Time to Stop the (Economic Policy) Madness
Here’s the state of the U.S. economy. It is operating well below its capacity—current real GDP is about five percent below potential real GDP, i.e, the value of GDP at full employment. The official unemployment rate stands at 9.1 percent. Add discouraged workers and this rises to 10.3%. Add those who are working part-time but want to work full-time and it rises to 15.8%. Forty five percent of the unemployed have been unemployed for 27 weeks or more. Initial unemployment claims last week were again over 400,000. And this doesn’t include the over 25 million workers who are staying put in jobs from which they would have moved in more normal times.
The economic recovery is stumbling badly and there’s not a lot to be optimistic about. The state and local government sector is hemorrhaging jobs and will continue to do so—IHS Global Insight has forecasted that the sector will lose an additional 110,000 jobs in the third quarter. And what are House and Senate Republicans worried about—the deficit. And what are they urging—slashes in federal spending along with tax cuts, of course. This is just lunacy. This is not the time to slash federal spending, it is not the time for contractionary fiscal policy. It is time for, oh dare I say it, MORE fiscal stimulus not less. The long-term economic consequences of doing nothing to address the unemployment problems we have now will be far more damaging to the future of the economy than the increases in the near term deficits and in the national debt precipitated by more stimulus.
But, the first stimulus didn’t work, people will say, so why a second round? Because as I (and many others) said at the time, the first stimulus was too small, it was offset considerably by decreases in state and local government spending, and relied too heavily on Republican-favored tax cuts with minimal spending impact. (The hoot, of course, was that even though the tax cuts were included to pacify Republicans, not one Republican voted for it.)
So, here’s what I wish President Obama would say in his meetings today with House and Senate leaders regarding deficits and the debt ceiling:
“We are not slashing federal spending now. We are going to increase federal assistance to state and local governments for the maintenance of public infrastructure and to prevent massive teacher layoffs. We are going to go through a second round of significant employee payroll tax reduction lasting through next year and will exempt employers from paying the payroll tax for new hires. (This by the way was just proposed by Robert Frank of Cornell University yesterday in the New York Times.) Yes, this will increase the near-term deficit and debt, but right now the biggest and most dangerous problem we face is long term unemployment. And no, I haven’t forgotten about the critical importance of getting our long-term fiscal house in order. We already have a good start with the recommendations from the bipartisan Simpson-Bowles Commission and Domenici-Rivlin Debt Reduction Task Force. And yes, the up-to-now intransigent House and Senate Republicans will have to compromise on tax revenue increases because progress cannot be made by focusing on discretionary spending cuts alone. And yes, Democrats will have to consider serious changes to Medicare, Medicaid, and, to a lesser extent, Social Security. And yes, I will use any political/media muscle/leverage I have to get my way.”
I hope (something like) this happen. If it doesn’t, we’re in for an economic malaise that we haven’t seen for a long time.