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% 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 underemployed, 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 programme. After all, we do know how to generate growth and create jobs. As a large and growing body of research shows (pdf), we just have to spend money. This means that tens of millions of people are suffering as a result of unemployment or underemployment 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 which 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 centre 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 like 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%, this would translate into almost 2.5m 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 really bad path. Of course, if our leading Democratic economists had been a little more farsighted, 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 that set the US 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 choices and worse ones. The folks setting the economic policy agenda for the Democrats are not going to get us there.