Considering all paths to job creation

While the American people grapple with the worst job market in a generation, President Barack ObamaBarack Hussein ObamaAssange hit with 17 new charges, including Espionage Act violations Progressive commentator says Obama was delusional thinking he could work with Republicans Obama makes surprise visit to Washington Nationals youth baseball program MORE recently unveiled proposals to spur job creation and economic recovery, touting it as a top priority. As we head into the new year, job creation bills are sure to be on Washington’s agenda in 2010. 

There is one important policy response that we recommend that Congress and the White House fully consider that would catalyze immediate and substantial economic stimulus and job creation. It involves the solution to a problem that has plagued the financial markets since the economic meltdown took hold.

In February 2008, the market for auction rate securities — debt instruments whose interest rates were reset through regular auction processes — completely failed due to problems elsewhere in the credit markets. The result was that billions of dollars in funds, once considered ultra-safe cash alternatives, were effectively frozen. Of the more than $75 billion of student loan-backed auction rate securities (SLARS) for which no market exists today, roughly $25 billion is being held by non-bank corporations and individual investors. The underlying collateral for SLARS is excellent (due to the fact that most student loans are guaranteed by the federal government), but the structure of the securities is so poor that most will remain frozen for at least 20 years.

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Many of the holders of SLARS are U.S. companies large and small, from retailers to manufacturers to technology firms. With their funds frozen, the economic and financial crisis’s effects have been greatly compounded. Many have been unable to complete projects and acquisitions, have been forced to scale back on capital expenditures, and in some cases have been forced to conduct layoffs or to postpone planned hirings.

A concerned group of SLARS corporate holders formed a coalition to heighten awareness of the ongoing and overlooked problem of SLARS illiquidity, and its impact on the still-fragile American economy. In the aggregate, the coalition holds more than $9 billion worth of illiquid SLARS on their balance sheets.

For many companies, whose cash reserves have been threatened by SLARS illiquidity, the hit to their businesses has been tangible and painful. Mining company Foresight Reserves, which had more than $100 million worth of SLARS, has been unable to complete development of a plant that would have created 200 high-paying jobs in Ohio and West Virginia and will have to shut down their efforts altogether if they do not obtain liquidity by mid-2010.

To assess the impact of this problem on the overall U.S. economy, and to gauge whether a systemic solution could lead to meaningful job creation, the SLARS Coalition turned to us at the University of Delaware. We considered what the impact would be of a systemic liquidity solution to the SLARS market that would allow funds to flow directly into the economy. 

We estimate that restoring liquidity to these SLARS investments would create an immediate $58 billion to $63 billion of economic stimulus that would in turn create an estimated 441,000 jobs in the first year. For every $1 billion of liquidity restored, a minimum of 15,000 jobs would be created and would lead to a total stimulus of at least $2.3 billion. This type of stimulus, which could go directly into inventory purchases, to increases in household incomes and to business capital investment, would be far more rapid than existing and proposed federal stimulus programs. Also, jobs that result from temporary stimulus spending last only as long the funding exists, whereas businesses invest in continuing operations that create permanent jobs.

While we do not advocate any particular means of restoring liquidity, the SLARS Coalition advocates that the Treasury Department sponsor a systemic solution to the marketplace. Were Treasury to establish such a liquidity mechanism, its investment risk would be minimal due to the fact that the underlying collateral is already government-guaranteed student loans, making it a net neutral move for the government. 

With unemployment weighing heavily on the minds of the American people, now is the time for an innovative approach to resolving this issue. 

We urge the administration and the Congress to consider all means to fight the unacceptably high jobless rate and to reinvigorate investment and growth in our businesses. A more serious look at restoring SLARS liquidity could provide real economic stimulus now and help to put thousands of our citizens back to work.

Butkiewicz and Latham teach economics at the University of Delaware.