Last week, Federal Reserve Chair Ben Bernanke announced a dramatic new commitment of the Fed to keep long term interest rates low in the hope of boosting employment and economic growth.
In doing so, Bernanke issued a wake up call to the Congress and to both presidential campaigns. It’s a Jobs Cliff, not just a fiscal cliff.
Bernanke provided a stark dose of reality:
“The weak job market should concern every American. High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents, Five million Americans have been unemployed for more than six months, and millions more have left the labor force, many of them doubtless because they’ve given up on finding suitable work.”
The country risks a lost decade of harsh suffering that threatens to leave permanent scars on families and on the economy. Action is required now.
But Bernanke is realistic enough to know that the Fed can have at best indirect effects on the economy. He reiterated his concern that Congress address the fiscal train wreck that is set up for the end of the year when the Bush tax cuts, the payroll tax cut, and extended unemployment insurance are slated to expire, and the automatic cut of nearly 9% of domestic and military discretionary spending – the sequester – goes into effect. “If the fiscal cliff isn’t addressed,” Bernanke said, “I don’t think our tools are strong enough to offset the effects of a major fiscal shock.”
As required by law, the White House published a projection of the cuts that might be entailed in the sequester. Add the tax cut and unemployment expirations and the effect will surely be to throw an already faltering economy into recession — and throw many more out of work. The Congressional Budget Office projects a rise of unemployment to 9% in 2013.
The Austerity Fixation
Yet instead of focusing on steps needed to generate jobs, Washington is mired in a debate about austerity – about how to put the squeeze on, not how to get the economy going. Bernanke’s action was a cry for the villagers to wake up.
Republican Vice Presidential nominee Paul Ryan recently scorned the president for not embracing the recommendations of the co-chairs of the Simpson-Bowles Commission (neglecting to note that his vote against the recommendations helped block their adoption by the Commission). At the Democratic convention, both Bill Clinton and the president suggested that deficit reduction should follow the principles of the Simpson-Bowles recommendations.
Many of these recommendations are wrong-headed, but Simpson and Bowles got one thing right: they concluded that long term deficit reduction should be implemented only after the economy recovered.
“Don’t disrupt the fragile economic recovery. We need a comprehensive plan now to reduce the debt over the long term. But budget cuts should start gradually so they don’t interfere with the ongoing economic recovery. Growth is essential to restoring fiscal strength and balance.”
Similarly, the much touted Rivlin-Domenici report also called for recovery first. As do recent studies on the deficits by former IMF Chief economist Simon Johnson and James Kwak (White House Burning: The Founding Fathers, Our National Debt and Why it Matters to You ) and Wall Street Journal columnist David Wessel (Red Ink: Inside the High Stakes Politics of the Federal Budget).
Jobs first. The reason all agree is simple – but seems to have been lost in the current debate: putting people back to work is the first and necessary step for deficit reduction. As people go from collecting unemployment and food stamps to working and paying taxes, spending goes down and revenues go up. All of the deficit reduction plans ASSUME a growing economy with reduced unemployment. None of them work without it.
Hysteria over America turning into Greece has driven the austerity crowd. But Europe, in fact, is a case study in the danger of inflicting austerity on economies in trouble – as Britain and the European Union descend back into recession, with increasing misery, declining revenues and rising social expenditures and increasing debt burdens.
Good jobs first. What is needed now is action on jobs: passage of the President’s American Jobs Act would be a good start. The US should be taking advantage of record low interest rates and an idle construction industry to finance a major, long-term program to rebuild America’s decrepit infrastructure. The sequester should simply be repealed; it is a ridiculous way to run a country. With the wealthy already capturing virtually all of the rewards of growth, the top end Bush tax cuts should be allowed to expire with the money used to keep teachers and cops on the job, to hire veterans and the young directly in non-profits, and urban and green corps. The payroll tax cut should be extended, for its repeal will be felt immediately in pay checks across the country. With 40% of the unemployed suffering long term unemployment, it is simply cruel to repeal extended unemployment insurance.
At the same time, Congress should lay out a long term plan for getting our books in order. In a rational world, this would address the elements that contributed to the recession that destabilized our economy and drove up the debt: Wall Street excesses, unsustainable trade deficits, and Gilded Age inequality. It would also focus on the source of projected rising deficits: our broken health care system. And it would prescribe “sacrifices” from those who have benefited from the past years – the rich who have captured ever increasing portions of the national income and wealth; the military which is running budgets higher in comparable dollars than their Cold War heights; the entrenched lobbies – Big Oil, Big Pharma, Big Agra – that pocket billions in obscene subsidies and tax breaks.
Progressives need to join the conservative Republican Chair of the Federal Reserve in demanding that Washington wake up.
Good Jobs First. Austerity can wait until the economy recovers. And then focus on what is broke (like health care), not on what works (like Social Security) and ask those who have not had to sacrifice to step up to the plate, not those who have already struggled with stagnant incomes, rising costs and growing insecurity.