Jul 12th 2010

One Big Thing Congress Can Do to Improve the Economy before Election Day

by Robert Creamer

Robert Creamer is a long-time political organizer and strategist and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on amazon.com.
Members of Congress see it in their town meetings, their mail, their polls and focus groups: the voters are angry. Of course at any given time, some set of voters are always unhappy. But right now it's different. Right now most people are unhappy.

The level of anger and unhappiness does not arise from disagreement with some government policy. It is not because they don't like the new health care law, or "big government." Voters are angry and unhappy because from their perspective the economy still stinks. Vast numbers of those who lost their jobs when the recklessness of the Wall Street banks sent the economy over the cliff, are still out of work. Those who are working have experienced stagnant incomes. Everyday Americans are worried about the economic futures of their families.

And it's no wonder. A recent study showed that more than half of Americans have been directly affected by the recession.

When Congress returns from its Fourth of July recess, there are not many things it can actually do to improve the economic picture in the four short months before Election Day. But there is, in fact, one thing Congress can do that will have a big impact right away: pass a jobs bill that provides fiscal relief to state and local government and extends unemployment benefits.

State and local government is facing the worst fiscal crisis in a generation. The recession slashed revenue, yet the same recession increased the demand for many critical services. As a result there is a very real chance that in the next few months state and local government will lay off between 600,000 and 800,000 people. That result would be catastrophic for the already-weak economic recovery - as well as the political environment for Democrats.

Let's say that the economy generates a fairly robust 150,000 new private sector jobs each month. That's a total of 600,000 new jobs between now and November. But that job growth could be entirely wiped out by layoffs from state and local government. If private sector job growth is slower, then these layoffs could move the job figures into negative territory. That could very well pull economic growth into the red as well triggering a double dip recession.

And extending unemployment benefits is equally critical. The Labor Department says more than 1.7 million people have run out of unemployment benefits, and that figure could rise to more than 2.1 million people by the end of this week.

Americans who are out of work are not laggards who want something for nothing. They are - by definition - seeking jobs that the economy does not provide. Does it make any sense that Congress could find the money to bail out Wall Street bankers and their $10 million bonuses and can't afford to make sure that the victims of Wall Street recklessness have something to keep their families from falling into poverty until they can find work?

More crucial to the cold calculus of economic growth, by blocking Congress from extending unemployment benefits, the Republicans have withdrawn millions of dollars of potential spending from the economy - money that would otherwise have been spent at the grocery store or the mall. That's just plain stupid.

Of course you hear the Republicans - and some Democrats - blathering on about how an extension of unemployment benefits or fiscal relief to the states must be "paid for" through other cuts or new revenue. They argue that the public is "fed up" with rising deficits and we must restore "fiscal discipline" now.

You didn't hear a peep from the Republicans when it comes to "un-paid for" funding to support the wars in Afghanistan and Iraq. And there is a case of collective Republican amnesia when it comes to the fact that when Democrat Bill Clinton left office there were fiscal surpluses as far as the eye could see - and that in eight short years, the Bush Administration ran up more in national debt than all of the other Presidents in American history combined. Nor does any Republican reference former Vice-President Cheney's famous observation that "deficits don't matter."
But as a matter of sheer economics, we do not need "fiscal discipline now." We need economic growth now. Economic growth is the only real path to assure a shrinking deficit and a healthy fiscal policy over the next decade.

The "real economy" is not composed of loans, money flows, currency transactions, or stock markets. The "real economy" is the process of creating goods and services that meet people's needs. Truck drivers, fire fighters, farmers, steelworkers, software engineers, tailors, janitors, writers, teachers - most people who work for a living -- are all engaged in "real" economic activity. The flow of money is not the "real economy" at all. It is a means of keeping score - a means of allocating who gets what - of determining what products are produced and what services are provided.

That doesn't mean that the level of personal debt, or the federal deficit, or the price of the dollar aren't critically important to economy. But they are ultimately only important insofar as they impact what goes on in the "real economy" - the quantity and mix of goods and services.
That's why the biggest economic problem we face in the short term is not the federal deficit - it is the deficit between the capacity of our economy to produce goods and services and the amount of economic demand there is to pay people to engage in productive activity.

