Washington is enmeshed in the economic version of the phony war. The two sides have declared war on one another, but neither has faced up to the fierce battles yet to come. Too few seem aware of the staggering challenges that face this country.
Here is a summary of the carnage wrought by the Great Recession summarized by the Economist from a Pew study (HT to nakedcapitalism.com):
More than half of all workers have experienced a spell of unemployment, taken a cut in pay or hours or been forced to go part-time. The typical unemployed worker has been jobless for nearly six months. Collapsing share and house prices have destroyed a fifth of the wealth of the average household. Nearly six in ten Americans have cancelled or cut back on holidays. About a fifth say their mortgages are underwater. One in four of those between 18 and 29 have moved back in with their parents. Fewer than half of all adults expect their children to have a higher standard of living than theirs, and more than a quarter say it will be lower.. for many Americans the great recession has been the sharpest trauma since the second world war, wiping out jobs, wealth and hope itself.
Stop and consider the implications. Then add the fact that continuing high levels of unemployment are now the consensus forecast. Long term unemployment will remain at record levels. In the US, where we provide only temporary support for the unemployed, this is a social catastrophe. Families break apart; drugs and despair increases; community institutions decline; domestic violence, racial and anti-immigrant hostility soar. The young graduating into this economy are likely to fare worse throughout their work lives.
In this context, the Washington debate seems particularly puerile. The business and financial elites are rolling out an attack on Obama as anti-business, accusing him of demonizing corporations. Given Obama's preternatural equanimity, the charge is risible. And utterly dishonest. (See for example, Paul Krugman's takedown of the latest screed by real estate mogul Mort Zuckerman, who Breitbarted an Obama quote, utterly distorting it to make his point.)
Republicans have returned to their supply side fantasies, arguing that top end tax cuts won't add to deficits, while filibustering against unemployment insurance and any jobs program. But we tried it their way in the Bush years. Deficit spending driven by top end tax cuts and wars produced a bubble economy, scarred by no jobs growth, stagnant wages, growing inequality, growing debt, and borrowing of $2 billion a day from abroad, largely from Chinese central bankers. And that was before the bubble burst. Surely, they have to offer something different.
Democrats, in contrast, believe the Recovery Act worked to save an economy in free fall, but wasn't big enough to put people back to work. So they call for more jobs initiatives, plus extension of unemployment supports as well as aid to cash strapped states to forestall layoffs of teachers and police. But, divided internally, with Blue Dogs focused on deficits, they've been reduced to offering up bite-sized legislative morsels not close to what is needed to address the problem.
Each of these positions assumes that we can recover back to the old economy. Just revive business confidence, or cut top end tax cuts, or offer up temporary jobs programs, and the economy will recover.
The problem, as President Obama argued so cogently in his Georgetown Economic Sermon on the Mount, is that we can't go back to the old economy and should not want to. The old economy was based on bubbles inflated by debt, with most Americans falling behind, meager job production, growing offshoring of manufacturing, and rising inequality. There is no answer there to the mass unemployment, declining wages, and even greater inequality we are experiencing now.
Obama argued that we had to build a new foundation for the economy out of the ruins of the old. He called for investing in areas vital to our future -- education and training, 21st century infrastructure, research and development. We had to shrink the financial sector so it no longer captured 40% of corporate profits. We had to balance our trade and make things in America once more. Capturing a lead role in the expanding renewable energy markets of the future was a national security and an economic imperative.
But that vision has been blighted in practice. The recovery act provided a down payment on the investment agenda, but now the president is committed to a three year freeze on domestic spending which essentially rules out any significant investment. The big banks were rescued but not reorganized, and emerged from the crisis more concentrated than ever. Germany and China and other mercantilist nations scorn Obama's call for balanced trade, and the president is reverting to peddling more of the trade accords that helped put us in this hole. Even on new energy, the US has lagged behind the Germans, the Spanish, the Chinese and others who are rushing to capture the lead on building the new technologies, and we can't even get a vote on an energy bill in the Senate.
And now the US debate is focusing increasingly on how we balance our accounts rather than how we build an economy that will put people to work and rebuild a vibrant middle class (and along the way bring our books into better balance).
House Democrats, led by Speaker Nancy Pelosi and Majority leader Steny Hoyer, now plan to lay out a new manufacturing strategy for America, a package of bills to support Making It in America once more. While the package is still being put together, it is likely to include a mandate to create a national manufacturing strategy and to review progress on it regularly. Tax credits and subsidies will be offered to jump-start new energy. Hopefully, US procurement laws will be revised to favor purchase of renewable energy made in America. A large national infrastructure bank that could help mobilize private capital for rebuilding America's decrepit infrastructure is vital (but has just been put aside in Congress). Comprehensive review of US trade laws, as well as a clear challenge to Chinese currency manipulation is essential. Given how empty the current debate is, the package will draw a sharp contrast, even if it isn't of scale.
It strikes me that the Democrats might be well advised to start with first principles. In 1946, faced with the daunting transition to a civilian economy after World War II with fear of a return to the Great Depression widespread, the Congress passed the Employment Act of 1946. The act mandated the federal government to use its powers to "foster continuous, useful employment for those able, willing and seeking to work." The act was fiercely debated, and, in the end, weakened by amendments that changed the name from the Full Employment Act to the Employment Act, dropped the guarantee of the right to a job to every American, and added price stability as an equally important goal.
That debate was revisited in the 1978 Humphrey Hawkins Full Employment Act, which initially sought to revive the mandate to full employment, and the right to a job. In the end, it too was diluted, offering five ultimate goals: full employment, growth in production, price stability, balance of trade and balanced budgets. It was this act that gave the Federal Reserve the dual mandate of pursing both full employment and price stability. Needless to say, over the last decade, the goals were distorted in practice, with price stability becoming primary, while trade deficits soared, manufacturing was shipped overseas, and budget deficits rose -- before the collapse.
It is time to reassert that full employment is the primary measure of our economy: "Continuous and useful employment for those willing and seeking to work." Mass unemployment is an unacceptable failure. We will not learn to live with it. We will keep pushing until we eliminate it. Government will strive to create the conditions for the private market to create the jobs we need. But it will act as an employer of last resort for those unable to find work over a long period of time.
It is easy to scorn such admonitions. Congress excels at setting high sounding goals that it is certain to ignore. But we've got an economy where corporate profits are up, bank profits are up, inequality is rising -- and there are no jobs. This cannot become the new normal. However naïve it may sound, it would be good for the congress and the president to have the debate. Commit clearly that full employment is the measure by which their actions should be judged. Or alternatively, admit that full employment is no longer plausible, so we will build a strong social contract -- of training, guaranteed income, health care -- for those discarded from the workforce. Let's have the debate -- for the one choice that is socially ruinous is the one we seem to be drifting towards -- mass unemployment without a safety net.