How Bad Is It?

by John Cassidy

After the prime-time drama of showdowns on Capitol Hill, agita in the West Wing, and a doomsday deadline averted comes the local news, wherein bad things happen to real people. Friday's payroll report for July showed that nearly fourteen million Americans are out of work, and more than six million of them have been jobless for more than six months. Those figures were slightly better than expected, but that just reflects how low expectations have sunk. Arriving a day after the Dow tumbled more than five hundred points-and just hours before Standard &Poor's took the unprecedented step of downgrading the U.S. bond rating-the figures confirmed, if further confirmation was needed, that the country is facing an immediate economic crisis. But, even after the rating downgrade, it isn't primarily a crisis of debt ceilings shattered, government spending gone wild, or any of the other hobgoblins that have dominated the discussion in the nation's capital. It is, as President Obama acknowledged again last week, a crisis of jobs and prosperity.

For more than two years, the unemployment rate has been close to or above nine per cent. (That is the official rate; if the government counted people who have given up looking for work or who have been forced to work part time, the rate would be sixteen per cent.) And it's not just the labor market that is frantically signalling distress. The gross domestic product, after growing modestly in 2009 and 2010, has hardly expanded at all this year. Consumer spending has stalled. In many places, house prices are still falling. On Wall Street, there is renewed talk of a double-dip recession.

A political system that responded rationally to the country's problems would be concentrating on creating jobs. Washington is moving in the opposite direction: toward austerity and job cuts. In the past few months, the 2009 stimulus program has started to wind down, and the Federal Reserve has withdrawn its emergency-support operation, which pumped money into the financial system. Now comes the debt ceiling agreement. The deal, which calls for more than two trillion dollars in spending cuts over the next decade, does less than nothing to promote economic growth or create jobs in the coming months, and next to nothing to solve the long-term fiscal challenges facing the country hence S&P's downgrade. In a statement, the ratings agency said, "The fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."If the country is to be solvent ten or twenty years from now, there will need to be reasonable limits on entitlement spending and a substantial increase in federal tax revenues, which are currently languishing at fifteen per cent of GDP, the lowest level in sixty years. Yet neither entitlement reform nor revenue increases are dealt with in the agreement.

Still, the downgrade should not be allowed to distract attention from the unemployment crisis. What is needed, and what the system appears unable to deliver, is short-term action on jobs and credible long-term deficit reduction. About the best that can be said of the debt-ceiling agreement is that it doesn't entail major spending cuts for this year or next. Of the nine hundred billion dollars in cuts already agreed upon, just twenty-five billion- less than one per cent of the federal budget-are slated for fiscal 2012. The cuts get steeper in later years. Where those cuts fall, and whether they are accompanied by significant revenue increases, will be determined by a "super committee" of congressional Democrats and Republicans, which is to report back in November with recommendations on how to find another trillion and a half dollars in deficit reduction. If the members cannot reach an agreement, or if Congress rejects its recommendations, a series of automatic cuts will go into effect in 2013.

In pushing the government to the brink of default, the House Republicans adopted outrageous tactics. Those tactics worked politically, but at great cost to the country. The debt downgrade was a direct result of the political paralysis in Washington. In retrospect, the White House erred last December in not demanding a raise in the debt ceiling as the price of extending the Bush tax cuts. Failing that, Obama should have refused to bargain with the House Republicans and threatened, if necessary, to raise the debt ceiling by administrative order, citing the Fourteenth Amendment.

But this was more than a failure of tactics: it was a failure of strategy. After last year's midterm elections, when the Tea Party swept into Washington, the Administration moved toward fiscal conservatism, proposing four trillion dollars in deficit reduction over twelve years. This proposal depended on two assumptions: that Republicans would negotiate in good faith, considering tax increases as well as spending cuts; and that the economy was strong enough to sustain an expansion in the face of a shift to austerity policies.

Now that those assumptions have proved to be alarmingly false, the President, while not ignoring the imperative of long-term debt reduction, must return to the economics of growth. He has already put forward some proposals-extending the payroll-tax cut, passing new trade agreements, clearing away some of the red tape that businesses encounter-which would help, but not nearly enough. A substantive jobs bill is what's called for, and the White House should send one to Congress as soon as possible after it returns from the summer recess.

What sort of policies might make a real dent in unemployment? Providing subsidies to businesses that hire new workers is one. Extending extra tax cuts to firms that build new factories and offices is another. More radical ideas include investing in infrastructure projects, importing a version of the job-sharing scheme that Germany has used, and launching a national community- service program. Most of these things would involve the federal government's borrowing and spending more money, but that, of course, is what governments are supposed to do in an economic downturn.

On Wall Street, unlike in Washington, there is general agreement that the 2009 stimulus package was one of the main reasons that the economy expanded, however slowly, in the past couple of years. So suggestions that a new jobs package would spook the markets are without foundation. Even now, after the bond downgrade, the markets and credit-ratings agencies would probably embrace a carefully costed package that is limited in duration, because it makes economic sense. The quickest way to reduce the budget deficit is to get potential taxpayers back to work.
The real barrier to a meaningful jobs program is not the markets or the ratings agencies but the GOP. If the Republicans were to vote down a jobs bill, however. It would hurt not only the economy but also, potentially, their own prospects. Meanwhile. for a Democratic President, especially one who has disappointed many of his supporters, campaigning as someone who fought to create jobs, rather than as a copycat budget cutter, would seem a winning strategy.

reprinted from The New Yorker, 15 August 2011, p.29