The Citizens’ Commission On Jobs, Deficits And America’s Economic Future

Report and Recommendations

This report was written by Jeff Madrick, a member of the commission and Senior Fellow at the Roosevelt Institute, with contributions from Roger Hickey, Robert Borosage and Richard Eskow of the Institute for America’s Future, Dean Baker of the Center for Economic and Policy Research, Robert Kuttner of The American Prospect and Demos, and Robert Pollin of the Political Economy Research Institute, with additional work by other members of the commission.

Executive Summary

The United States continues to suffer the aftereffects of the worst economic recession since the Great Depression, triggered by a financial crisis whose causes were ignored or made worse by elite policymakers for decades. Today, more than 25 million Americans who are ready and willing can’t find full-time work. Personal wealth has declined sharply, creating an especially uncertain future for people approaching retirement age. Confidence is down for both consumers and businesses, which prevents sustained economic growth.

At the same time, largely due to the severity of the recent recession, a federal government that enjoyed record surpluses just 10 years ago now faces record deficits that are spreading alarm and confusion across the land. Moreover, this severe downturn comes after a decade that featured the worst job creation in the post-war period, declining wages for most Americans, weaker unions confronted by employer attacks on rights to organize, continued decay of basic infrastructure, an ongoing crisis in public education, record trade deficits and job loss abroad, and extreme inequality.

Despite the ongoing pain that unemployment is still inflicting on individuals and families, despite the slow growth in demand that is hurting small business, despite the wrenching budget crisis hitting most state governments, and despite the longer term decline that can no longer be ignored, the debate in Washington is now dominated by conservative cries for immediate reduction of the federal deficit. Several elite “commissions”—two privately financed, and one created by the president and Congress—have effectively shifted the attention of the media to deficits as the primary focus for public action.

One voice has been conspicuously absent from most discussion of deficits—that of the American people. Polls have shown that the public’s opinion and that of many leading economists are surprisingly well aligned. The public agrees with economists who warn that deficit reduction must be performed judiciously, without restricting government’s ability to create jobs and without damaging needed social programs. Both agree that that we must make investments vital to reviving America’s long-term prospects.

The Citizen’s Commission on Jobs, Deficits and America’s Economic Future was created to offer proposals that can return our economy to healthy, sustainable growth, while taking action to reduce deficits and debt in a way that enhances the future well-being of the American people. And since the conventional wisdom is so dominated by a relatively narrow range of opinions, it is our intention that this document will elicit media coverage of an alternative point of view—and that its recommendations will be widely discussed by civic and business and labor leaders in communities all across the nation.

This commission has two major priorities. The first is to assure that the U.S. economy recovers fully and returns to a fast track of growth. This is the right way to reduce the current high deficit. The second is long-term public investment in sustainable growth, ensuring a healthy economy that can generate adequate revenue for needed public services. We have outlined three key principles that any plan for growth and deficit reduction must follow:

1. Grow the economy. Don’t kill growth and jobs in the name of deficit reduction.

2. Target what truly drives deficits. Don’t fix what isn’t broken.

3. Invest in future sustainable growth while balancing our national accounts.

These are not just moral imperatives. They are economic prerequisites for successful deficit reduction.

Causes of Current and Future Deficits

Much, if not most, of the current public discourse is misleading and poorly informed.

The federal deficit tripled between 2008 and 2009, reaching $1.5 trillion and 10 percent of GDP in 2009. This was the culmination of a process that began with the passage of the first Bush tax cuts, accelerated with the invasions of Iraq and Afghanistan, and peaked with the economic collapse of 2008. It therefore follows that any reasonable short-term plan should focus the causes of our current deficit. Yet most of the measures currently being debated fail to do so. Despite the role that tax cuts played in creating today’s deficits, many such plans would lower taxes for the wealthiest Americans while increasing them for the middle class. They would also restrict government efforts to bring us out of our current economic crisis, weakening the economy and reducing future government revenues.

