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The Battle Over Budget Cuts

There is a new economists’ sign-on letter being circulated that warns bad things will happen if there are big cuts to the public investment portion of the federal budget, as Republicans in Congress are now advocating. The argument in the letter is correct, but it is nonetheless painful to see this sort of thing being circulated right now.

The politicians in Washington may have missed it, but we are still in the middle of the worst economic downturn since the Great Depression. The unemployment rate is still 9.0 percent and virtually no forecaster, including those in the administration, expects it to return to normal levels any time soon. In addition to the unemployed we have more than 8 million people under-employed and millions more who have given up looking for work altogether.

In such times we might expect that there would be discussion of a big new stimulus program. After all, we do know how to generate growth and create jobs. As a large and growing body of research shows, we just have to spend money. This means that tens of millions of people are suffering as a result of unemployment or under-employment simply as a result of bad economic policy.

The politicians who could in principle push through more stimulus have been intimidated into silence by the business lobbies and the media who have decided to make concerns about the deficit the top and only economic priority. In this context, it would have been reasonable to expect that a letter drafted by prominent liberal economists (the lead signers include Alan Blinder and Laura Tyson, two of the top economists from the Clinton Administration) would center on the need to boost demand to create jobs. Economists who don’t have to run for office can say such things even when politicians can’t.

But there is no mention of stimulus, just a plea not to cut public investment. This plea could even be taken as an implicit endorsement of cuts to other areas of spending such as Medicare, Medicaid and Social Security.

In fairness to the authors of the letter, the state of politics in Washington is quite bleak right now from a progressive standpoint. The Republicans won a huge victory last fall with the conservative wing of the party on the ascendancy. They seem virtually certain to retake the Senate in 2012. Arguably the best that can be hoped for is to shelter a few selected areas from spending cuts.

While that may be true at the moment, it is hard to see this path as anything other than a slower road to disaster. After all, no one believes that the economy is going to turn around based on the sort of budget that is likely to come from a compromise with the Republicans. And President Obama is virtually certain to be held accountable for the state of the economy in 2012. Furthermore, even if he does manage to get re-elected, he will still be dealing with the same sort of congressional opposition he faces today. And of course, no one in their right mind can think that the current economic situation is acceptable.

At some point, we have to talk about changing the terms of the debate. This is where our two honcho Democratic economists need to be taken to the woodshed. They could be trying to argue the case that the economy needs additional stimulus to get back to normal rates of unemployment. The Republicans may block this path, but at least then the public might understand that people are unemployed or underemployed because of a political decision, not an act of God.

If they think increased stimulus is an impossible lift at this point, why not argue the case for work sharing? We can encourage employers to shorten hours instead of laying people off. If we can reduce the rate of layoffs by just 10 percent, this would translate into almost 2.5 million additional jobs over the course of a year.

In principle, this work sharing doesn’t even have to cost any money. It’s just substituting payments for short-time work for unemployment benefits. Work sharing is the reason that Germany’s unemployment rate has fallen in this downturn, even though it has seen less GDP growth than the United States.

Pushing for either more stimulus or work sharing would at least set out a positive agenda, as opposed to splitting the difference on a real bad path. Of course, if our leading Democratic economists had been a little more far-sighted we never would have been in this mess in the first place.

They would have been talking about the housing bubble back in 2002-2004 when it could have been reined in without wrecking the economy. Better yet, they could have been talking about the stock bubble back in the Clinton years before it set the U.S. economy on a path of bubble-driven growth.

It would be good if Republican plans to shut down the government and/or gut large areas of public investment can be thwarted. But serious progressives have to move beyond a situation where we are choosing between bad and worse choices. The folks setting the economic policy agenda for the Democrats are not going to get us there.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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