The following was originally published by Politico
This spring, much of Washington is afflicted with deficit allergies.
The Senate had to break a filibuster just to pass a one-month extension of unemployment insurance without “paying for it.” House Blue Dog Democrats are posturing about a balanced-budget amendment on top of the president’s three-year freeze on domestic discretionary spending.
The president’s bipartisan commission on deficit reduction holds its first public session Tuesday. Federal Reserve Chairman Ben Bernanke issues dark warnings about the need for deficit reduction.
This allergy is accompanied by spring fevers from infectious signs of economic recovery.
“America is back!” crows Newsweek, hailing the “remarkable tale of our economic turnaround.” March saw an increase of 160,000 jobs. Retail sales are up. The stock market bounced 70 percent in little more than a year.
Vice President Joe Biden predicts the economy will soon be adding 500,000 jobs a month. Springtime in America! Surely, it’s time for the government to tighten its belt.
Don’t bet the house. Spring blossoms wilt in the summer’s heat.
The sprigs of economic recovery can’t disguise the still-bleak terrain. Unemployment remains near 10 percent, with more than 26 million Americans lacking full-time work. This high unemployment puts continued downward pressure on wages.
Americans have seen trillions in wealth evaporate, largely from savings and home values. Consumers are still burdened by debt. One in four homes with mortgages is underwater. Bankruptcy filings in March were up 23 percent from a year earlier.
Banks, still laden with toxic paper, aren’t doing much new lending. Small banks are going belly up at record rates, with a wave of bad commercial property loans about to hit.
States and localities face crippling budget deficits. They are laying off teachers and police, while raising taxes and tuitions.
The Obama recovery plan is a large part of what has been propping up the economy. But most of that money will be spent by the fall.
Meanwhile, “stimulus” has joined “liberal” as an orphaned word in Washington.
The reality is that deficits this year should be larger, not smaller. The recovery act was too small, not too large.
So-called Senate “moderates” in both parties larded in tax cuts, while they reduced spending on school construction and other projects.
The result: The Recovery Act spending was barely sufficient to counter the cuts and tax hikes imposed by the states — “50 little Herbert Hoovers” as Paul Krugman dubbed them.
The economy will stagnate with high unemployment. Long-term deficit projections — mostly caused by soaring health care costs — are horrifying. But a slow recovery will make them worse.
As Christina Romer, head of the White House Council on Economic Advisers, warned this month: “It’s the aggregate demand, stupid.”
Right now, Congress should pass legislation to help states and localities forestall the looming wave of layoffs.
The $100 billion bill Local Jobs for America, introduced by Rep. George Miller (D-Calif.) is a start. Sen. Tom Harkin (D-Iowa) has proposed a piece of that — $23 billion — to limit the loss of teachers.
With youth unemployment at 26 percent, direct public service employment — such as summer youth jobs and a 1 million-person green corps to clean parks, repair facilities, plant trees and the like — is essential.
With nearly one-fourth of construction workers unemployed, it is pound foolish not to spend money to renovate our decrepit energy grid, roads, sewers and schools.
Direct investments should be supplemented with a new public investment bank able to borrow significant sums from the private market — as championed by Govs. Ed Rendell of Pennsylvania and Arnold Schwarzenegger of California — to help rebuild America.
Choosing between deficit reduction or greater stimulus isn’t a matter of taste or of economic mumbo jumbo. It’s about values and priorities.
For too many lawmakers, high unemployment seems to be an acceptable price for fiscal probity.
But there are worse things than deficits, and grinding mass unemployment is one of them. Families will divide. Young hopes will be crushed. Wages will stagnate; Gilded Age-style inequality will grow worse; poverty will spread.
Politics will grow even uglier than it already is.
And in an election season, politics matters.
Republicans and tea partiers are bludgeoning Dems over the deficits and Big Government. Independents are said to be particularly concerned. Democratic pollsters warn the party has to prove that it has a plan to get the budgets in balance.
This, too, is more a flight of springtime fancy than reality.
The fall’s election will be fought largely on two issues: jobs and the banks.
Democrats will be judged on whether they’ve succeeded in putting people back to work and whether they’ve held the bankers accountable for the mess they created.
Voters always say they care about deficits. But they are angry that Washington looks like it ran up deficits bailing out banks without doing much for Main Street.
If deficits were higher but people were going back to work, Democrats would be doing better in the polls.
Even the tea partiers agree, according to Republican pollster David Winston. By 2-to-1, they favor reducing unemployment over balancing the budget.
President Barack Obama called for about $266 billion in new spending this year to create jobs and sustain benefits for the unemployed. With recent reports suggesting the deficit will be $300 billion less than projected, it is time for the president to lead a fight for jobs.
Bernanke counts himself an expert on the Great Depression and Japan’s “lost decade.” Romer is also a student of the Great Depression. In both of those financial crises, a premature turn toward deficit reduction sustained the downturn.
If we repeat that mistake, we will surely be suffering from learning deficits.