This piece originally appeared in The Hill’s Congress Blog
The preeminent economic challenge of our time is to generate robust job growth and make sure unemployment drops steadily and rapidly. Our failure to adequately address the persistent high unemployment rate means we can expect depressed wages; eroded benefits; wrecked career trajectories, especially for the young; and years before family incomes return to their pre-recession levels. This is especially disappointing given that there were no improvements in workers’ inflation-adjusted wages and benefits, among either high school or college graduates, in the prior recovery from 2002 to 2007, and working-class family incomes were lower in 2007 than at the start of the prior business cycle in 2000. What is at stake is whether we will have a lost decade ahead of us coming on top of the one we have just been through. The meager job growth in June and the last few months reported in the last ‘jobs report’ accentuates the need to take decisive action.
Our high unemployment is primarily the result of the huge job losses — roughly 5 percent — associated with the financial and housing crisis, and the corresponding rise of unemployment to 8.9 percent by April 2009, all before the president’s stimulus even took effect. As my colleagues at the Economic Policy Institute Josh Bivens and Heidi Shierholz have just documented, “private sector job growth in the current recovery is close to that of the recovery following the early 1990s recession and is substantially stronger than the recovery following the early 2000s recession.” The programmatic and employment cutbacks of state and local governments have especially weakened this recovery, resulting in fewer state/local jobs and a comparable loss of private sector jobs as contractors lose business and spending declines. Had the state and local sector behaved as it did in earlier recoveries, we would have 2.3 million more jobs and the unemployment rate would now be between 6.7 percent and 7.5 percent instead of at 8.2 percent.
The fact that private sector job growth in this recovery has been comparable to that of the prior two recoveries — those under the two Bush presidencies — indicates that fears of regulation and uncertainty are not what has held job growth back. Surveys of small businesses are also clear that weak consumer demand is the most important problem. This is not surprising, as households have been paying down their debts and scaling back consumption and overall demand for goods and services following the loss of housing and stock wealth in 2008. This has been compounded by, as Goldman Sachs’s chief economist Jan Hatzius wrote, fiscal policy, which “has also been a net drag over the past two years, especially at the state and local level but now increasingly at the federal level as well.” Any further spending cuts at the federal — as per the plans by Wisconsin Rep. Paul Ryan (R) or presumptive GOP presidential nominee Mitt Romney — or at the state or local levels will only exacerbate the problem and slow the recovery or even cause the economy to shrink.
President Obama did offer a helpful jobs plan in September 2011 that I wish he had pursued strongly in late 2009 or early 2010, which an Economic Policy Institute analysis by John Irons noted at the time “includes $162 billion for the continuation of the payroll tax holiday and extended unemployment insurance benefits, and $285 billion for other new measures, including the expansion of the payroll holiday, infrastructure investments, aid to states and localities, school construction, etc.
Overall the package would increase employment by about 4.3 million jobs over the next couple of years [2012-13]. The new initiatives would boost employment by about 2.6 million jobs, while the continuation of the two temporary provisions (EUI and the payroll tax holiday) would prevent a backslide of over 1.6 million jobs.”
This still remains the best approach: Invest in infrastructure and school modernization at a time when savings are ample and interest rates are low. Prevent further cutbacks in needed state and local services that have been slowing the recovery. Maintain safety net benefits such as food stamps and unemployment benefits that help those hurt by the recession and also help boost consumer spending. These create more jobs than other spending at this moment, according to the Congressional Budget Office.
Such a plan necessarily means having a higher fiscal deficit for a few more years. This is necessary to support overall demand in the economy and should be joined by expansionary monetary policy as well. The real deficit problem we face is not from current deficits, which are primarily due to the weak economy and the associated loss in revenues. Rather, our deficit problem is the longer-term rise in healthcare costs and the scaling back of tax rates that have been undercutting revenue. This should be addressed once the recovery becomes robust. We must also do more to strengthen wage growth and improve job quality and security.