Anxiety among employed and unemployed Americans alike over weak demand for their labor should concentrate the minds of Congress when they return to work today. Job growth is at a standstill, unemployment is high, wages are falling, and our economy is stagnant. Congress can take steps that would address all of these problems—and the Obama administration must push it to do so.
There is broad consensus among economists of different political persuasions that the time to do so is now. A range of economists and independent forecasters say boosting the economy and getting people back to work should be job number one for Congress and that ideological objectives should be set aside until that’s been accomplished.
The stakes are high. Economists are coming to the conclusion that without fiscal action, the economy may not continue to recover. According to JPMorgan Chase & Co.’s economists, “the US and Europe are dangerously close to recession. … the most critical period for the US economy will likely be 4Q11, when we may see some fallout from the heightened volatility of risk markets, and 1Q12, when we get an automatic tightening fiscal policy if, as our US team currently assumes, this year’s fiscal stimulus measures will expire.”
This sentiment is echoed by Christine Lagarde, the newly appointed managing director of the International Monetary Fund, who said in late August, “Developments this summer have indicated we are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed. So we must act now.”
Standing in the way of action is the Republican leadership in the House of Representatives, which is too caught up in its extreme ideology-driven agenda to see what needs to be done. They want to follow the lead of Europe and implement severe cuts in public spending and lay off workers in the middle of the biggest jobs crisis in decades.
That’s not the right remedy at all, according to those whose job it is to follow the U.S. economy. Over the past two months, broad, widespread agreement has emerged that the action needed now is not cuts in public spending but measures to address the shortfall in aggregate demand in the economy to include boosts in government spending. Here’s what this wide array of economists is saying:
- Bill Gross, founder and co-chief investment officer of the investment management firm Pimco, the world’s largest bond fund, and a prominent Republican, says we need “to create a demand for labor. The private sector is not going to do it.” Even if the government must do it directly, “Putting a shovel in the hands of somebody can be productive.”
- Nariman Beharavesh, chief economist at IHS Global Insight, a top economics forecasting firm, says that “the single-biggest risk facing both the United States and Europe is a policy mistake that would take away stimulus that is helping to hold up growth.”
- Richard A. Posner, Reagan-appointed judge on the U.S. Court of Appeals for the 7th Circuit and senior lecturer at the University of Chicago Law School, argues that “it’s worth pointing out that anything that takes money out of the economy, such as reducing federal spending or increasing federal taxes, will exacerbate the current depression. Consumers will have less money to spend, and this will discourage employers from hiring.”
- Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., advised the investment bank’s clients that “some of the weakness in the economy this year is clearly due to the shocks from the Japanese earthquake and the sharp increase in oil prices, and some is probably due to an even lengthier period of downward pressure on aggregate demand from the bursting of the housing and credit bubble. But a review of the spending and tax data at the federal, state, and local level suggests that a significant part is also due to fiscal adjustment. This has been particularly true on the spending side, where the first quarter of 2011 showed the largest negative impact of government spending on real GDP growth since the mid-1980s.”
- Joe Stiglitz, professor of economics at Columbia University, Nobel Prize winner in economics, former chairman of the Council of Economic Advisers under President Clinton, and chief economist for the World Bank, states plainly that “the only thing that can be done is fiscal stimulus, spending more money. And, the United States is in a sense a good position, because we can borrow at very low interest rates. We’ve underinvested in education, technology, infrastructure for a couple of decades, particularly in the Bush years. The result of that is we have many high return investments, those investments pay far more than the cost of capital, and that means if we make those investments, the national debt in the intermediate term will actually be lower and debt sustainability will better, i.e., that is to say that the debt to GDP ratio will be lower.”
- A recent Wall Street Journal survey of economic forecasters found that most agreed that “the main reason U.S. companies are reluctant to step up hiring is scant demand.”
- Ben Bernanke, chairman of the Federal Reserve, argued over the summer that “a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.”
- Richard Koo, chief economist for Nomura Research, the analytical arm of one of the world’s biggest investment banks, reacting to Standard & Poor’s argument that America’s AAA rating can only be restored by cutting the budget deficit by $4 trillion, said last month that “adoption of such a policy by the U.S. government today would plunge the economy into another Great Depression.”
- Jerry Webman, chief economist of Oppenheimer Funds, the investment management firm, says that “Government spending cuts are contrary to what would be expected in a fragile economic environment.”
- Paul Ashworth, chief U.S. economist at Capital Economics, says that “there is no demand. Businesses aren’t confident enough, and the longer this goes on the harder it is to convince them that they should be.”
- Laura Tyson, professor at the Haas School of Business at the University of California-Berkeley and a former chair of the Council of Economic Advisers, has noted that “weak demand rather than structural changes in the composition of output or a mismatch between worker skills and jobs is the primary cause of continued high unemployment.”
Simply put, across the spectrum, there is agreement that “it’s the aggregate demand, stupid.” This blunt quote isn’t from the Keynes-reading, Nobel Prize-winning economist and blogger Paul Krugman, but rather Bruce Bartlett, columnist for The Fiscal Times who held high-ranking economic positions in both the Ronald Reagan and George H.W. Bush administrations.
Krugman himself has said, “the past year has actually been a pretty good test of the theory that slashing government spending actually creates jobs. The deficit obsession has blocked a much-needed second round of federal stimulus, and with stimulus spending, such as it was, fading out, we’re experiencing de facto fiscal austerity. State and local governments, in particular, faced with the loss of federal aid, have been sharply cutting many programs and have been laying off a lot of workers, mostly schoolteachers.”
And as a wide range of experts have recognized, the key variable in demand right now is how much the federal government spends. The last thing our economy needs is cuts in public spending. While not every individual quoted above would support huge increases in public spending, most believe some are needed and none believes that real cuts are the order of the day.
In short, there is a broad consensus that deficit reduction can wait until after we deliver the boost our economy needs today.
Usually, politicians would know from their constituents that job creation is the top issue in their lives. Without a job, most families cannot afford all the other things that are important to them—a roof over their head, food on the table, or a good education for their children. Earnings from employment make up about 80 percent of the income for families earning less than $100,000 per year, and most workers are family breadwinners or co-breadwinners.
Yet last month the Tea Party-inspired right wing of the House of Representatives hijacked the congressional agenda to worsen the jobs situation. Last month, for example, House Republican leaders held up reauthorization of the Federal Aviation Administration, a move that led to the immediate furlough of 4,000 government workers and another 70,000 construction employees and halted much-needed investments in our air transport system. This is exactly the wrong policy at the wrong time. What’s needed is the exact opposite—just ask the wide range of economic observers who say so.
Heather Boushey is Senior Economist at the Center for American Progress. Sarah Ayres is a Research Associate working with the Economic Policy team at the Center. Michael Ettlinger is Vice President for Economic Policy at the Center.
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Vice President, Economic Policy