Deficit Obsession Squelching Job Creation Talk
Somewhere between the terrifying economic breakdown of recent years and the current acceptance of a New Normal featuring painfully high unemployment, the crucial conversation we were supposed to be having about the future got drowned out by a small-minded obsession with closing the federal budget gap.
The crucial conversation centers on what we are going to do for our sustenance now that our old economic model has broken down; how we can best exploit our still-formidable powers of innovation to generate enough jobs to transition from living on second mortgages to subsisting on paychecks.
Yet the only policy conversation now capturing any attention is what items can be trimmed and which programs curtailed in a bid to close the federal budget gap. The next step on this unsatisfying reach for prosperity through austerity comes Wednesday as the president's bipartisan deficit-cutting commission releases its recommendations for how to get the job done.
Expectations are predictably low (as expectations tend to be when standards are set by people in Washington, who wear acknowledgments of political impossibility as badges of sophistication). The 18-member deficit-cutting commission requires a 14-member supermajority willing to sign off on its chosen prescriptions before it can even forward recommendations to Congress. And even if that happens, Congress has become the place where policy proposals go to die, sinking into the partisan muck.
Concurrence among members of the commission is far from assured. Democrats are dug in against proposed cuts to Social Security benefits through a lifting of the retirement age from 67 to 68. Republicans are opposed to raising taxes in seemingly any fashion -- a stance whose efficacy depends on either dismantling much of the federal government or repealing the laws of arithmetic.
But set aside the details of the proceeding, the inside-the Beltway questions about whether bipartisan consensus is possible and what that consensus might look like. The truly disheartening thing is how little conversation is being devoted to the one question that really matters: How do we bring about a fundamentally better American economic reality?
The last decade-plus has seen the economy turned into something like a giant Ponzi scheme overseen by Wall Street. Our best and brightest minds stopped earning their living by making products and services of intrinsic value and instead went off to work at major investment houses where they sold a pair of intoxicating fantasies -- first, the idea that a New Economy was upon us, justifying ridiculous prices for Internet companies; then, the fairy tale that we could prosper by borrowing against eternally appreciating home values.
Those days are over, but we have yet to figure out what to do next, how to concentrate our energies and capital so as to lay the foundation for a new, sustainable economic era. That conversation has effectively been ditched as a casualty of the current obsession with the deficit.
This is the ultimate deficit we confront: the dearth of serious discussion about what to invest in so as to encourage growth in the sorts of promising industries that might yet lead us back to prosperity.
Renewable energy and the life sciences are obvious places where targeted federal research dollars combined with tax incentives for private entrepreneurs hold great promise as potential sources of jobs. But less obvious areas of potential growth beckon as well, from transportation to entertainment.
In place of our current obsession with spending less, we need a conversation about spending smarter, as part of a forward-looking plan to harness the nation's considerable brainpower. The same country that managed to produce Apple and Google (not to mention Shake Shack hamburgers and a cure for static electricity) surely has other ideas in store, if only given a spur.
Many of the most successful industries in American history would not have emerged without significant federal contributions. The Internet, for example, was an outgrowth of a communications network launched by the military, and then extended and refined using technology developed (and often federally funded) at major American research institutions. The result was a messy, frenetic but ultimately lucrative surge of innovation that produced thousands of new businesses and millions of jobs.
It would be wrong to now direct policy toward developing the next Internet. Innovation cannot be turned on like tap water, and government should not be in the position of planning the economy. But substantial dollars have to be directed at boosting the nation's basic and applied research capacity. The government can help build up the store of ideas, and then allow private entrepreneurs to turn those ideas into businesses. Then, instead of arguing about how to nip and tuck in a time of wholly inadequate growth, we can argue about what to do with the fruits of growth.
Growth, by way, happens to represent the best means of accomplishing the immediate task consuming Washington -- closing the budget gap. Contrary to overheated rhetoric from both parties, the budget gap is not the result of big government spending sprees. It is largely the product of three things: the Great Recession, which dramatically slowed economic growth, cutting the government's tax revenues, while increasing the costs of unemployment insurance, food stamps and other support programs; the wars in Iraq and Afghanistan; and fiscally irresponsible tax cuts handed out early in the Bush administration, mostly to wealthy Americans.
The wars are winding down. The tax cuts are set to expire at the end of the year, though Congress may wind up extending them as part of the deal-making now required to gin up the votes to accomplish anything in Congress. But the resumption of healthy growth will improve the picture more than anything else the government can accomplish.
And the last thing we need, if we are serious about growth is an aggressive reduction in government spending. Indeed, we need the opposite -- an immediate increase to compensate for weakness throughout the economy. We need to stimulate growth so businesses will hire. Then, after the jobless rate comes down and workers have wages to spend, the government can get serious about pulling back.
This is the logic behind a plan released today by a trio of progressive think tanks, the Economic Policy Institute, the Economic Policy Institute and Demos.
"Jobs and economic growth are essential to our capacity to reduce deficits, and there should be no across-the-board spending reductions until the economy fully recovers," the report declares. "In fact, efforts to spur job creation today will put us on a better economic path and create a solid revenue base."
None of this is to suggest that the deficit is something that can safely be ignored. The Congressional Budget Office forecasts that when the books are closed on 2010, they will show a whopping $1.3 trillion gap between what the federal government spends and what it takes in. That amounts to more than 9 percent of the nation's annual economic output. As the government borrows more to cover the gap, its total outstanding debts are expected to reach 69 percent of national output by 2020, nearly double the level of 2007.
Even the most benign effects of this deepening indebtedness are worrisome. As the government devotes a greater percentage of its revenues to merely servicing its debts, that leaves fewer dollars for everything else -- public education, parks, road maintenance.
The worst potential effects are downright frightening. China or Saudi Arabia, whose central banks own trillions of dollars worth of American government debt, could lose faith in Uncle Sam's ability to repay them and demand higher interest rates. That could make credit harder for Americans to obtain, slowing sales of homes and cars and generally depressing economic activity.
The Federal Reserve, struggling to prod the economy forward, could print so many dollars that the global financial system loses faith in the value of American paper. The world could then demand more dollars for its wares -- barrels of oil and shipping containers full of laptop computers.
Only a fool would dismiss these scenarios outright and keep spending in blissful disregard of the dangers. But that does not make the reverse true -- the increasingly popular notion that all continued spending is reckless.
What are we buying for our further indebtedness? This is the question that matters. If we simply paper over our structural problems with willy-nilly spending to take the edge off immediate troubles, that leads nowhere good. But if we borrow a little more now as part of a carefully conceived plan to boost the nation's productive capacity, that ought to pay dividends for years to come.
If a child came to you and asked you take out a loan for $50,000, your proper response would depend upon the context. If your kid were proposing to use the cash to circumnavigate the globe by cruise ship while frequenting the baccarat tables, no chance. But if the money were going toward tuition at a top-flight university, putting your kid in a position to earn high wages, buy a home, and maybe one day care for you in your old age, who would say no to that?
We do not have such a proposition at the moment, but we need one. And we can only get one if we cool the deficit-cutting fascination in favor of a better pursuit -- crafting an ambitious job-creation strategy. We will almost certainly need to borrow more to finance such a plan, accepting larger short-term deficits for a shot at something that should shrink the deficit in the years to come: sustained economic advancement.
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First Posted: 11/29/10 04:44 PM ET Updated: 05/25/11 07:15 PM ET