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Why a Romney economic adviser wants the government to just hire people

Kevin Hassett testifying before the Joint Economic Committee on long-term unemployment. (C-SPAN.)

Kevin Hassett is the John G. Searle Senior Fellow and Director of Economic Policy Studies at the American Enterprise Institute (AEI). Formerly an associate professor of economics and finance at the Graduate School of Business at Columbia University and a senior economist at the Federal Reserve Board of Governors, he served as an economic adviser to Sen. John McCain's 2000 and 2008 presidential campaigns, George W. Bush's 2004 campaign, and Mitt Romney's 2012 campaign.

On April 24, he testified before the Joint Economic Committee of Congress, arguing for a variety of policies to assist the long-term unemployed, including direct hiring of the unemployed into government jobs, work-sharing programs, wage subsidies, and privatized training programs. We spoke on the phone Thursday; a lightly edited transcript of our conversation follows.

Dylan Matthews: In your testimony, you identify "scarring" rather than a skills mismatch as a major reason why the long-term unemployed aren't getting hired. In other words, the fact that they're unemployed for so long is itself making them less employable. Can we identify what exactly is causing that?

Kevin Hassett: I think that it's not identifiable. It's hard to think of the experiment that would allow us, fully, to identify that. I know that some folks have tried. But we know that the employers don't want to interview these folks, and that some subset of them would be great employees, and some subset wouldn't, and people are making the choice that the costs of screening are so high that they just shouldn't be talking to the people in that pool.

If you think of it that way, it makes the answer to your question irrelevant. For example, let's say if people are purple, they may not be a good worker. If you're interviewing workers, you screen out certain workers. So for efficiency, you screen out purple people. For race, it'd be illegal, but long-term unemployment is serving a screening purpose like that. It may be because they're more likely to have health problems, and mental problems because of the stresses of unemployment, and so employers wouldn't want to face an issue like that.

I was talking to a friend who's a very successful venture capitalist, and he said, if you hire one very bad guy, the amount of damage they can do is extraordinary. So how do you convince firms to take that risk?

The Human Toll of High Unemployment from AEI

Would one option be to ban discrimination against the long-term unemployed?

I can't imagine how they'd write the law. If somebody were going to hire you, they would want to know what your work history was. It'd be a very dangerous space to enter policywise. It's very unlikely you could achieve a regulation that'd accomplish what we want.

There are folks who go through these stresses that Dean Baker and I wrote about in the New York Times, but there's this extra problem that employers then may say well, that guy might be scarred so why should I bother, and it makes the scarring worse, and you end up in a terrible spiral.

That's how you can explain the astonishing negative evidence on peoples' lives. That's the thing that confuses me. If you look at what it does to peoples lives, I have a friend who's a priest, and he said long-term unemployment is a bigger pastoral care challenge than a death in the family. A death in the family, there's this impulse of incredible negativity, but then people start to recover. A person, say a 55-year-old who's always the breadwinner in his family, if he loses his job, every morning it gets worse.

It's just a horrible emergency, and the thing that stuns me is that policymakers haven't digested what an emergency it is. We'll have a hearing like the one at JEC, and then there doesn't seem to be much appetite.

I was surprised to hear you calling for a direct jobs program in your testimony. That's not something you expect out of AEI fellow.

I started thinking I'd be willing to do that, even though it sounds counterintuitive for an AEI guy to support direct hiring, when we were thinking about the jobs claims of Obama's stimulus. I asked one of our researchers, "How many people could we have employed, for a year, at a median wage?" with the stimulus money. And I don't remember the exact number, but it was something like 23 million.

But the point was giving someone a job by building a bridge is a pretty indirect way to create jobs. I've had this argument with [Council of Economic Advisors chair] Jason Furman and other Obama supporters, but you know, when the government is buying stuff, that the people who can produce it are unemployed!

An egregious example of that, which the stimulus proposed, was to spend money expanding and improving information technology in government, which is probably a worthy idea, but how many software designers are unemployed? To the extent that we have this big effort to improve the software of government agencies, we're bidding up the wages of these guys.

So there was this delicious point, that wasn't even in this context. But also, when you look at the negative effects of long-term unemployment, they just get disconnected, and we have a hard time reconnecting them. These are folks who are going to be a serious spending challenge for government throughout their lives. They explain our disability insurance statistics, for example.

If somebody's 40 years old, and not employed for 25 years, that costs governments lots of money, and if we think rationally about reducing spending, maybe it's worth it to pay for their first year at a private employer. Direct hiring, or a direct subsidy for hiring, could save taxpayers a fortune. And it could save a life.

This reminds me of a point Jared Bernstein made recently about the TANF program in the stimulus, which was basically a direct jobs program and which had a very low cost-per-job.

Right, when I started working on my testimony I remembered those bang-for-the-buck numbers. It cost peanuts, but accounted for 10 percent of the administration's own asserted job creation.

[AEI fellow Michael] Strain is thinking more about traditional labor market frictions, and so proposes maybe emergency expansion of right-to-work laws, and minimum wage reductions for the long-term unemployed, and I think that that's one set of things that you might think about.

