October 08, 2009
Dean Baker
Los Angeles Times, October 7, 2009
[This is the first piece in a debate with Maya MacGuineas of the New American Foundation about budget deficits, spending, and the recession. See it in its full context here. The second piece can be found here.]
It appears as if the media would like the tens of millions of unemployed and underemployed U.S. workers to be celebrating the fact that we are now in a recovery and the economy is growing. In spite of the prevailing happy talk about recovery, these workers are right not to be impressed. If the economy had been competently managed in the past, we would never have allowed a housing bubble to grow to such dangerous levels. And if it were competently managed today, we would be much closer to full employment.
The true benchmark for knowing when an economy has recovered from a recession is when it is back to its full-employment level of output. The Congressional Budget Office projects that, without additional measures to hasten recovery, we will not reach this point until 2014. People ought to be offended when politicians and economists tell them that they should just spend the next five years waiting for the labor market to improve.
The high levels of unemployment that we are experiencing and are projected to continue to experience imply an enormous amount of suffering. Unemployed and underemployed workers find it all but impossible to support their families. Millions are losing their homes. This pain will have enduring consequences as children find their schooling disrupted when their families are forced to move or can’t provide them with necessities such as nutritious food or decent healthcare. These children may end up permanently disadvantaged.
There is no reason to accept this situation. Since economist John Maynard Keynes’ major works on government economic policy in the 1930s, we have known that the government can boost demand in the economy and put people back to work. It took the huge burst of spending associated with World War II to get us out of the Great Depression. We don’t have to spend on a war, but the government can create the demand needed to quickly restore the economy to full employment.
There are some obvious routes for boosting the economy that Congress could pursue. The first course would be to extend unemployment benefits for workers whose benefits are about to expire. These workers are looking for jobs in a labor market that doesn’t have any. Unemployment insurance helps not only help families in need, it also boosts the economy by providing some money for the unemployed to spend.
The second route is to support state and local governments so that they don’t have to lay off school teachers and firefighters and raise taxes. Almost half of the growth impact of the last stimulus package was offset by cutbacks and tax increases at the state and local levels.
The third route is through a tax credit that would pay employers to shorten work hours. The basic point is simple: If workers put in 5% fewer hours, but the tax credit left their pay (and therefore demand) unchanged, then employers would want to hire 5% more workers. Such a tax credit, properly designed, could quickly bring unemployment back to acceptable levels.
Those who question the need for an additional boost to the economy should go way back to February 2008, when the first stimulus package was passed with bipartisan support in Congress and signed by President Bush. At the time, Washington was combating a 5.1% unemployment rate. Without a further boost to the economy, the CBO projects that it will be almost five years until the unemployment rate falls to the level that prompted the first stimulus.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
