Deficit Crisis or Job Crisis?

Obama’s Latest Plan

“American Jobs Act” $447B Tax breaks

Half payroll tax cuts for workers & employers Additional tax breaks for employers who hire new workers

Infrastructure investments (school buildings; transportation projects)

Aid to state and local governments (rehire teachers) Extend unemployment benefits Raise taxes for those above $250,000

Hoped for economic result

Create 50,000 jobs/month By comparison: 35,000/month for last 3 80,000 net jobs for October

“Fully paid for as part of the President’s long term deficit reduction plan”

But …. Should the deficit be reduced in the short term?

Indeed, can enough of it get passed by Congress?

Focus on the Deficit

Deficit basics

Federal Budget Deficit Annually, it is the amount of money the federal

government spends minus the amount of money it takes in [Deficit = G - Tx]

Treasury must borrow the shortfall -- issues bonds National [or Public] Debt

Cumulatively, amount of money the government has had to borrow throughout our nation’s history

Interest Interest costs reflect both the amount of money borrowed

and the interest rate. 

USA born (Jan 1, 1791) $75,463,476

Lowest ever (Jan 1, 1835) $33,733

Pre-Reagan (Oct 30, 1980)

$907,701,000,000

Debt milestones – born into debt

FY 2011 (currently) $15,476,000,000,000

Pre-Reagan $1.0T

Reagan $1.9T

Bush II $6.1T

Obama $2.4T

Who holds the debtWhen the debt was accumulated

Are these debt numbers worrisome?

Two common measures of the national debt: Net debt

Debt held by the public Borrowing from the private sector (including banks and

investors) and foreign governments. 

Gross debt Net debt plus the debts the Treasury owes to U.S.

government trust funds [like Social Security]

Pre-Reagan $1.0T

Reagan $1.9T

Bush II $6.1TNet debt = $8.1T

Obama $2.4T

2Q 2011= 95%

2Q 2011 = 57%

% of

GDP

Interest payments

As noted earlier, interest due depends not only on the size of the debt ….

But also the rate of interest It has been low recently The amount of interest paid on the rising debt is

actually falling! [absolutely and % of GDP] Comparisons (as % of GDP)

USA – 1.5% Germany – 2.0% UK – 2.6%

On taxes ….briefly

Actual corporate taxes paid as % of GDP by OECD countries

Actual, total tax revenues paid as % of GDP in 33 OECD countries [2008] Highest:

#1 Denmark = 48.2% #2 Sweden = 46.3% #3 Belgium = 44.2%

Lowest: #33: Mexico = 21.0% #32: Chile = 22.5% #31: Turkey = 24.2% #30: USA = 26.1%

Unweighted average = 34.8%

Is there a deficit crisis?

The jobs crisis

WSJ: Untangling the Long-Term-Unemployment Crisis

What are the costs of unemployment?

What causes unemployment?

Structural [long term] unemployment: Free trade of goods [China] Free movement of capital [“runaway”] Technological change

Mismatch of skills with jobs available

Cyclical [ups and downs over business cycle] “Job creators” -- only private enterprise? Taxes too high – The O’Rielly Factor? Weakened overall demand for goods & services

The unemployment rate understates the larger problem

Discouraged workers Those who have given up looking for work They are no longer counted as unemployed

Involuntarily unemployed Those working but preferring a full time job Walmart employees, UPS, etc.

These can add half again as much or more to the unemployment rate: 9% + 4.5% = 13.5%

Also the “underemployed”

Output

(Y)

Income

(Y)

Spending

(Aggregate Demand or AD)

Spending stimulates firms to produce

Production generates incomes

Incomes give actors the ability to spend

Why are there jobs? Key concept is “aggregate demand” [AD]

Think of “AD”

as “GDP”

This means jobs

Why recessions? Because “leakages” occur in the spending

stream

Production generates income tohouseholds

saving (S)

leakage

intended investment ( II )

injection

firms decide how much to invest

households decide how much to consume and save

Output (Y)

Spending (AD)

Income (Y)

consumption (C)?Sufficient to sustain output at a steady level

If not, workers are laid off

leakage

injection

Production generates income

Spending stimulates firms to produce

saving (S)

equlibrium in the market for loanable funds

intended investment (II) is equal to S

9.8

output (Y*)

consumption (C)

income (Y*)

Spending sufficient to sustain full employment

AD = Y*

The market solution

output (Y*)

income (Y*)

Insufficient spending

AD < Y*

Production generates income

Income goes to households

If leakages are larger than injections…

lower income

lower spending

AD = lower Ylower output

What if markets don’t adjust?

Savings

Why recessions? Because “leakages” occur in the spending

stream

Production generates income tohouseholds

saving (S)

leakage

intended investment ( II )

injection

firms decide how much to invest

households decide how much to consume and save

Output (Y)

Spending (AD)

Income (Y)

consumption (C)?Sufficient to sustain output at a steady level

Tx

Government spending (G)

Short term solution if the market fails: Government “Pump priming”

If investment spending is weak (I<S) so there is a net leakage from the spending stream

Then government “stimulus” is called for to inject spending back into the spending stream Key to recovery: create a deficit! (G>T)

If overall demand is up, sales improve, output increases, hiring improves, unemployment decreases, income increases – and demand goes up again “In the long run we are all dead” [Keynes]

Conclusion

The immediate problem is not the deficit or the public debt In fact the solution is to increase it, at least for a

time The job crisis is far worse

It can be mitigated with fiscal stimulus lasting, say, 5-7 years.

But this will not solve what’s fundamentally wrong with the US economy

And there’s a paradox ….

Central paradox

Why has the deficit debate taken precedence in the midst of massive,

destructive unemployment?

The Austerity War

James Crotty, “The Great Austerity War” (on web site) Richest and most powerfully segments of society, in

concert with conservative political forces …. Have and are demanding that (Federal and State)

deficits be eliminated by public-sector austerity. “Starve the beast;” redirect funds to the private sector

Attack on spending programs that support the poor, and the working and middle classes

Began in the 1970s and 1980s

Austerity class war rules Washington today

Read Ari Berman’s The Nation article on web site (November 7, 2011)

Members of the class include: Wall Street titans [Pete Peterson; Rbt Rubin]

Deficit hawk groups [Ctr for a Responsible Federal Budget]

Budget wonks [Alice Rivlin]

Red state Democrats [Mark Warner]

Pundits [Tom Friedman, David Brooks of NYT]

Blue-ribbon commissions [Bowles-Simpson]

Consistent focus: cut, cut, cut public spending

They exercise power thru

Congressional testimony Constantly quoted in media Issue policy reports Advocate “balanced” solutions, often wildly

out of step with public opinion & reputable economic policy Imposing cutbacks on social security & medicare

benefits Eliminating mortgage interest dedications No tax pledges by politicians

What’s to be done?

The desperate need for deeper changes