Highlights of Main Findings
Starting with the financial collapse and Great Recession of 2008-09, the U.S. economy has been experiencing the most severe and protracted employment crisis since the 1930s Depression. As the employment crisis has proceeded, U.S. commercial banks and large nonfinancial corporations have been building up huge hoards of cash and other liquid assets. This study examines the impact on job creation of mobilizing these excess liquid assets into productive investments within the U.S. economy over the next three years:
$1.4 trillion in excess liquidity: Commercial banks are carrying a total of $1.6 trillion in cash reserves and the nonfinancial corporations are holding $2 trillion in liquid assets. After accounting for the safety needs of these businesses in a highly risky economic environment, we conclude that the banks are holding $1 trillion in excess cash and the corporations are carrying $400 billion in excessive liquid assets. This brings the total of excess cash held by the banks plus excess liquid assets held by the corporations to $1.4 trillion.
Credit market lockout for small businesses: As a corollary to the banks piling up cash reserves, smaller non-corporate businesses have experienced a massive contraction in the supply of credit available to them since the onset of the recession. Total net borrowing for these businesses has been in the negative since 2009.
Unemployment would fall below 5 percent by 2014: Approximately 19 million new jobs would be generated within the U.S. economy over three years if the $1.4 trillion in excess liquid asset hoards were channeled into productive investments and job creation. This would push the unemployment rate below 5 percent by the end of 2014. We document how this would create new opportunities for workers at all credential levels within the U.S. economy. We also show the regional benefits for both the Los Angeles and Seattle metropolitan areas.
Policies to mobilize excess private liquidity for job creation: We propose a range of policy approaches that can expand overall demand in the economy, reduce the level of risk for borrowers and lenders, and/or raise the costs for banks and nonfinancial corporations to continue holding excess liquid assets. These policy approaches include further federal stimulus initiatives, measures to reduce the existing debt burdens of homeowners, taxing the excess reserves of banks, and extending federal loan guarantees for small businesses.
Targeting priority sectors for growth: We propose targeting four areas for growth:
- businesses which would benefit sub-stantially by raising efficiency even if market demand is not growing;
- small businesses that face larger than normal credit constraints;
- more labor intensive businesses; and
- businesses that generate large social as well as private benefits.
Summary of Study
Amid the ongoing employment crisis in the U.S. economy, U.S. commercial banks and large corporations are sitting on huge hoards of cash and other liquid assets. The banks are carrying $1.6 trillion in cash in their accounts at the Federal Reserve while the corporations are carrying about $2 trillion in liquid assets. In combination, these holdings amount to about 23 percent of U.S. GDP.
At the same time that the commercial banks and large corporations are carrying these hoards of cash and other liquid assets, smaller non-corporate businesses (i.e. those with fewer than 500 employees) have experienced a massive contraction in the supply of credit available to them. This pattern is the corollary to the banks piling up cash reserves. For smaller, non-corporate businesses, total bor-rowing fell from $526 billion in 2007 to nega-tive $346 billion in 2009 — a nearly $900 billion reversal. The small business sector overall continued to obtain zero net credit over both 2010 and 2011.
The central question this study examines is: what would be the impact on employment in the U.S. if some significant share of these liquid asset hoards were channeled into the expansion of productive activities and investments by private businesses? Our basic finding is that U.S. employment could expand by about 19 million jobs between 2012 and 2014. This would drive the official unemployment rate down to below 5 percent by the end of 2014. We reach this conclusion after taking full account of the need for the banks and corporations to carry a large fraction of these funds as a safety cushion in the currently risky environment. We also take account of the prospects for rising inflation and gains in average real wages for workers if job opportunities were indeed to increase rapidly.
How Much Excess Liquidity is Available for Job Creation?
As of the most recent September 2011 data, the commercial banks are carrying an unprecedented $1.6 trillion in cash reserves. They obtained most of this money through the Federal Reserve having maintained the interest rate at which banks can borrow at nearly zero percent — that is, the banks have access to nearly unlimited liquid funds at no borrowing costs. In addition, U.S. nonfinancial corporations are holding about $2 trillion in liquid assets. They are using a large proportion of these funds to engage in financial engineering, such as buying back shares of their own stocks, as opposed to investing in new productive equipment and expanding their operations. We recognize that a significant fraction of these funds needs to be held by banks and corporations as a safety cushion in the currently highly risky environment. After making highly conservative assumptions about the safety requirements of the banks and nonfinancial corporations, we conclude that the excess liquid holdings of the private sector are about $1.4 trillion, with $1 trillion held by the commercial banks and the remaining $400 billion by the nonfinancial corporations.
