Commentary: Addressing the Right Problem

Commentary: Addressing the Right Problem

12/28/2012 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

Negotiators in Washington face a dismal weekend leading up to – and perhaps including – New Year’s Eve, made worse because they’re trying to solve the wrong problem.

They’re wrangling over how to avoid the “fiscal cliff” when a series of laws aimed at or contributing to the nation’s deficit are set to expire, complicated by Treasury Secretary Timothy Geithner’s pronouncement the nation is approaching its debt ceiling. Their priority should continue to be jobs.

The tale is very familiar: without action the lower tax rates pushed by President George W. Bush — it obfuscates the issue to call them the “Bush-era” tax rates – expire and drastic budget cuts designed to force Congress to make a meaningful effort to reduce the deficit kick in.

The budget cuts, affecting every part of government from defense through transportation and beyond, were meant to be draconian but to not take effect with the expectation Congress would act reasonably.

But attacking the deficit will not address the nation’s number one problem: that more than 12 million people are “unemployed”, in quotes because the term means they are out of work, available for work and looking for work. If you throw in people who are discouraged and not in the labor force or who are working part time for economic reasons, the number people still affected by the Great Recession more than doubles.

The Recession was costly and helped to balloon the deficit. In fiscal year 2009 (which began on October 1, 2008, three and a half months before President Obama took office) the deficit increased $960 billion to $1.4 trillion. About one-third of the increase — $317 billion – was due to the Recession and the spike in joblessness: personal income tax receipts dropped $230 billion, unemployment insurance payments rose $70 billion and food stamp grew $16 billion.

In fiscal year 2010 the deficit actually declined $121 billion in part because the same three factors improved: personal income tax receipts declined (from fiscal year 2009) only $17 billion, unemployment insurance spending rose just $34 billion and the cost to the government of food stamps went up under $15 billion.

The deficit went up in 2011, by $2.6 billion, an increase of 0.2 percent, as unemployment insurance spending dropped while personal income tax receipts improved but the food stamp program expanded.

In fiscal 2012 the deficit came down sharply — $227 billion – as personal income tax receipts grew again and unemployment insurance payments declined.

Is there a pattern? Growing jobs both increases government tax receipts and reduces unemployment insurance outflows while slowing the growth in the cost of the food stamp program, a trifecta to shrink the deficit.

The irony of the wrangling over the fiscal cliff is that toppling over it will shrink the deficit even faster; but then cutting off your head is a sure-fire way to lose weight; don’t think about the consequences.

It is not that deficits don’t matter – despite what Vice President Dick Cheney said defending his (whoops, his boss’s) administration’s tax cuts. It’s just they don’t matter immediately. We’ve been here before, using government resources to recover economically.

To quote the President:

“From our earliest days we have had a tradition of substantial government help to our system of private enterprise. But today the Government no longer has vast tracts of rich land to give away and we have discovered, too, that we must spend large sums of money to conserve our land from further erosion and our forests from further depletion. The situation is also very different from the old days, because now we have plenty of capital, banks and insurance companies loaded with idle money; plenty of industrial productive capacity and many millions of workers looking for jobs. It is following tradition as well as necessity, if Government strives to put idle money and idle men to work, to increase our public wealth and to build up the health and strength of the people —to help our system of private enterprise to function again.

“It is going to cost something to get out of this recession this way but the profit of getting out of it will pay for the cost several times over. Lost working time is lost money. Every day that a workman is unemployed, or a machine is unused, or a business organization is marking time, it is a loss to the Nation.”

That wasn’t Barack Obama, but Franklin Delano Roosevelt, addressing the nation almost 75 years ago, on April 14, 1938.

Roosevelt went on: “Let us unanimously recognize the fact that the Federal debt, whether it be twenty-five billions or forty billions, can only be paid if the Nation obtains a vastly increased citizen income. I repeat that if this citizen income can be raised … the national Government and the overwhelming majority of state and local governments will be definitely ‘out of the red.’ The higher the national income goes the faster will we be able to reduce the total of Federal and state and local debts. Viewed from every angle, today’s purchasing power — the citizens’ income of today — is not at this time sufficient to drive the economic system of America at higher speed. Responsibility of Government requires us at this time to supplement the normal processes and in so supplementing them to make sure that the addition is adequate. We must start again on a long steady upward incline in national income.”

Reading history, it seems, is important.

On the economic front, the New Year kicks off with a full week’s worth of data reports crammed into just three days highlighted by the monthly employment situation report next Friday. The last report, for November, showed payrolls expanded by 146,000 and the unemployment rate dropped further to 7.7 percent. The improvement in the unemployment rate was driven largely by a reduction in the labor force rather than in the number of persons unemployed. That trend is not sustainable and indeed economists expect the number of payroll jobs to increase by about 143,000 but the unemployment rate to tick up to 7.8 percent.

Hear Mark Lieberman next Friday on P.O.T.U.S. radio, Sirius-XM 124, at 8:45 am eastern time.

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