10/15/2013 05:26 pm ET Updated Jan 23, 2014

The Wrong Deficit: Full Employment Requires More Spending and More Borrowing, Not Less

These are grim economic times, for sure. Even after three years of "recovery," one in seven Americans who would like full-time work can't find a full-time job. Millions of Americans have lost their homes, and millions more are at risk. Since 2007, the median wealth of African American and Latino families has fallen by more than half. In the midst of all of this suffering, US corporate profits are at an all-time high. The richest 1 percent of Americans have enjoyed soaring incomes for more than three decades.

The U.S. economy and the human beings it ought to serve are suffering, first and foremost, from a Jobs Deficit. Closing this gap -- facilitating the creation of good jobs -- should be the very top priority of Congress and the White House. But it isn't. Instead, our leaders remain engaged in a terribly misguided squabble over how best to lower the federal budget deficit. The current impasse -- the government shutdown and the Republicans' refusal to raise the debt ceiling -- is just one (especially appalling) episode in a long-running drama.

President Obama's vision for the budget and the country differs substantially from that of the GOP, for sure. But President Obama has, unfortunately, embraced the faulty premise that deficit reduction should be a top priority. He, along with a chorus of deficit hawks, longs for a "grand bargain" that would get the debt and the deficit "under control."

Here is the problem: in a stagnant economy, cutting spending is a terrible idea. Cutting spending during a recession is like blood-letting an anemic patient (or invading Iraq to avenge an attack by Al-Qaeda): it is precisely the wrong intervention. The U.S. economy needs more spending, not less. Check your economics textbook.

This is indeed the worst downturn since the Great Depression. How did the Great Depression finally come to an end? After nearly a decade of mass unemployment, stagnation, foreclosures, bankruptcies, and muddled policy (sound familiar?) the US government massively increased its spending to pay for the War; that is, it ran enormous budget deficits. War spending put people to work; these newly employed workers spent their income, and this spending created jobs for others. Between 1939 and 1945 the national debt increased by a factor of six. Was this a "burden for future generations"? Hardly. The post-war generation and their Baby Boomer kids benefited enormously from this debt-financed recovery. They inherited some debt, sure, but they also inherited an economy that provided them with vast economic, educational and personal opportunities -- and higher incomes. The three decades following WWII brought rising incomes for every class of Americans; the income of the median U.S. household doubled! By any measure, this debt-financed spending was a wildly successful investment.

The most effective way to reduce the current Jobs Deficit, and to provide opportunities for our kids now and in the future, is for the government spend more -- for schools, teachers, universities, infrastructure, alternative energy, mass transit, safe workplaces, and safe food and water. This spending would create jobs today, lighten the load of those who are hurting the most, and promote jobs and competitiveness in the long run. Serious, well-funded efforts to liberate home owners from their enormous debt burden would help to re-ignite consumer spending and the housing market. And what's more, increased spending would also be good for business. Rising demand means rising revenues, and an incentive to hire workers.

In stagnant economy, wise deficit spending should be understood as an investment.

The Republican response to our current economic crisis is as familiar as it is appalling: more tax cuts for the rich; more tax cuts for corporations; less regulation of Wall Street; attacks on public sector unions and immigrants; and cuts in programs that benefit the middle class and the poor, including Head Start, Medicare, Medicaid and Social Security. This is the essence of Representative Paul Ryan's proposed 10-year budget, which got unanimous support from House Republicans last year. This vision is not only appalling and mean-spirited, it is bad economics. That is, these policies would promote inequality and stifle growth. (And, by the way: tax cuts do not reduce deficits!).

Right Wing fantasies notwithstanding, spending under President Obama has been remarkably stingy -- too stingy! Indeed, public sector employment has declined by 600,000 since President Obama took office. The "sequester" cuts $85 billion from the 2013 federal budget and $1.2 trillion over the next ten years.

Insufficient demand explains the Jobs Deficit, not "high" corporate taxes, not regulation, not immigration, not "uncertainty" about taxation and regulation, and not the budget deficit. To eliminate the Jobs Deficit, the government needs to spend -- and borrow -- more, not less.

The politics of the moment makes a bold economic stimulus plan unlikely. Still, at the very least, we need to recognize that an ongoing obsession with the budget deficit is misguided and dangerous. Further spending cuts will slow economic and employment growth, and inflict still more unnecessary pain on millions of Americans.

*For a more detailed discussion, see Tim Koechlin "The Wrong Deficit," Challenge -- the Magazine of Economic Affairs, vol. 54, no. 6, 2011 (November/December). This paper also appears as Political Economy Research Institute working paper (PERI) Working Paper #264.

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