the government inherently working at cross-purposes to itself? Clinton's answer -- that the Fed can safely raise interest rates without reducing growth or job creation -- is no answer at all. The purpose of raising interest rates is to slow the economy. If it doesn't do that, it hasn't worked.

Some people escape this puzzle by arguing that one side or the other of the government's push-me pull-you jobs policy is simply wrong. There are always those eager to criticize the Fed for squeezing unnecessarily. And there are those who say government jobs-creation programs of any kind are a waste.

But the Fed bashers rarely dispute the Fed's theoretical duty to guard against inflation by preventing the economy from overheating -- that is, to nurture long-term growth even at the short-term cost of jobs. It's just that, to the Fed's critics, now is always the wrong time to squeeze. And critics of government jobs programs have their own favorite jobs-creation nostrums, such as business tax cuts. They also like the idea of forcing welfare mothers to work. No one wants to leave the job of jobs to the Fed. So the puzzle remains.

Labor Secretary Robert Reich has a good solution to one corner of the puzzle. He says retraining programs of the kind he likes so much are intended to change the terms of the trade-off between unemployment and inflation. The reason unemployment can get "too low," even while millions remain jobless, is that the labor market is diverse. Shortages of workers can develop in hot areas, bidding up wages, while workers in other areas remain unemployed.

Economists talk about a "natural rate of unemployment": the rate below which labor shortages start to develop in some sectors. There is much debate over where that level is and whether it has changed in recent years. The consensus is that it's around 6% -- about where we are now. But Reich argues that retraining can reduce that natural rate of unemployment by helping workers move from areas of labor surplus to areas of labor shortage. It puts off the moment in any boom when the Fed has to blow the whistle.

A similar argument can be made for welfare reform. The natural rate of unemployment includes people who are between jobs as well as people who can't find work. It doesn't include members of the welfare underclass who aren't even looking for a job. Putting them to work increases total employment but does not create inflationary pressure.

Government jobs-creation programs still have to be justified on their own merits, as sensible expenditures of taxpayers' dollars. For many citizens, it's just sinking in, for example, that putting welfare recipients to work will cost more than simply sending them checks as we do now. Maybe this is worth it, maybe not. But there is no contradiction between such efforts and the Fed's job of slamming the brakes if unemployment gets too low. The idea is to lower the definition of "too low."

Nevertheless, it must be frustrating for any President to watch the Fed playing party pooper. That's why Clinton deserves great credit for supporting Alan Greenspan -- just as Ronald Reagan's best economic deed was standing by without protest as Fed chairman Paul Volcker wrung inflation out of the economy in the early 1980s. Clinton's fortitude is even more admirable, since Greenspan is trying to avoid a future bout of inflation, not cure a current one. And according to Woodward, Clinton's political advisers all think Greenspan is the devil incarnate, so Clinton gets extra points for resisting them.

Yes, the government can indeed walk and chew gum -- create jobs and guard against inflation -- at the same time. Now, who can explain those headlines that say, economy booms; stocks plummet?