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President Obama's Budget Plan

Wednesday, 13 April 2011 13:37 By Dean Baker, The Center for Economic and Policy Research | News Analysis

President Obama’s statement was about as encouraging as could have been hoped for in the context of an agenda committed to deficit reduction. He rightly stressed that the wealthy, who have been the big winners in the economy over the last three decades, can afford to pay more in taxes. He also correctly pointed out that Social Security is an essential program for the nation’s retirees and workers, and that it does not contribute to the deficit. He also pointed out that the way to fix Medicare and Medicaid is to fix the private health care system, not to privatize Medicare as the Republicans in Congress have proposed.

On the negative side, it is unfortunate that President Obama accepted a formula that cuts three times as much from projected spending (including interest) as he proposes to increase taxes. It is also striking that he proposes to cut twice as much from domestic discretionary spending (the portion of the budget that includes most investment spending) as he does from defense spending, especially since defense spending is projected to be about 20 percent larger than domestic discretionary spending over the 10-year budget horizon.

More importantly, a deficit reduction agenda is a serious problem in the context of an economy that badly needs additional demand. While the economy is much healthier today than it was two years ago, the pace of job growth is not acceptable.

Even at the pace of job growth we saw over the last three months, the best three months in the recovery to date, we will not get back to normal levels of unemployment until almost the end of the decade. The decline in the unemployment rate that we have seen over the last year was entirely the result of workers dropping out of the labor force, as the employment to population ratio did not rise at all.

As recent analyses from Mark Zandi, Goldman Sachs and others have shown, deficit reduction in the current environment will cost jobs. While the President’s plan does not call for immediate deficit reduction, the Republican Congress is likely to add to the cuts agreed to last week. Furthermore, the unemployment rate is still projected to be above 7.0 percent in the 4th quarter of 2013, when the President’s cuts would begin to take effect.

It is worth remembering that the first stimulus package was passed in February 2008 (and signed by President George W. Bush) when the unemployment rate was 4.7 percent. It is striking to see a Democratic president that is apparently prepared to accept an 8.8 percent unemployment rate that is projected to fall very slowly back to more normal levels.

Jobs should be the top priority for policymakers right now. The people who are out of work are not the ones who gave us this recession. It is the fault of the people who design economic policy.

Watch: Dean Baker talks with Rachel Maddow about President Obama's budget speech and need to remain focused on stimulating the economy and creating jobs:

Visit msnbc.com for breaking news, world news, and news about the economy

Dean Baker

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.


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President Obama's Budget Plan

Wednesday, 13 April 2011 13:37 By Dean Baker, The Center for Economic and Policy Research | News Analysis

President Obama’s statement was about as encouraging as could have been hoped for in the context of an agenda committed to deficit reduction. He rightly stressed that the wealthy, who have been the big winners in the economy over the last three decades, can afford to pay more in taxes. He also correctly pointed out that Social Security is an essential program for the nation’s retirees and workers, and that it does not contribute to the deficit. He also pointed out that the way to fix Medicare and Medicaid is to fix the private health care system, not to privatize Medicare as the Republicans in Congress have proposed.

On the negative side, it is unfortunate that President Obama accepted a formula that cuts three times as much from projected spending (including interest) as he proposes to increase taxes. It is also striking that he proposes to cut twice as much from domestic discretionary spending (the portion of the budget that includes most investment spending) as he does from defense spending, especially since defense spending is projected to be about 20 percent larger than domestic discretionary spending over the 10-year budget horizon.

More importantly, a deficit reduction agenda is a serious problem in the context of an economy that badly needs additional demand. While the economy is much healthier today than it was two years ago, the pace of job growth is not acceptable.

Even at the pace of job growth we saw over the last three months, the best three months in the recovery to date, we will not get back to normal levels of unemployment until almost the end of the decade. The decline in the unemployment rate that we have seen over the last year was entirely the result of workers dropping out of the labor force, as the employment to population ratio did not rise at all.

As recent analyses from Mark Zandi, Goldman Sachs and others have shown, deficit reduction in the current environment will cost jobs. While the President’s plan does not call for immediate deficit reduction, the Republican Congress is likely to add to the cuts agreed to last week. Furthermore, the unemployment rate is still projected to be above 7.0 percent in the 4th quarter of 2013, when the President’s cuts would begin to take effect.

It is worth remembering that the first stimulus package was passed in February 2008 (and signed by President George W. Bush) when the unemployment rate was 4.7 percent. It is striking to see a Democratic president that is apparently prepared to accept an 8.8 percent unemployment rate that is projected to fall very slowly back to more normal levels.

Jobs should be the top priority for policymakers right now. The people who are out of work are not the ones who gave us this recession. It is the fault of the people who design economic policy.

Watch: Dean Baker talks with Rachel Maddow about President Obama's budget speech and need to remain focused on stimulating the economy and creating jobs:

Visit msnbc.com for breaking news, world news, and news about the economy

Dean Baker

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.


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