Ignore the fiscal cliff and focus on jobs

Talk about deficits distracts from the New Deal's main lesson: An economy recovers when people go back to work

By Marshall Auerback

Published July 17, 2012 1:42PM (EDT)

This article originally appeared on AlterNet.

Here's something you're unlikely to hear when you turn on the TV. Deficits are not the problem in our economy. And tax cuts for those making less than $250,000 a year are not the solution. What America really needs is a serious national program to put people back to work. That's the key to saving the economy. So why don't we ever hear this in pundit-land?


The pundits are too busy talking about dreaded “fiscal cliff." At the end of 2012, they warn, many temporary but significant tax cuts are going to expire. The resultant increase in taxes means consumers will have less to spend which in turn will cause the economy to suffer.

Of course, both the president and Congress could easily extend these cuts. But there's a widespread -- and misguided -- fear that doing so will damage the country’s long-term fiscal health by failing to deal with imaginary dangers of what they call a “fiscally unsustainable” path. Both branches of government sadly embrace this misguided paradigm, and the arguments relating to the extension of the tax cuts (i.e. whether it should be for everybody, as the Republicans argue, or simply for those Americans making under $250,000 a year, as President Obama recently suggested).

When it comes to federal budget deficits there appear to be only two respectable positions, which are both, unfortunately, wrong. The first is the “deficit hawk” position that argues that budget deficits are never acceptable because they only lead to complete crowding-out: every dollar of government spending, so the story goes, is offset by a dollar of private spending. In this view, long-run problems occur because government debt will have to be repaid in the future, which means higher taxes and less private spending. So they continually claim that the stimulus package did not save any jobs and will actually cost us jobs later. This is a minority view among economists and policy makers, although it remains popular among those Republicans who have a political interest in denying that the Democrats and the Obama administration have done anything right.

The second view—the “deficit dove” position--is that deficits are probably acceptable for the short run, and perhaps even necessary to save the economy from another great depression. However, say the deficit doves, the benefits we receive today are partially offset by costs in the future when we will need to tighten our belts to repay the debt. Even President Obama has repeated the line that deficits today leave our grandchildren with a heavy burden, which is why he has retained this tragic obsession with entitlement reform. The pain is said to be compounded by the imminent retirement of baby-boomers, which will increase “entitlement” spending. So the deficit doves tell us that we need to get the budget “under control” as quickly as possible.

James Carville is one of the few who pushes back on the deficit doves. He has argued that the Democrats made a "fundamental error" backing off on their steadfast support of entitlement programs to give way to the idea that they need trimming in order to cut the deficit. That, as Carville has noted, is a political loser for the Democrats, and it’s also bad economics.

Why is that the case? Because Democrats end up embracing a form of Augustinian “fiscal chastity” (“Oh Lord, make me fiscally chaste, but not yet”), which leads us down the same path the Republicans want to take. A world with an eviscerated social safety net; where our homeless remain house-less in spite of today’s housing glut; where our sick and elderly get inadequate healthcare and are precluded from living the last years of their life in relative dignity.

President Obama’s focus on retaining tax cuts for those earning under $250,000 is laudable in terms of focusing on the goal of alleviating the vast income disparities that exist today in the U.S., but simply redistributing the burden of the fiscal austerity (for example, by taxing high-income earners more) will have no hope of providing a net stimulus to American consumption, which is what we need to get the economy going again.

The reality is that the whole “debt crisis” is a manufactured issue designed to destroy entitlement spending once and for all. The truth is that for the 82-year period since 1930, the U.S. government’s budget has been in deficit of varying proportions of total economic output 67 of those years (that is, 84 percent of the time). Each time the government tried to push its budget into surplus, a major recession followed that forced the budget back into deficit because automatic stabilizers like social welfare payments, unemployment insurance, food stamps, etc. had to kick in.

These deficits have provided a floor for private domestic saving over most of this period. In times of past crisis – the Great Depression and World War II – the U.S. deficit grew relatively large and national debt followed it upward as a percentage of GDP. Then, as growth resumed and stability was re-established, the deficit fell back as a percentage of GDP to the level required to support private domestic saving and maintain reasonable levels of spending power to support relatively high employment levels.

Today’s job market is one where employment growth momentum appears to be slowing down. Unemployment is officially at 8.2 percent, but it is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

At the rate we’re growing jobs, it will take at least a decade before the employment levels of the mid-2000s are reached.  By contrast, in the 1930s, the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and CCC (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939, and the Civilian Conservation Corps, 1933-1942). Even Ronald Reagan did a better job in the 1980s, when 8 percent unemployment was still considered to be politically unacceptable.

The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA and the CCC. The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

It would, at the very least, act as an transitional job, enhancing the ability of workers to move back to the private sector as and when private sector demand revived and job recruitment efforts intensified. The latter would have a pool of “shovel ready” labor on which to draw, rather than an army of unemployed with corresponding deteriorating job skills, which invariably set in with longer-term unemployment.

As for the canard that only private sector jobs are “real” jobs, that’s bunk. Businesses don’t really care who’s on the buying end of the transaction. They just want to sell everything they produce. It can be bought by domestic households, foreign households, domestic government or foreign government. Makes no difference. What they need – what benefits them – is an environment that maximizes the probability that there will be a demand for what they are trying to sell. If there isn’t enough total spending in the economy, then the government can cut taxes or raise government spending (good deficits) to induce the right amount (non-inflationary) of spending.

Unlike the household sector, the government sector (with a sovereign currency) can sustain its deficit spending in the long run. And that spending will ultimately generate the growth that will generate the incomes and jobs, which will enhance tax receipts and reduce the deficit. It’s a win-win, if only the president would have the courage to make the case, rather than meekly fighting his campaign on the GOP’s intellectually tarnished and politically dishonest ground.

Marshall Auerback is a market analyst and commentator.

Marshall Auerback

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