The Hot New 'Conservative' Jobs Plan Is Missing The Most Fundamental Element

Michael Strain of the American Enterprise Institute has been pushing his fellow conservatives to advance a constructive job-creation agenda, and many of the ideas he favors are good:

Offering relocation vouchers to the long-term unemployed in high-unemployment areas; allowing firms to hire the long-term unemployed at less than the current minimum wage and supplementing their income with an EITC-like payment; reforming our disability insurance program so that it doesn’t serve as a permanent exit from the labor market; publicizing and encouraging worksharing as an alternative to layoffs; getting the government off the backs of entrepreneurs; reducing occupational licensing requirements; encouraging domestic energy production; providing lump-sum bonus payments to unemployed workers who find a job; and more.

Most of these ideas are good, though I'm wary of weakening the minimum wage since the evidence that it significantly drives unemployment at current levels is weak. But the most important problem with Strain's plan is that it omits the key component that makes Democratic economic plans more serious than Republican ones: An approach to macroeconomic stabilization.

When the economy enters a recession, businesses stop investing, they lay off workers, unemployment goes up, individuals stop consuming because they lost or fear losing a job, businesses cut back further due to weak demand, and misery ensues. To break this cycle, you need macro-level policy that stimulates demand and investment, preventing unemployment from rising too high.

Liberals are big on macro-level intervention. Their main favored approach is fiscal stimulus: having the government run large budget deficits to generate demand that the private sector won't. They are also much more likely than conservatives to favor interventions through the housing market, such as wholesale mortgage modifications.

As Ramesh Ponnuru points out, conservatives need their own macro stabilization approach. He favors (as do I) a monetary policy that adjusts inflation upward when real economic growth falters. This would make it easier for the labor market to adjust to declines in productivity and help de-leverage homeowners at a time when home pries are likely to fall. The effect would be to tame rises in unemployment and declines in GDP.

If conservatives don't support and implement an effective macro stabilization policy, misery will ensue (as it has since 2008) and voters will demand direct government interventions to offset that misery, such as more generous entitlement programs.

Now, some conservatives think macroeconomic stabilization is impossible. This is the view of the Paulites and anyone else who takes Austrian economics seriously. If that's so, they need to say so—and they need to recognize that, in an economy where you can't prevent spells of severe unemployment, a generous welfare state becomes more morally necessary.

I happen to know from Twitter that Strain is more or less in the Ponnuru camp on monetary policy. So why isn't he flagging a more aggressive monetary policy as the lead, most-important component of his conservative jobs plan?

Strain's plan could be a credible, conservative blueprint to make the labor market more resilient to downturns and get more people back into work. But it needs a monetary policy as its keystone.