Long Term Debt vs. Unemployment—False Choices

by Bill Kavanagh:   The Republican focus on the federal deficit as a primary issue in this year's Congressional election cycle makes little sense in the context of our real economic problems. Economist Brad DeLong uses a good metaphor in a response to Henry Blodget's questions about long-term federal debt:

Think of it this way: our natural gas pipes are corroding, and there is a good chance that tomorrow ten years from now we will have a gas leak and if we do not fix it the house will explode. And Henry Blodget is using that danger to argue that we shouldn't turn on the heat tonight even though it is snowing outside...

Here's the false warning that's being promulgated: "There's a crisis coming in federal spending and if we don't start dealing with the pain now by cutting programs and spending by the government to alleviate unemployment, we'll be overwhelmed later by the mountain of debt we're accumulating."

Here's why it's a false warning: The long-term debt service on government spending to stimulate the economy pales in comparison to another problem. That looming issue is the long-term (and societally draining) economic damage done to the country if we let a decade be lost to high unemployment and lost productive labor, thereby creating additional drains on both the public and private sectors.  In the current employment crisis environment, job one should be getting the country back to work— in order to create the conditions in which we dig ourselves out of this critical situation limiting the economy's stability and resilience.

It's myopic to look at debt due to federal domestic spending only, rather than the total situation the US economy is currently facing. Yet this single-minded approach seems to be crowding out discussion about solving the growing long-term unemployment crisis and its drain on the housing market, the demand for goods and services, and on the country's sense of hope that the future is something to invest in, rather than horde against.

I hope we can keep talking sense about dealing with the real problems in front of us, rather than being distracted by fears that a stronger America won't ever make sacrifices or hard choices to deal with paying our bills. Right now, the sacrifices being made are focused incredibly unevenly on those least equipped to cope with the losses: namely the poor and those becoming poorer daily.

Dean Baker responds to those voices crying out about an American "debt crisis" in the following way:

We can point to a debt crisis in Greece, and arguably Portugal and Spain, but it is not clear what that has to do with the argument for stimulus in the United States. There were debt crises in Latin America in the 80s, no one ever raised these in the context of the Reagan era budget deficits.

There needs to be more coverage of reasonable plans to revisit the unemployment issue during this election year, not less of it.

(Kavanagh cross posts at Bill's Big Diamond Blog.)

Comments

[Steve B.]

Lol this is ridiculous, I totally agree that something needs to be done about the unemployment issue in America, but what I disagree with is the notion that our government is the one who should be "creating jobs". I in no way am lumping Bill into the group of naive liberal loonies that have a tendency to post on this site as both him and Deb tend to make solid arguments (which I often disagree with) that have at times caused me to re-evaluate my position but this is classic double speak. Does anyone here have a fundamental understanding of economics or do they just copy the BS CNN keeps feeding them. Liberals champion the idea that they can spend their way out of a recession and we should follow the European model of having more social welfare programs/safety nets but conveniently ignore the fact as a result Europe has systemic high unemployment rates. If you follow that model the net long-run effect will only be higher inflation which when coupled with our already bad debt problem isn’t what I’d call a winning combo. I know we're in a recession (bought on in large part by the bubble the Fed created and idiotic policies by guys like Chris Dodd and Barney Frank) but the reason people are talking about fixing the debt burden your generation is leaving mine is because it’s A LOT worse than liberals for whatever reason want to admit. Even if you want to ignore the federal deficit for the moment look at the states people, in order from worst to (relative) best these states/territories are ALL insolvent and currently being funded by the US treasury's "shadow bailout";
California, Michigan, New York, Penn., Ohio, Illinois, N.C., Indiana, New Jersey, Florida, Wisconsin, Texas, S.C., Kentucky, Missouri, Connecticut, Minnesota, Georgia, Nevada, Mass., Virginia, Arkansas, Alabama , Colorado, R.I., Idaho, Maryland, Kansas, Vermont, South Dakota, Tennessee, Virgin Islands, & Delaware. From my count that’s 31 states and 1 territory that are in the billions to high millions of dollars in debt…Just the other day Connecticut's bond rating got downgraded and them along with other states are delaying tax refund payments because they simply don't have the cash! Your telling me in a climate where debtors can't even pay off their current debts that they should go ahead and spend more money on creating jobs (at a net loss mind you) so they can put a band-aid on a problem that’s systemic as opposed to temporary?
It's going to get even worse when the pension fund crisis hits and states start telling people "yeaaa about that pension money we were suppose to pay you....we don't have it" Will you then demand further deficit spending to cover what should be owed? Our leaders really are screwing up and as a result we are suffering but someone needs to do the politically unpopular thing and champion solid fiscal policy or there IS no long-run.
"There were debt crises in Latin America in the 80s, no one ever raised these in the context of the Reagan era budget deficits" is a total red herring. Reagan era deficits weren't even close to how bad it is today. Reagan was dealing w/ a debt to GDP ratio that was less that 60%...we are dealing w/ deficits unseen since the 1940's @ above 90% debt/gdp and quickly approaching levels above 100%.
You say you're worried about our lack of "hope that the future is something to invest in, rather than horde against" but HELLO, please I beg you simply Google our future debt projections given our entitlement spending and tell me it's a something you'd invest in.

