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J. Bradford DeLong
professor of Economics
at the University of California at Berkeley
Kick-starting
employment
Unemployment is currently rising like a
private-sector money, and use it to buy up risky financial
rocket, because businesses that normally
assets. The US Treasury is asking the private sector to
would be expanding and hiring are not, and
put $35 billion into this $500 billion fund so that the fund
managers all have some “skin in the game,” and thus do not
those businesses that would normally be
take excessive risks with the taxpayers’ money.
contracting and shedding workers are doing
private-sector investors ought to be more than willing
so very rapidly. Businesses that ought to be to kick in that $35 billion, for they stand to make a fortune
expanding and hiring cannot, because the
when financial asset prices close some of the gap between
depressed general level of financial asset
their current and normal values. if the fund does well over
prices prevents them from borrowing money
the next five years – returns profits of 9% per year –private
or selling bonds on profitable terms.
investors get a market rate of return on their very risky equity
investment and the equivalent of an “annual management
fee” equal to 2% of assets under management.
response, central banks should purchase if the portfolio does less well – profits of 4% per year – the
government bonds for cash in as large a quantity managers still get a healthy but sub-market return of 10% per
as needed to push their prices up as high as year on their equity. and if the portfolio does badly – loses
possible. Expensive government bonds will shift 1% per year – they lose roughly 70% of their investment.
demand to mortgage or corporate bonds, pushing up their Those are attractive odds. Time alone will tell whether
prices. the financiers who invest in and run this program make a
Even after central banks have pushed government bond fortune. But if they do, they will make the US government an
prices as high as they can go, they should keep buying even bigger fortune. and 2% of assets under management
government bonds for cash, in the hope that people whose is an annual fee that many sophisticated investors have
pockets are full of cash will spend more of it, and that this will been willing to pay private hedge funds – topped off with an
directly pull people out of joblessness and into employment. extra fee of 20% of annual profits, which the Treasury is not
in addition, governments need to run extra-large deficits. paying.
Spending – whether by the United States government The fact that the Geithner plan is likely to be profitable
during World War ii, following the reagan tax cuts of 1981, for the US government is, however, a sideshow. The aim is
by Silicon Valley during the late 1990’s, or by home buyers to reduce unemployment. The appearance of an extra $500
in america’s south and on its coasts in the 2000’s – boosts billion in demand for risky assets will reduce the quantity
employment and reduces unemployment. and government of risky assets that other private investors will have to
spending is as good as anybody else’s. hold. and the sudden appearance of between five and ten
Finally, governments should undertake different government-sponsored funds that
additional measures to boost financial make public bids for assets will convey
asset prices, and so make it easier for information to the markets about what
those firms that ought to be expanding and models other people are using to try to
hiring to obtain finance on terms that allow value assets in this environment.
them to expand and hire. This sharing of information will reduce
it is this point that brings us to US risk – somewhat. When assets are seen
Treasury Secretary Timothy Geithner’s plan as less risky, their prices rise. and when
to take about $465 billion of government there are fewer assets to be held, their
money, combine it with $35 billion of prices rise, too. With higher financial asset
april 2009
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