07/12/2011 03:04 pm ET Updated Sep 11, 2011

Jobs and the Deficit

Everyone is talking about jobs but no one is doing a hard analysis of the impact of various deficit reduction proposals on job creation or loss.

In framing the current deficit debate, House Speaker John Boehner (R-OH) has said that the U.S. has three problems: a spending problem, a deficit problem and a jobs problem. This framing leads him to policy recommendations limited to spending cuts to address the deficit and an unsubstantiated assertion that such cuts will lead to job growth. He may have a case in the long term but he is clearly mistaken in the short term. Cuts in government spending, federal, state and local have led to the loss of hundreds of thousands of government jobs. Just last month the net gain in private sector jobs was a paltry 57,000 and they were largely offset by the loss of 39,000 government jobs.

The long-term case, dubious at best, is that cutting the deficit without raising taxes will keep down inflation and give businesses the confidence to hire. But inflation is very low now, borrowing costs negligible and U.S. corporations are sitting on $1.8 billion in cash and still not hiring. Speaker Boehner's claim is a warmed over version of the "trickle down" theory. But there is no evidence that "trickle down" economics produces jobs, not in the anemic job growth during the presidency of George W. Bush or since.

Speaker Boehner's framing of the issue is short two problems. In addition to the three problems he mentions, we also have a revenue problem and an income distribution problem. While it is true that spending has ballooned to 25% or more of GDP from about 21%, it is also true that revenues have plummeted for 19% of GDP to below 15%, a sixty year low. This is due to many factors including the Bush tax cuts and their extension. But the major cause is the recession that has driven up spending while slashing tax revenue. In order to cut spending to meet current revenue, draconian cuts would be required, imposing extreme hardship and triggering a recession -- or worse. And there would be massive government job and service losses.

This is the crux of the current debt ceiling debate. Speaker Boehner and his colleagues, especially those with Tea Party proclivities contend that merely agreeing to raise the debt ceiling is sufficient "sacrifice" to warrant massive spending cuts even as the GOP leadership asserts that the ceiling must be raised. If the GOP maintains this position, a political collision and financial crisis are inevitable.

But there is also a fifth problem, one missing from Speaker Boehner's list and that is the income distribution problem. Since 1980 there has been a growing income gap in America that has now reached proportions not seen since the 1920s. The top 1% of Americans now receive 20% of the national income. Worse, middle-income families have seen little or no income growth in a decade or more. The middle class that has driven growth in the post war period has stagnated. This situation was disguised by the housing bubble where the increasing home values were used as an ATM machine and consumption was fueled by debt. But no more.

Imagine that you had one million dollars to distribute. You could give it all to Warren Buffet, John Paulson or George Soros and hope it would trickle down into jobs. Good luck. Or you could give $1000 to each of 1000 middle-income families. You would expect most to spend a significant part of it on pent up demand. That is the principle of the marginal propensity to consume. And such demand is what triggers production and hiring. In short, it matters how you distribute the benefits or burdens of deficit reduction measures. If they favor -- or disfavor less -- upper income groups, the result is likely to be more job losses or lower job growth. If they favor -- or disfavor less -- middle and lower income groups, more jobs or fewer losses are likely to result. Middle-income family consumption is key to economic recovery and job creation.

The Congressional Budget Office (CBO) should be asked to score any proposal, especially any agreed compromise for the likely jobs impact. Everyone is talking about jobs but no one is doing a hard analysis of the impact of various deficit reduction proposals. That needs to change.