Not Working in America: People and Public Policy

David Coates.
Not Working in America: People and Public Policy
Posted: 06/15/11 11:35 AM ET
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The job figures for May were truly ghastly. In a month in which the economy needed to add 150,000 jobs simply to keep pace with the growth in the labor force, the private sector created 83,000 jobs and the public sector actually lost 29,000. Nearly 14 million Americans remain involuntarily unemployed. Another nine million (or more) remain trapped in part-time employment for want of anything better. The average time people were without paid work this past winter was a staggering 36 weeks in an economy whose ratio of unemployment to available jobs peaked at a disturbing 8:1. In April. McDonald's offered itself as an exception to the gloom, creating 62,000 new low-paying jobs, but it did so from a pool of applicants more than one million strong! A million -- by chance exactly the number of Americans already out of work long enough to have exhausted their right to unemployment benefits. Whatever else there is in America right now, there is a lot of unemployment.

The unemployment numbers among particular groups within the American labor force are currently approaching a scale normally reserved for under-developed economies incapable of dealing with global competition. Unemployment among young American workers, for example, averaged 18.4% in 2010. Unemployment among high school graduates reached 22.5%. Unemployment among African-Americans in 2010 topped 20% in three states and 15% in 17 others. Hispanic unemployment levels were and remain similar. And that is not all. Add to these figures the data on wage stagnation. Mix in the latest report from the OECD placing the United States fourth in the global income inequality tables (only Chile, Mexico and Turkey currently have a greater income spread ); or pull into view the latest data on the scale of poverty in modern-day America. (The poverty level crept up again in 2009, to 14.3% from 13.2% the year before. ) If you do any or all of that, one thing must become immediately obvious: namely that public policy designed to lift this economy out of recession is entirely failing.

The big question, of course, is why.

I

From a liberal perspective, the answer is clear -- that there were serious and recognized flaws in the scale and detail of the policy pursued by the Obama administration from the very outset. The original Obama stimulus package should have been bigger. It should have been more prolonged, and it should have been differently structured. The Bush-initiated TARP was disproportionately generous to financial institutions over manufacturing ones, and failed to impose lending requirements on the banks so favored. The Obama-initiated ARRA was a one-off $800 billion package hoping in vain to offset a two-year downturn in economic activity recorded by the CBO at $2.7 trillion. That Obama-designed stimulus package was not only too small for the task. It also unfortunately mixed tax cuts and spending projects in almost equal measure, even though it was widely recognized at the time that spending projects would have a significantly bigger multiplier effect on the rest of the economy than any tax cut could hope to have, particularly any tax cut for the super-rich. Those spending projects were in any case slow to come, and were followed after the mid-term elections by yet another tax cut -- this time, at the insistence of Republican lawmakers, one extending to the super-rich as well.

For far from having government spend more -- directly to create employment and indirectly to generate demand -- Obama's conservative critics have been in a position since November 2010 to insist that that the entire design of public policy be altered. The conservative case has been essentially two-fold: against stimulus spending and quantitative easing in the short term, and against Keynesian-inspired thinking always. Government largesse is currently squeezing out private sector investment and job growth, according to the Republican leadership and their ideological acolytes, and welfare payments are guilty of extending unemployment by undermining the incentive to work. "My calculations suggest," Robert Barro wrote, that "the jobless rate could be as low as 6.8% instead of 9.5% if jobless benefits hadn't been extended to 99 weeks." (Wall Street Journal, 8/30/2010) "Printing money is no substitute for pro-growth fiscal policies," was Representative Mike Pence's response to the Federal Reserve's second round of quantitative easing. (WSJ, 11/15/2010) "Supersized deficits are denting business confidence, not least by implying higher future taxes," was how conservative historian Niall Ferguson put it. (Financial Times, 7/20/2010) "Liberals are still arguing that the federal spending stimulus wasn't large enough," Cogan and Taylor wrote. "How many multiples of nothing - its result according to new evidence - would they like?" (WSJ, 12/9/2010) "To improve the economy," 200 conservative economists told the incoming administration, in a letter organized by the Cato Institute, "policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."

It is this kind of thinking that produced the 235-193 April vote in the House of Representatives for the Ryan budget, the one cutting $5.8 trillion from federal spending over the next decade and replacing Medicare as we know it with a voucher system. It is this kind of thinking that now has would-be presidential candidates among the Republican leadership proposing major tax cuts as the way to growth: most recently in the case of Tim Pawlenty, proposals to significantly lower income tax rates for individuals and corporations, and to completely abolish taxes on capital gains, interest income, dividends and inheritances. And it is this kind of thinking that currently underpins the refusal by Republicans in the House of Representatives to raise the federal borrowing limit until that raising of the debt ceiling is accompanied by what the chairman of the Ways & Means Committee called "substantial spending cuts and real budgetary reforms." As Lori Montgomery recently put it, among contemporary Republican lawmakers and party activists, "anti-tax orthodoxy runs deep" (Washington Post, 6/5/2011) so deep, in fact, as to now entirely dominate all aspects of their economic thinking.

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