How to Mobilize Excess Private Liquidity to Support Job Creation
Private businesses operate to earn a profit. As such, the fact that banks and non-financial corporations are sitting on approximately $1.4 trillion in excess liquidity rather than expanding their businesses and hiring workers must mean that, at some level, they do not see adequate profit opportunities in the U.S. economy today through investments and job creation. The first problem facing businesses in general is the insufficient level of demand in the economy. The economy is also operating with a severe credit constraint — that small businesses in particular are being locked out of credit markets. We therefore consider a range of policy approaches that can expand overall demand in the economy, reduce the level of risk for borrowers and lenders, and/or raise the costs for banks and nonfinancial corporations to continue holding excess liquid assets. These policy approaches include further federal stimulus initiatives, measures to reduce the existing debt burdens of homeowners, taxing the excess reserves of banks, and extending federal loan guarantees for small businesses.
Targeting Priority Sectors for Growth
An expansion of private business investment on the order of $1.4 trillion will need to be spread throughout all sectors of the economy to be effective on this large a scale. At the same time, there are areas of the economy where conditions are more favorable for a large expansion. These include, first, the range of businesses for which market demand does not have to be growing in order for firms to profit substantially from investments that raise productivity and thereby lower costs. One example of this would be energy efficiency building retrofits, where investments can save business owners 20-30 percent on their energy costs, relying only on existing proven technologies. Another example is investments in privately-owned infrastructure, including the electrical grid system, freight rail, airports, and water ports.
Other priority sectors should include businesses facing larger than normal credit constraints, including especially various types of small businesses; businesses that are more “labor intensive,” i.e. rely more heavily on employing workers as a means of expanding their operations; and businesses that generate strong positive social benefits as well as private benefits. An example of businesses with strong positive social benefits would be community health clinics. Expanding such clinics as part of the reform of the U.S. healthcare system will create substantial improvements in care, especially within lower-income communities throughout the country.
Estimating National Employment Impacts
Of the $1.4 trillion total that we estimate is available now in excess liquidity held by commercial banks and nonfinancial corporations, we assume that when these funds are channeled into new productive activities, about $200 billion, or 14 percent will be needed to cover a rise in prices — i.e. inflation — as well as real wage gains. We assume that both inflation and real wages grow by 3 percent per year over 2012 – 2014. This leaves $1.2 trillion that would be available for creating new jobs. We estimate that this level of new private investment would generate about 19 million new jobs. If this level of job creation were to occur between 2012 and 2014, it would drive down the official unemployment rate be-low 5 percent by the end of 2014. We also show the range of jobs that will be created by this level of spending, including breaking down the total numbers of jobs created according to educational credentials. We find that about 5.7 million jobs, roughly 30 percent of the total, would be for people with college degrees or higher, and another 30 percent for people with some college experience. The remaining 7.8million jobs, about 40 percent of the total, would be for those with less than high school degrees. In other words, we reach the unsurprising result that an employment expansion of this magnitude will generate large numbers of new opportunities for people at all educational credential levels, and with a wide range of experience and skills.
Employment Impacts for Los Angeles and Seattle
Of course, a program to inject $1.4 trillion in new private business spending for job creation will reach into every region, state and community of the country. We illustrate what the effects would be in two specific metropolitan areas: Los Angeles, which includes both Los Angeles and Orange Counties, and the cities of Glendale, Santa Clarita, Pomona and Pasadena; and Seattle, which includes King, Pierce and Snohomish Counties, and the cities of Tacoma and Bellevue. We show that the impact in the Los Angeles metro area of receiving its proportional share of the overall expansion in business spending would be to create a total of 780,000 jobs over three years. This would drive the official unemployment rate in the Los Angeles metro area down from its current level of 11.5 percent to 6.1 percent by the end of 2014. The Seattle metro area’s proportional share of overall spending would be about $19 billion. This would generate about 230,000 new jobs in the region. This would drive the Seattle region’s official unemployment rate down from its current level of 9.8 percent to 5.8 percent.
Overall, moving the $1.4 trillion in excess cash and other liquid assets now held by commercial banks and large nonfinancial corporations into productive investments would transform the U.S. economy, creating millions of new job opportunities throughout the country.
Of course, getting these funds to move out of their hoards and into productive investments and job creation will require that a challenging combination of policies be implemented successfully. The main point on policy is that realistic options are available, both in terms of supporting overall demand in the economy as well as ending the credit crunch for small businesses. As such, there is no reason that the U.S. needs to remain stuck in a long-term unemployment crisis. Rather, through a combination of policy measures, overall demand can be strengthened and the credit constraint weakened. This will be the combination of measures necessary to start fulfilling the needs of U.S. citizens for decent job opportunities at all levels.
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