Future deficits will be driven almost exclusively by the explosive growth in health care costs. Those who advocate for increased austerity are failing to address true the causes of government spending. Furthermore, there is no evidence that implementing policies to reduce government deficit would increase private spending. As we note (see Appendix I), there is ample evidence that such spending cuts would create more unemployment, making a second recession possible and even likely.

The Lesson of 1937

The nation has been at a similar juncture before. Franklin D. Roosevelt’s New Deal reduced unemployment from 25 percent to 10 percent in three years, but he was then pressured to reduce spending before the economy was fully stabilized. The result was another sharp increase in unemployment and a weakened economy that only improved when the nation entered World War II.

Then, as now, government spending was one of many legitimate policy concerns. Then, as now, previous government efforts had shown signs of success. President Obama’s stimulus program created an estimated 3.5 million jobs and would have created more had it been larger. As in 1937, the nation’s economy remains fragile and the recovery is not yet complete. More investment is needed. Premature austerity would be as unwise and counterproductive now as it was then. Plus a nascent and struggling “recovery” is not sufficient given the decline of the last decade. Premature austerity would terminate any possibility of building a new foundation for growth and shared prosperity.

Though weak growth returned by 1934, unemployment was still stuck above 12 percent on the eve of World War II. It was the massive wartime deficits, (peaking at 28 percent of GDP compared to less than 9 percent today) that finally produced strong recovery.

Postwar leaders, unlike today’s deficit hawks, were wise enough not to panic about the large war debt (twice today’s size relative to the economy) but continued such public investments as the G.I. bill, low-interest home loans, and the interstate highway system. Rather than suffering an austerity scheme that would have made debt loom larger, the postwar boom enabled the economy to grow its way out of debt.

Government Investment Still Works

Today’s deficit debate often fails to recognize a critical fact: The Obama stimulus of 2009 helped stop the recession—and reduced the level of future deficits. The lesson learned in 1937 is still true today: Government intervention works. And it should not be ended prematurely.

The $800 billion Obama stimulus package of early 2009—the American Recovery and Reinvestment Act—serves as perhaps the strongest recent proof of this statement. The package consisted of a wide array of spending programs, from expanding unemployment insurance to aid to the states to investments in traditional infrastructure projects and the green economy. Roughly one third of the package was devoted to tax cuts. A handful of economists still insist the stimulus was ineffective or even harmful because it raised deficits. The facts are unambiguously otherwise. The nonpartisan Congressional Budget Office modeled the consequences in May 2010 and found that the stimulus will raise the level of gross domestic product significantly into 2012. The CBO produced high and low estimates. In fiscal year 2011, for example, it estimated that the stimulus will increase GDP between 0.7 percent and 2.2 percent. It will reduce unemployment by between 0.5 percent and 1.4 percent. It also concluded that because the economy is running so far below potential, there will be little if any increase in interest rates—that is, little or no crowding out. A Wall Street Journal survey found that 75 percent of economists agreed the stimulus resulted in more growth and less unemployment.

In addition, no respectable economic model shows that the Obama stimulus, composed both of tax cuts and spending programs, will add more than marginally to the long-term budget deficit. To the contrary, one widely cited model showed that it will reduce the deficit in coming years. Former Federal Reserve chairman Alan Blinder and Moody’s Analytics economist Mark Zandi (an adviser to the presidential campaign of John McCain) found that the Obama fiscal stimulus package raised the federal budget deficit in fiscal year 2010, but will lower it substantially in both fiscal years 2011 and 2012.In conclusion, the government stimulus programs ended the free-fall of the economy. Without these policies—fiscal, monetary as well as government bailouts and guarantees—Blinder and Zandi estimated that the recession would have deepened into 2011 and the unemployment rate would have peaked at 16.5 percent rather than roughly 10 percent. The federal budget deficit would have equaled $2 trillion in fiscal year 2011, some 15 percent of GDP, rather than the 7 or 8 percent now likely. But the recovery programs were not sufficient to raise the nation out of a prolonged period of stagnation, with persistent high unemployment. And it was countered directly by the cuts in state and local spending required by their balanced-budget requirements.