Right now, nine and half percent of our work force is sitting idle, not producing the goods and services people need to enjoy a better life. The goods and services they would have produced on any given day are simply wasted - lost forever. As a society, we miss out on the housing they could have built, the food they could have produced, the software they could have designed, the research they could have done. That is actual economic waste. It means there is simply less economic pie to go around. And since the top two percent of the population do a pretty good job making sure they get a big slice, you can bet that average Americans are the ones who are stuck with smaller and smaller pieces of pie.

So our first priority is to eliminate the deficit between our productive capacity and what we are actually producing as a society. First and foremost we have to get people back to work.
In other words, putting people back to work is not a "lagging indicator" of economic growth. It is economic growth. Economic growth is about nothing other than people working to produce more goods and services.

The problem is that in recessions, individual consumers and businesses cut back on spending. They set money aside and reduce the demand for goods and services. During the current recession the savings rate in the U.S. went from only 1% to 6.4%. Now it's 4%. In fact, over the long haul our society should be saving more, but the problem is that a big increase in saving during a recession reduces economic demand and just deepens the spiral of fewer people working and less demand, which leads to more layoffs and less demand and so on.

So while it is perfectly rational for an individual or family to cut back its spending and save more when times are tough, that is a disaster for the overall economy. But acting together through the government we can break that spiral. That was the great lesson that John Maynard Keynes learned from the Great Depression. The federal government has to act decisively to close the deficit between productive capacity and actual production - it needs to create the economic demand to assure that everyone is back at work. To do that it has to borrow money. That's what is necessary to put the economy back on its feet and grow private sector demand once again. We did it in early 2009 with the Stimulus Bill that saved or created almost 3 million jobs. We need to do more.

There is absolutely no evidence that the increase in public sector debt necessary to spur demand and put people back to work has been "crowding out" private borrowing or raising interest rates. In fact interest rates are at record lows. The Federal Funds rate is near zero. Over the last year the yields on long-term bonds have actually dropped. There is, in other words, less competition to place debt than a year ago. In fact, the markets are more concerned with the prospect of deflation, not inflation.

President Obama and the Democratic leadership of both the House and Senate have pushed hard for measures that would prevent state and local layoffs and extend unemployment. The Republicans have obstinately opposed these measures. And there are some Democrats who worry that a vote for a jobs bill would leave them vulnerable to a charge that they are "tax and spend" liberals.

But let's face it, the Republicans are going to say that no matter what they do. The real question between now and the election is whether the Congress can do anything to make voters feel that their personal economic situation is improving. The real question for voters in November won't be if a Member of Congress voted yes or no on House Bill "whatever." It will be whether their brother-in-law found work.

The last thing Democrats can afford is to go into Election Day with an economy that is actually losing jobs once again. That is exactly what may happen if Congress does not pass state fiscal relief and extend unemployment benefits. That would lead to a political narrative that is much more toxic for Democrats in swing districts than any single vote - certainly not a vote to save the jobs of firemen, police officers, teachers, the people who care for the elderly and the men and women who repair our roads.

One final note. The Republicans often blithely argue that "only the private sector creates real jobs." They need to get out of their ivory towers and fancy think tanks and look around. In the economic sense, "real" jobs include any job that actually produces goods and services that add to the store of our collective well-being.

Next time you need a police officer, ask him if he has a "real job." How about the teacher who teaches Johnny to be a productive member of our society? What about the guy who builds the road you drive to work on; or the fellow who cleans the street after the ball game? What about the person who empties the bed pan for an elderly veteran in a nursing home? Now compare the contribution these people make to our collective well-being with the trader at Goldman Sachs that bets on the price of exotic derivatives for a living.

Congress must pass fiscal relief for the states as soon as possible. And while it's at it, the Senate needs to finish the job of holding the big Wall Street banks accountable that caused this economic mess in the first place.

Robert Creamer's recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.

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