Fiddling While Rome Burns

Congress Needs to Take Action on the Economy

Congress needs to get the economy moving again, and short-term deficit concerns shouldn’t get in the way, write Michael Ettlinger and Heather Boushey.

Job seekers line up for a resume critique at a career fair put on by National CareerFairs in San Jose, CA. Jobless claims were up last week and are essentially flat for all of 2010, which is alarming when coupled with the weak private sector job growth in May. (AP/Eric Risberg)
Job seekers line up for a resume critique at a career fair put on by National CareerFairs in San Jose, CA. Jobless claims were up last week and are essentially flat for all of 2010, which is alarming when coupled with the weak private sector job growth in May. (AP/Eric Risberg)

Congress needs to do something about the economy, and concerns about the short-term deficit shouldn’t be the barrier. But if members are dedicated to immediately addressing the deficit there are ways to do that while still providing a boost to economic growth. However it’s done, action needs to be taken, whether short-term deficits are increased or not.

The economy teeters. Congress and the president’s heroic effort to put through the American Recovery and Reinvestment Act at the beginning of 2009 literally brought us back from the brink of a Great Depression. But (a) the hole was deeper than we even knew at the time ARRA was designed and (b) even then we knew that this wasn’t an ordinary recession—that this was going to take more than a year or two to recover from. That’s why ARRA wasn’t just aimed at activities that would provide an instantaneous boost.

Last week we also learned that jobless claims are up. That’s not always the most reliable indicator of the economy’s condition, but they’re essentially flat for all of 2010, which is not a good sign. And it’s downright alarming when coupled with the weak private sector job growth in May. The patient is stable but not recovering.

Standing still when you’re where you want to be is fine. But we aren’t where we want to be—not by a long shot. The economy is operating well below capacity and there are 15 million people unemployed. In the coming months, without further action, this economy could go up modestly, down dramatically, or continue languishing. Either way, we need to do more to get over the hump into full-blown, strong sustainable growth.

The most obvious immediate components to doing this are straightforward:

  • Get money to states and into communities so they don’t have to lay off teachers, firefighters, police officers, and other public servants. There are three reasons for doing this. First, the last thing we need is another sector contracting, putting more people out of work and contributing to an economic downward spiral. Second, many of the functions these workers serve are important for our long-run economic growth, most obviously, teachers. And third, the need for the services these workers provide, if anything, increases when the economy is weak. We have good evidence that when unemployment rises, it puts stress on communities and especially children. Cutting police and firefighters just when communities may need an extra cop on the beat or eliminating school programs right when children are most vulnerable is the proverbial cutting off your nose to spite your face.
  • Support for small-business lending. The importance of small business to job creation is often overstated. But it is important. Right now there’s every reason to believe that the credit markets are working greatly to small business’ disadvantage. After the administration’s substantial work, the credit markets for large businesses are functioning adequately—they can sell their bonds. But the banks aren’t delivering for small business. Small-business owners work in communities around the country, and we should be supporting them as an important element in our economic structure.
  • Help the jobless so their reduced spending resulting from their joblessness is not more of a drag on the economy than it needs to be. And we need to help them anyway—it’s just plain cruel to leave the jobless to fend for themselves in an economy like this where jobs are hard to come by.

The administration has plans for all of these. The House of Representatives has proposals and passed much of this agenda. The Senate is debating legislation. But both the administration and Congress deserve blame for the lack of robust action. The administration has not offered a consistent message on the need for action and its view on the right balance and timing of efforts to create jobs and reduce deficits. Both houses of Congress are getting caught up in panic over current deficits.

The Center for American Progress has set itself firmly on the ground of worrying about the long-term federal government deficit. But we have also been crystal clear that right now is not the time to start clamping down. Within reason, we can afford higher deficits now that lay the foundation for economic growth as long as we show the world we’re serious about deficits in the future. In fact, that economic growth is needed for us to reduce our longer-term deficits.

Still, if Congress wants to take immediate measures to pay for the spending we need, there are options. We could design an immediate temporary tax that would not adversely change economic behavior on the wealthy, oil companies, or other industries. This would be a net plus, helping economic growth, if the revenue were used to pay for the well-considered spending described above.

Alternatively, we could add to the national debt now and lay out explicit plans to pay for it in the future. We could, for example, use revenue from the proposed bank tax to pay for these investments. Under congressional scoring rules, about $40 billion of the approximately $90 billion that tax is expected to raise over 10 years is available to offset current spending. The administration has argued that this money should be used to offset the long-term costs of the financial bailout. But we can’t have everything we want, and the priority should be stoking the economic recovery. We need economic growth to solve our fiscal problems and it is increasingly looking like we can’t take that growth for granted.

If Congress wants to stick to the administration’s guidance on the bank tax, however, there’s a simple answer. Increase the level of the tax in the first several years of its imposition. Spending five years’ worth of expected revenue in a quick shot to help the economy now would be an investment that would help the economy, including the banks that would have to pay the tax.

But the bank tax isn’t the only option. There are many possibilities, some better than others, but all of which would be better than not taking action on the economy: a small, temporary high-income surtax or estate tax boost, or a temporary “repayment” surtax on any of the federal taxes could be adopted now but be scheduled to go into effect in two years and end in five. Or future spending could be shaved.

In the end, all of the ways to pay for the boost we need—letting deficits rise for now, raising selected current taxes, or being explicit about the budget savings or tax increases in the future—are preferable to doing nothing or too little. Congress and the president need to work this out.

Michael Ettlinger is the Vice President for Economic Policy and Heather Boushey is a Senior Economist at American Progress.

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Michael Ettlinger

Vice President, Economic Policy

Heather Boushey

Former Senior Fellow