It has become clear in retrospect—and some argued it from the outset—that the Obama stimulus was not nearly enough. Another weakness was that the portion devoted to tax cuts had little stimulative impact. Given the political circumstances, it would have been difficult at the time to produce a more focused package. On the other hand, when a strong recovery did not materialize, the Obama administration could have started developing and championing another growth package. It did not.

Overview of Recommendations

This report of the Citizens’ Commission on Jobs, Deficit Reduction and America’s Economic Future puts forward a set of proposals that would protect and accelerate the economic recovery while achieving a stable but sustainable level of debt by 2015. It reduces debt to a manageable level while at the same time providing a strong program of government investment that will create jobs and ensure ongoing growth. Our plan achieves that goal without cutting Social Security or capping or “voucherizing” Medicare (as many conservative proposals do). It provides immediate efforts to support economic growth, substantial investments vital to the strength of our economy, cuts to federal wasteful spending and a variety of measures to increase revenues.

An important note: Any plan to substantially reduce the federal deficit should be deferred until unemployment has dropped to an acceptable level, which we have defined as 5.5 percent. Our plan is no exception. Our recommended changes to the 2015 budget should only be implemented if unemployment has reached that level. We believe it will if our short-term investment recommendations are adopted.

Our recommendations are based on the following principles:

Address the current economic crisis first. Before engaging in widespread deficit reduction efforts, we must institute a program of short-term targeted spending to restart the economy and sustained investment to begin to support longer-term growth. Key among the former is aid to the states, whose constitutionally mandated budget austerity is not only inflicting painful cuts in social services but also creating a huge and destructive drag on the national economy. We also must pursue innovative monetary and credit market policies to move roughly $2 trillion in idle cash hoards now held by banks and non-financial corporations into productive job-creating private investments.

Tax justice and empowered workers generate prosperity, fairness, growth—and revenues.Tax cuts were a major cause of our current deficit. Any plan that continues or increases tax breaks for the wealthy will add to the deficit. In an era of excessive inequality, we should end Bush era tax cuts for the wealthiest Americans, tax capital gains and dividends as normal income, tax activities damaging to our economy like excessive financial speculation, and eliminate or reduce tax expenditures that mainly benefit the wealthy.

To ensure ongoing prosperity, we must also provide ongoing tax relief for lower- and middle-income households. These households will spend, not save, the additional income. We must also take steps to reduce the war on unions and worker rights (involving corporate action and misguided public policy) that has been a major factor in preventing working from getting their share of productivity growth over the past three decades. Lower taxes and higher wages for working families will generate consumer activity that leads to more growth, more jobs, and more tax revenue.

Reduce wasteful government spending without compromising public objectives. Spending cuts are needed, but we increase, not decrease investments in areas vital to our future, and insure that any adjustment not worsen already extreme inequality. We must eliminate spending that is unneeded or wasteful, reduce obsolete and unneeded military spending, and make prudent cuts in government expenditures that are not vital to its core mission.

Protect and strengthen Social Security. Social Security retirement benefits are the main source of income for most retirees, and most of this income is spent rather than saved. This leads to growth and jobs without adding to the deficit, since Social Security is funded separately. We must remove Social Security from “deficit cutting” exercises, increase its revenues, provide modest benefit increases, and assure the public that its $2.6 trillion in trust fund assets will not be used for other purposes.

