Dangerous and misguided deficit recommendations

A dangerous approach to deficit reduction

Last week, the co-chairs of the National Commission on Fiscal Responsibility and Reform and the Peterson-Pew Commission on Budget Reform released proposals for reducing the federal deficit. EPI’s analysis shows both are seriously misguided plans that could undermine badly needed job creation, prolong the jobs crisis, and ultimately further weaken the country’s fiscal health.

In response, EPI’s Research and Policy Director John Irons issued a statement that the National Commission on Fiscal Responsibility and Reform “is running seriously off track.” Irons noted that almost half of the adjustments suggested in the Commission’s co-chairs proposal would come from cuts to discretionary spending, a portion of the budget that is not responsible for long-term deficits. At the same time, it proposes little to increase tax revenue and gives barely a nod to the prime driver of longer-term deficits, rising health care costs, suggesting only that lawmakers establish a process to control health care cost growth. The plan’s proposed changes to Social Security would result in reduced benefits for most people, Irons stressed. This initial proposal was drafted by co-chairs Alan Simpson and Erskine Bowles to stimulate discussion. It will be followed on December 1 by a final report.

In a separate response, Irons and Policy Analyst Andrew Fieldhouse called the Peterson-Pew deficit reduction target dangerous and misguided. They stressed that the Peterson-Pew plan, which calls for immediate deficit reduction aimed at reducing public debt to 60% of gross domestic product by the year 2018, “would slow the economic recovery enough to possibly risk a double dip recession.”

EPI believes that the current economic downturn is not a reason to adopt fiscal austerity. Rather it is time to invest in the middle class, create jobs, and spur economic growth. In the coming weeks, EPI, together with Demos and The Century Foundation, will release a Fiscal Blueprint that details the policies we believe will create jobs now and achieve long-run fiscal sustainability.

20 more years of high unemployment?
The Labor Department's November 5 employment report showed a nationwide unemployment rate of 9.6%. Although that report contained the welcome news that 159,000 private-sector jobs were created in October, even that level of job creation is not sufficient to reverse a backlog of 14.8 million unemployed workers anytime soon. Economist Heidi Shierholz, in her analysis of the latest jobs data, said that if the pace of job growth seen in October were to continue going forward, it would take a staggering 20 years to return the country to its pre-recession rate of unemployment.

Two million unemployed workers are at risk of losing their unemployment insurance benefits before the end of the year if Congress fails to continue benefits for the long-term unemployed. EPI’s research shows not only that extended benefits are needed, but that they are an effective policy for creating jobs. EPI’s analysis of new Labor Department data on job openings released November 9 shows there were five unemployed workers for every one job opening in September, a ratio that has actually widened since the summer. This means that for four out of five unemployed workers, there are still no jobs.

Shierholz and EPI President Lawrence Mishel outlined the benefits of emergency unemployment insurance in the Issue Brief A Good Deal For All, where they showed that maintaining these extended unemployment benefits for the long-term unemployed will create about 700,000 full-time equivalent jobs and save millions of people from poverty. The authors also note that because unemployment insurance benefits are quickly invested in local communities, thereby stimulating economies and creating jobs, the “sticker price” of these benefits is considerably less than advertised. “The government will bring in more revenue from the taxes paid on the wages earned by those who otherwise would not have jobs,” they state.

EPI’s latest research on the benefits of unemployment insurance builds on earlier work, including the May 2010 panel discussion, Long-term Unemployment: Causes, Consequences, and Solutions, where a group of leading economists agreed that extending unemployment insurance during periods of high unemployment was smart fiscal policy. A short video of some of the panelists from that event explaining how unemployment insurance creates jobs is available on EPI.org.