Monday, August 09, 2010

Galbraith: The issue is jobs

Don't be fooled by hawks who warn of a "long-term deficit crisis," says the celebrated economist—expanding entitlement programs will save money and free up jobs for those who really need them: young people. Plus, read the manifesto here.
In the Great Crisis, the United States lost about eight million private jobs. The unemployment rate rose above ten percent. And the ratio of employment to population fell almost five percentage points. Very few lost jobs have been replaced: private employment has risen only about a million since the worst days. In the public sector the effect of the American Recovery and Reinvestment Act was only to offset large layoffs being made by state and local governments, so public employment has hardly risen at all.
Two million of the lost jobs are in construction, which faces a long slump. Three million were lost in manufacturing, which is down 40 percent since 2000, and those jobs likely won't ever return. Unemployment rates for Black, Asian, and Latino workers have all doubled. The average duration of unemployment has risen to an astonishing 35 weeks, with nearly half of all unemployed out of work for almost a year.
So: Jobs are Priority One. But very little is being done. And what little is done is hotly contested. Even extending unemployment insurance proved difficult—and UI, while necessary, is not a jobs program.

Sir Harold Evans and the economists who signed his letter thus rightly argued for stronger action—action that would increase public budget deficits now. That action could include jobs programs, it could include revenue sharing for states and localities, it could include a national infrastructure/energy/climate bank, and it could include tax cuts to boost the spending power of private households.
• Read the full manifestoBut as this debate gets going, there are two traps. The first is the idea that we need another "stimulus package." How I hate that phrase! The message it conveys—of something fast, temporary, quickly withdrawn—is wrong. We're not in an ordinary postwar recession. We've suffered a major collapse of the financial system. Repairing this, and working off household debt loads and the housing glut, will take years. Yes, the economy can recover without strong private credit, but the recovery will be slow and unemployment will not be cured.
The second trap is the idea that we should undo it all later on. Even worse, many argue that we must make cuts today, effective at a later time, to offset the "stimulus." Since the major programs which are authorized today for later effect are Social Security and Medicare, this translates to "cutting entitlements" in order to bring "long-term budget deficits under control."
This is a pernicious idea, with two major foundations. One is the simple political appeal of a balanced argument—the same as Obama's decision to stay in Afghanistan while leaving Iraq. It's nice to have things both ways, to be for stimulus now and austerity later. The problems come, in war and economics, when you have to deal with the consequences, for real people, of actions taken largely for rhetorical effect.
The second foundation of the "long-term deficit crisis" argument is the work of the Congressional Budget Office. CBO creates its long-term deficit projections with a bizarre two-step operation. First, it wipes out the deficits caused by unemployment, simply by assuming that high unemployment will go away soon. And then CBO recreates the projected deficit by assuming (a) continued rapidly rising health care costs, and (b) much higher interest rates, while (c) overall inflation remains extremely low.
These assumptions are a mess. They are implausible and internally inconsistent. I know of no economist who defends them on their merits. They are accepted only because most people have never looked at them critically, and because they are politically convenient to some. But in the real world, you cannot make good policy on the basis of forecasts as bad as these.
In the real world, unemployment isn't going to go away soon. And the only risk of fighting it too vigorously now is that there might be some more inflation or a decline in the value of the dollar much later on. Except for energy prices, these risks are very, very remote. World inflation disappeared 30 years ago with the collapse of union power, global commodity gluts, and the rise of low-wage manufacturing in (especially) China. The dollar is, in fact, too strong right now, because of the problems in Europe. And while energy prices are a risk, the way you deal with that is with an energy policy, not by deficit-cutting.
While seers from Wall Street proclaim a "deficit crisis," obviously the capital markets don't take that talk seriously. If they did, they wouldn't be willing to lend to Uncle Sam for thirty years at four percent! But in fact they are doing this every week. Yes, long-term interest rates could change, but supposedly everything we need to know about future deficits is known right now. There simply is no funding problem for the U.S. government, and in the real world of financial markets, none is foreseen.
So what are the real effects of cutting Social Security and Medicare?
Medicare pays doctors' bills for the old. It pays out at lower rates than does private insurance for working people. Cutting Medicare would mean two things: less health care for the elderly, and therefore more financial stress on their families. And more health care costs overall, as people substitute with private insurance for the public cuts. Both of these are very bad ideas.
Social Security pays to keep working people (and their dependents and survivors) out of poverty when they are old. It spreads its benefits to all who have worked, whether they have children who would otherwise support them or not. The payroll tax spreads the burden to all working people, whether they would otherwise be supporting elderly parents or not. Both of these transfers are fair, modest, and sustainable. Cutting Social Security would simply create more poor elderly—those who could not turn to their children—and more stressed working families—those with parents in need. Both of these are very also bad ideas.
In fact, the right response to the crisis is to expand, not cut, both Social Security and Medicare.
The reality is, we are never going to make up good new jobs for everyone who has been hit. (I'd love to be the next Harry-Hopkins-and-Harold-Ickes-combined, but I'm not going to get the job.) So let's face reality, and make some tough decisions about who we want to be jobless: the relatively old or the very young. Seen this way, it's an easy choice.
There are many older workers who've already worked hard jobs for many years. They would love to retire. But they don't, because early retirement on Social Security is very costly: you lose benefits every month over your entire future life, unless you hang on to the regular retirement age. We should give these people a break, and lower, not raise, the full-benefit Social Security retirement age—say, to 62 for the next three years. This would give millions a chance to get out, if they want to.
Similarly for Medicare. There are many older workers who have health needs, and who work on only because they can't afford to lose their employer-based insurance. Let them out! In the crisis, I proposed cutting the Medicare-eligibility age to 55 (and the Senate almost included this in the health care reform bill). It's still a good idea, but something more moderate, such as opening a three-year window for early exits, would be better than nothing.
Encouraging early retirements would mean that young people—just out of school, with fresh skills, good health, and high energy—would get the jobs they need now. They would not be stuck waiting, or spinning their wheels in school, for years and years. Meanwhile, the retirees, supported by Social Security and Medicare, would provide a continuing stable support to total demand, creating jobs for others as they get older.
This is the way the economy should work. When we have older people, we must care for them, and the best way to do that is to give them the resources to support themselves. There is no "burden problem" as our economy is plenty productive for the working population to support the elderly in modest comfort, particularly if we include some of our truly wealthy in the tax base.
Care for the elderly, energy, climate change, the Gulf of Mexico catastrophe, our decayed infrastructure, public health—these are real issues. Let's deal with them. The "long-term budget deficit" is a phony problem, ginned up by politicians, some economists, and the historic enemies of Social Security and Medicare on Wall Street. For God's sake, let's not sacrifice our most successful social programs to the hysteria we're hearing from them.
James K. Galbraith teaches at The University of Texas at Austin. He is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.
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