Establish realistic and sustainable long-term deficit goals. Any long-term deficit plan deficit must be politically sustainable, fiscally sound, and not impose unacceptable levels of hardship. We recommend a short-term period of imperative recovery expenditures. We seek a gradual reduction in the deficit-to-GDP ratio over the coming decade. We recommend an annual deficit target of 3 percent of GDP as a medium term goal once recovery comes. This could be achieved as early as 2015—if the economy recovers, and if we don’t choke off that recovery with premature deficit reduction. We are skeptical of targeting a date certain independent of the condition of the economy. The test of when to aim for that 3 percent deficit target is whether unemployment has come down to 5.5 percent. Such a target, over the long term, will enable us to stabilize the level of debt as a proportion of GDP at sustainable levels, because with high employment GDP will be growing faster than the debt

Restore the financial sector’s role as an effective engine of growth. The banking industry used government-provided economic advantages to engage in reckless speculation, leading to the current crisis. Banks continue to receive “discount money” and other government support without adequately performing their traditional economic role as lenders. The financial industry has recaptured a high and economically unhealthy percentage of the nation’s profits. We recommend a financial transactions tax and programs to encourage increased bank lending in a responsible manner both to ensure our current recovery and to promote long-term stability. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act does include several important features that could succeed in encouraging long-term financial stability. These include the so-called “Volcker rule” prohibiting proprietary trading by large banks, the requirement that all derivatives trading be conducted on regulated exchanges, careful oversight of public credit rating agencies, and the creation of a Consumer Financial Protection bureau. However, details on the implementation of Dodd-Frank have been left to the discretion of various regulatory agencies, such as the Federal Reserve and the Securities and Exchange Commission. This creates enormous opportunities for the banking industry to weaken the effectiveness of the new regulatory system. To rebuild a healthy economy, focused on channeling our enormous financial resources into productive investments and job creation, it is imperative that all the main provisions of Dodd-Frank be strongly enforced immediately and over time.

Address the health care cost crisis. Alarming long-term projections of growing debt come almost completely from uncontrolled growth in health care costs. We do not have an entitlement crisis; we have an unaffordable health care system. Rather than capping, cutting or “voucherizing” Medicare or Medicaid, we need continued health care reforms that control costs through changes to the structure of the medical economy—such as the immediate establishment of a robust public option plan available to all Americans, direct government negotiation of drug prices, and thorough additional cost-cutting and quality improvement measures.

Who We Are

The Citizen’s Commission is comprised of economic policy experts, such as former Secretary of Labor Robert Reich, Jeff Madrick and economists Dean Baker, Robert Pollin and Heidi Hartman, and formerrmer members of the House and Senate. But perhaps most importantly, many of its members are leaders of national organizations with enormous reach into American communities, from labor leaders such as Larry Cohen and Mary Kay Henry to coordinators of national organizing networks such as Deepak Bhargava, Angela Glover Blackwell, as well as other leaders whose work engages the grassroots public in debates about the economic direction of our country. The commission was organized by the Campaign for America’s Future, which has led nationwide public organizing campaigns around the future of Social Security, health care, green jobs and the future of manufacturing.

Note: Our Citizens’ Commission was inspired to action in part to challenge the one-sided media coverage lavished on the Simpson-Bowles National Commission on Fiscal Responsibility and Reform, the Pew-Peterson Commission on Budget Reform and the Bipartisan Policy Center Debt Reduction Task Force.

Our deliberations were also informed by recent work by the Economic Policy Institute, especially their report, “America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility,” published by Demos, EPI and The Century Foundation on November 29, 2010. As does our commission, this report outlines policy changes to achieve job growth, long-term public investment and outlines a deficit reduction plan that achieves primary fiscal balance by 2018.

We were also both educated and inspired by the recent set of proposals put forward by a member of the president’s fiscal responsibility commission, Representative Jan Schakowsky. In the best tradition of the great democratic debates, Rep. Schakowsky’s plan presents a proposal to reduce the federal deficit without making middle-class Americans foot the bill. It is an alternative to the Bowles-Simpson plan and would reduce the deficit by $441 billion in 2015, surpassing President Obama’s $250 billion target. Critically, the Schakowsky plan accomplishes deficit reduction without making cuts to essential federal expenditures that benefit the middle class or are crucial to future growth.