2011: Jobs Versus The Deficit

Wednesday, 05 January 2011 12:54 By Dimitri B Papadimitriou, New Geography | Report | name.

The roadmaps showing the way out of our 1.4 trillion dollar federal deficit almost always begin at the same starting points. During 2010, it became taken-for-granted that today's record-setting red ink is a result of unrestrained government spending — especially stimulus spending. And the idea that the economic upturn in jobs and growth will begin with deficit reduction has become widely perceived as 'common sense'.

The December release of the federal debt panel's Simpson-Bowles report crystallized a mass re-set of priorities, with politicians and pundits freely equating solutions to 'the deficit crisis' with economic recovery. While conservatives and liberals reacted differently to the report's specifics, the assumption that immediate deficit reduction would be healthy and virtuous was largely accepted. The president has also pledged to follow this path.

The media, meanwhile, geared up with a national debt counseling forum. November ended with three out of four of the lead columns in the Washington Post providing advice on the subject. US News and World Report called on the president to get busy and "name a deficit Czar". Deficit reduction? There's an app for that. A prominent New York Times feature titled "You Fix the Budget" included an interactive Iphone/Ipad application that urged readers to "Make your own plan and share it online". Jobs and growth have inspired no such apps thus far.

Are congressional free-spending ways really the problem? Counter-intuitive though it may seem, the strongest evidence indicates that the deficit is tied to many political expenditures that are mandated and locked in place, and not to any 'spending spree'.

Consider the sharp increase in expenditures for SNAP (the old “food stamps” program), or for unemployment benefits. While the guidelines to qualify for these benefits have stayed roughly the same, payments have ballooned — in the case of SNAP, 72 percent from 2007 to 2009, as detailed in a report from The Levy Economics Institute of Bard College. The federal government did not choose to increase this spending. And the financial threshold for receiving benefits was not lowered. But many more families slid out of the middle class and into the safety net. As the economy tanked, the recession itself automatically triggered increased federal outlays, which in turn fed the deficit.

In other words, the system is performing as we originally intended, and hoped, that it would. Like a truck engine suddenly expected to haul a much heavier load, the federal budget is burning more gas… and by doing so, is able to continue uphill, carrying individuals, families, and businesses out of financial disaster.

If calls to drastically reduce the deficit succeed, and federal spending is radically turned down now, the result will be comparable to cutting the engine's fuel supply. The roll back downhill will be swift, horrific, and potentially out of control.

For a glimpse of how deficit slashing could play out, take a look at Portugal. Already, there are signs that recent austerity measures will actually increase its government’s fiscal deficit, a consequence of falling tax revenue and rising social needs as a result of increased unemployment. Portugal’s central government lost ground in the first nine months of this year as its deficit rose by about $280 million, even as actions to restrain it were set in motion. The pursuit of yet more deflationary spending cuts and tax increases could continue the vicious cycle.

Crisis-related spending, whether oriented toward businesses or households, has been trashed as costly. But shouldn't it be obvious that business and household income and spending help the private sector, which needs to thrive for the economic growth we need?

Liberal think-tanks are not alone in their view that running deficits is a logical and necessary response to a severe recession. Even David M. Walker, former CEO of the Peter G. Petersen Foundation, an anti-deficit think tank dedicated to austerity, has joined Lawrence Mishel of the Economic Policy Institute in acknowledging that the United States must address “jobs now and deficits later"; Mishel and Walker have called for two years of elevated deficits.

And the public does not disagree, despite the Tea Party street-theater shows. In this autumn's CBS News Poll, 54 per cent saw the Economy/Jobs as the nation's most important problem, compared to 3 per cent for the Budget Deficit/National Debt; the CNN/ Opinion Research Corp figures were almost the same. Fox News and Bloomberg polls also showed that concerns about the economy and jobs considerably — by about 20 per cent — trumped the deficit and spending.

Gestures to counteract deficits with measures such as the pay-freeze on federal salaries, or with anti-earmark legislation, are purely symbolic at best and, in the case of salaries, counterproductive.

Similarly, calls for the deficit to be pegged to no more than 21 percent of Gross Domestic Product, as in the Simpson-Bowles report, or 20 percent, as suggested by Representative Mike Pence (R-Indiana), make no sense, and provoke one simple and as yet unanswered question: Why?

We are indeed in a crisis. But the crisis is jobs, and the solution is to grow the economy. Deficit reductions would have a negative impact on both. The deficit hawks who demand chicken feed-sized cuts have yet to provide data — let alone logical arguments — that show how these cuts could lead to job creation and growth.

The deficit should not be treated as the main problem when it is, in reality, only the product of a poorly functioning economy. There are many good reasons that a reasonable deficit reduction plan should be early on the agenda when the US economy is once again strong. But the austerity measures being floated today range from meaningless to ludicrously dangerous. There is no reason that this so-called crisis needs to be acted on while the economy is weak. In deficit reduction — as in navigating turns in the road — timing is everything.

Dimitri B. Papadimitriou is President of The Levy Economics Institute of Bard College. He recently co-edited, with L. Randall Wray, The Elgar Companion to Hyman Minsky

Last modified on Wednesday, 05 January 2011 12:56