But my view, and this is the thing you saw in the testimony, is that the crucial thing is to recognize it's one of the hardest problems to have, and we're not really sure what to do about it, and we should be rigorous about conducting experiments about what works. That's where I'm pushing now, whenever I have a chance to talk to elected officials. Get smart people on both sides, lock them in a room, design 15 long-term unemployment pilot programs, and structure them like they did with the negative income tax experiments, as legitimate experiments we can use to evaluate what works.

If we did that, it'd be a lot easier. The GAO has told us how terrible the job training programs are, but it's hard to get rid of them without replacing them with something that works. We spent $18-20 billion on these and there's no evidence it helps anybody. If you say, "Let's stop doing that," you look like someone who doesn't care, you have the affect of a person who doesn't care. But if you have a bunch of experiments, trying out work subsidies, or privatized training which they did in Germany - did I tell you about Germany?

No! Tell me about Germany.

So how about this: we invent private firms to find the long-term unemployed and get them a job, and you could have a prize for the firms that succeed. Exactly what the numbers should be requires thought and study, but suppose we think a 40 year old will be disconnected until retirement, and it will cost the government $2 million to support that person, both in terms of direct monies and the tax dollars we don't get. Why not pay a search firm $100,000 if they can document that they found that guy a job?

It turns out Germany set up a program like that, that has had some pretty good success. It's the kind of creative thinking that we should all embrace, because the situation is really terrible.

You also talked a bit about this as a geographic problem in your testimony.

If you look at the geographic variation in long-term unemployment, it's really striking. There are pockets where employers don't want to go, but for some reason, in part because of adequate safety nets, people don't want to leave. They're the kind of places where long-term unemployment becomes a real focal thing in a region, and what we could do to address that is a challenge.

A real classic free market type might say that the optimal equilibrium is to move out of Detroit, but there's this strong conservative theme, started by Jack Kemp, that you could use capitalism to resuscitate these failing places by turning them into, basically, Art Laffer dreamlands. So these were the "enterprise zones" and "empowerment zones."

I think that could be a really good idea, but here's the thought that animated work I'm in the process of finishing right now. Are you pissed off that everyone's setting up facilities in Ireland, and the Irish are reaping benefits, and their revenue authorities are reaping benefits, and the corporate tax is raising no revenue from them? That pisses you off, right?

So why not make Detroit a tax haven like Ireland? Thinking about what that might look like is why I'm not done with the paper yet, but we built things that don't work because we built them poorly, these enterprise zones, and they're almost impossible to use, but by working on the thought of, "Let's make these pockets of long-term unemployment really attractive places and easy places to invest in."

For example, the old rule was you could invest in an enterprise zone and not pay capital gains, but only if you rolled the enterprise zone sale proceeds back into an investment in an enterprise zone, and you had a limited amount of time to do that, months or something, and you have to get 50 mandarins to sign off on the fact that you have a qualifying investment, and there's two years of regulatory delay.

So this is one thought that's been bandied about that, which originates from Sean Parker, was, "Why not make it so you can do that if you set up a venture fund that invests in places we identify as really needing help, where the long-term unemployment rates are in the double digits, you could have advantageous tax treatment?" Let the Carlyle group help us solve the problem. Those are the range of things, and the last one is the thing I'm working the hardest on, and will have a proposal on in a few months.

What do you make of the approach of the HIRE Act, which provided payroll tax breaks for businesses that hired unemployed workers? Did that bill end up working?

There are folks who we have a moral responsibility to help, who are going to cost the taxpayers lots of money in the future, so there's a strong argument for us to help them with current cash. An incentive for an employer to take a risk would be hard to argue against.

Whether we use the payroll tax, because it's connected to benefits that are underfunded, that might be why I wouldn't choose to use the payroll tax for that purpose, but the abstract principle of whether a subsidy is defensible, I mean, I wonder if someone's willing to argue against that. The only counterargument I can think of is that they're only hiring people they're hiring anyway.

Is there anything you think monetary policy can do to help correct this?

This is the old story, that when we're way below [the natural rate of unemployment] or above potential GDP, then the less desirable workers get hired, and so as an abstract principle, a super-heated economy, were one able to accomplish that with monetary policy, is the kind of thing you'd need to get folks back into society.

The classic example is Spain, which had a huge long-term unemployment problem and never fixed it ever, and folks don't get reconnected, so there are permanently lower employment to population ratios. The question of whether the Fed could actually accomplish a superheated economy is maybe a different article.

The thing I'm not sympathetic to, though, is you might say, if there are all these long-term unemployed lurking outside the labor market, then if it heats up they won't have upward wage pressure. They will keep wages from rising fast, so you don't have an inflationary risk, so you can stimulate like crazy.

I'm not sympathetic to that for the same reason we talked about with the bridges and the software engineers. If we superheat the economy, the parts that boom the most might boom even more. The best educational investment is probably still the Colorado School of Mines, and it'll be an even better investment if we superheat, so you still have to worry about inflation. I think the best thing we can do is fiscal policy. Think up lots of experiments to run, and then run them.

I think that does it for my questions. Any last comments before we wrap up?

The biggest thing to get people to understand is that it's still a national emergency. Unemployment is down, and job creation is better, but that doesn't necessarily mean that the folks we're talking about are going to see significant improvements in what's going on. It's still an emergency, and it's a really important one.