When I said the FDIC is broke and the bank bailout would be a move to only further monopolize the big banks people on this site thought I was crazy, I was right. When I said Obama was full of crap and his voting record suggested he would do what was politically convenient rather than all the rainbows and sunshine he was spinning on the campaign trail people on this site said I was hater, I was right. And when I said people need to stop demonizing the rich and overreacting to any/all remotely lavish company spending I was accused of parroting republican rhetoric (lol I'm a libertarian) and once again I was proven right to the tune of thousands of jobs being lost in cities like Vegas due to Conference Season being ruined because companies feared bad press by the media. The well meaning morons essentially caused exactly the type of job loss they intended to prevent...good job.
If you want more jobs in the economy give small businesses more not less incentive to expand their operations, take an honest look at our Federal Reserve System and how their operations create more problems than they solve, and look at the crap policy coming out of Washington. Deficit’s are the real problem government can actually fix because they they’re the one spending the money and making us all poorer in real terms. Job creation isn’t something they can serve in the long term. Even if it was, is that yet another institution you would trust to the guys whose budget projections routinely come out 2-3x the original amount and couldn’t setup a website that properly tracks the stimulus dollars they gave out? Get a clue.

[Bill]

Steve, your arguments would be more compelling if you were to show some evidence, rather than name-calling. I’m not going to exchange insults; instead, let’s deconstruct the logic of your comment:

On using the power of government spending to fight the worst recession in over half a century— First, you contend that the federal government can’t create jobs, despite the record, which indicates that the federal government does provide employment and has also funded countless projects directly which do, thereby encouraging spending by those employed and fighting off some of the worst of the panic during the Great Recession. I wish more of the stimulus had gone to employment instead of tax cuts, but the portion that did go to projects had an effect.

We need more encouragement for creating jobs, not less. To the extent that targeted stimulus spending was put towards employment-creation, it worked. The problem is that it wasn’t enough. I’d encourage you to read Paul Krugman’s analysis of our situation and the dangers of doing nothing more to encourage and stimulate growth and employment. See: http://www.nytimes.com/2010/05/21/opinion/21krugman.html?partner=rssnyt&emc=rss

Equating our stimulus with European economies’ social programs (as you did) underplays the differences between our economy and those of Western Europe— and conflates issues that have nothing to do with my post with what I advocate in it. I was talking about alleviating unemployment and stimulating the private market with spending, not about social programs. In addition to missing my point, you also miss another fact relevant to your contention: the biggest European economy, Germany, has a current unemployment rate of 7.7%, significantly lower than that of the US. I’m sure the facts are less important than the accusation that the Europeans all have greater unemployment than we do, but it’s nice to check them.

You point to lower bond ratings for individual states as evidence that the federal government can’t create jobs. This is a perplexing argument, since the states have nothing like the levers of a central bank; they aren’t the entities I was talking about, unless you are thinking of how the federal government could assist them to balance their books while providing employment opportunities. Federal assistance would actually raise the states’ bond ratings, not lower them further.

You argue about Social Security in the midst of all this, while it isn’t the subject at all. Again, my post was about the proper role of short-term deficit spending and dealing with long-term deficits in a responsible way. Yet, I can’t help but wonder how cutting Social Security benefits (or worse, privatizing them), which seems implicitly your position, would go over with the public in this troubling time. Not well, one would think. Thank God we didn’t privatize Social Security in 2005, when the last President wanted to, shortly before the private investment market melted down cataclysmically.

Somewhere in your comment, you casually blame the housing bubble on Barney Frank and Chris Dodd, without any explanation. I suppose there must be a reason you believe the leaders of what was the minority party during the bubble to have caused it. It’s not, however, in evidence.

There were so many other red herrings you threw in that I’m not going to be able to address all the issues hit with a glancing and superficial blow, but my main concern is that you never substantiate the reason that lowering unemployment through short-term deficit spending, coupled with long-term discipline, isn’t crucial to avoiding a decade like Japan’s economy endured throughout the 1990’s.

It’s academic, since the chances of getting significantly more government spending are practically negligible, given the political (but not rational economic) heat being generated about deficit spending. Let’s just hope that we don’t get the draconian cuts you hope for instead, since that will choke off the limited recovery we have underway.

[Matt_solis]

It’s easier to work towards your own interests than working together as a group to solve a problem. It's even harder to unite other countries with different global agendas towards a common goal.

There's a lot of thought provoking video clips regarding complexity and how global problems become almost impossible to solve on a Facebook community page
http://www.facebook.com/thewatchmansrattle

Why do we have a tendency to fight one another when we know sharing results in the most optimum outcome for everyone? Why does our biology cause us to hurt the ones we love, hoard resources and compete with one another?

Heres the link to the video
http://www.facebook.com/video/video.php?v=1493017207106

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