Here We Go Again….It’s the Deficit...No, No….It’s Unemployment

On September 6, 2010 President Obama’s former Director of the Office of Management and Budget (OMB) wrote an editorial published in the New York Times entitled, “One Nation, Two Deficits.” He began his editorial with these words, “The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term.”

Peter Orszag, as President Obama’s first budget director helped to shape the 2009 American Recovery and Re-Investment Act (ARRA), also known as the stimulus and the health care legislation that finally passed both Houses in early 2010. He also promoted and carried out an effort by the White House to pry away from Congress some of the responsibility for making bad decisions, especially when it comes to the budget. We have all witnessed the tremendous legislative tug-of-war since the first day that President Obama assumed office, between the party of “No” and the party of in the words of Boss Godfrey of Cool Hand Luke fame, “What we have here is a failure to communicate.”

Peter Orszag spends a considerable amount of time talking about the soon-to-be-expired tax cuts for the wealthy. He argues that “In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.”

His arguments however, seem to be based only on political calculations, particularly as regards the difficulty of getting Republicans and Democrats to agree on anything. His plan of extending the Bush tax cuts for an additional two years is attractive to almost everyone who is set to have their taxes increased by the expiration of the cut—a relatively small part of the American population compared to those of us who are struggling every day to make ends meet. Ironically, these tax cuts are set to end automatically, while almost every other action or outcome requires a vote in Congress.

What seems to be missing from Orszag’s editorial however is the raging policy debate which asks the question, “Why isn’t the economy actually recovering, despite the stimulus and near-zero interest rates?" Orszag seemingly assumes a strong traditional recovery will be underway by 2013. If you can’t raise taxes now because of the crimp that puts in American spending and consumption, then on what basis is it logical to think that the recovery will be in full swing in just two years? With all things being equal, I just don’t see our economy being much better by then. I wish it were so, but this economic recovery will simply not just materialize out of thin air.

On April 2, 2010 I wrote a blog, The Reality of Debt, so I won’t re-argue why debt in and of itself is not necessarily a bad thing, but I will state that sadly enough, various political demagogues and Wall Street interests have mounted what appears to be an extremely successful campaign to convince Americans that despite persistent massive unemployment for the foreseeable future, more than 15 million Americans underwater on their home mortgages and two unnecessary wars, what we really should be worried about is America’s national debt.

It has not helped that the majority of the American media has failed to understand the basic economics or the plain math of the issue. President Obama and economic advisors (the ones John Boehm wants the President to fire) forecasts unemployment at 10, 9.2 and 8.2 percent respectively for 2010 through 2012. The rate, in their estimation, does not fall to the 5.2 percent rate it considers full employment until 2018.

The difference between 10 percent unemployment and 5.2 percent is more than seven million people without a paycheck. That also does not count the increase in millions of people involuntarily working part time, or millions who leave the labor force because they simply cannot find any work.
This state of affairs would be unacceptable in any civilized society, but it is even more outrageous in the world’s richest country. It means millions of ruined lives that will persist for decades to come in the form of increased poverty, lower educational levels, mental illness, suicide, crime and a whole host of other societal ills.

So, when we go back to the original questions, “Why has the economy not yet recovered, even with the stimulus and near-zero interest rates?” it is because the stimulus package for one thing, was too small. This fact fits the data: In 2009, taking into account the spending cuts and tax increases of state and local governments, the 700 million dollar plus stimulus was less than one percent of GDP. That is why the stimulus is estimated at only having saved somewhere around two million jobs—and that is while we are as a country down more than eight million jobs since the recession began. Consequently, the bottom line is that we NEED MORE STIMULUS not less. As heretical as it might sound, this is not the time to be worrying about deficits or national debt.

As I wrote in April and in one or two other blogs devoted to this concept of debt, there simply is no short-term challenge with running even large deficits in this economy, as weak as it is. Remember, investors, while they decry the expiration of tax cuts to the wealthy, are simultaneously buying up even long-term U.S. Treasury bonds at almost unbelievable low interest rates. These investors, despite their hand wringing, don’t really believe that our government is risking our national wealth with this level of debt. Right now, interest payments on the debt that Senator Mitch McConnell keeps screaming about is just 1.4 percent of GDP.

One real debt generator however is our military. On an annual basis, we are spending around five percent of our GDP on just the Defense Department budget. Prior to September 11, 2001, the Congressional Budget Office had predicted just 2.4 percent for 2009. The difference is more than twice the long-term shortfall in our Social Security system. It is just possible that we should focus on protecting our airports and seaports from existing terrorists rather than creating new enemies by occupying other countries or burning the books of their faith.

It isn’t the debt that threatens our future. Please, think about it.