The dismal May employment numbers show the U.S. economy is sputtering, and those who were hoping for a summer of economic green shoots have been kidding themselves.
From February to April, private employers added an average of almost 220,000 jobs -- that's progress, though only at about half the pace the economy needs to get back to pre-recession employment levels. But in May, the number fell to just 83,000 new private-sector jobs, and that number drops to 54,000 if you net out the jobs lost to continued layoffs at all levels of government. Manufacturing employment had also ticked up slightly, but in May the industry resumed its long-term trend of shedding jobs. Economists had hoped that increased consumer spending signaled a stronger economy, but it mainly reflected higher prices for fuel and food.
Lately, the media and the Washington hothouse have been busy debating deficit reduction. Those are the wrong debates. Deficit reduction does nothing for job growth, and is economically perverse at this stage of a weak recovery. Continued high unemployment will wreck President Barack Obama's re-election chances; even more important, it will condemn the economic prospects of an entire generation. It's not as if we are doomed to this future. There are solutions, but they are off the radar screen of mainstream politics.
For starters, we need a large-scale program of public investment to improve our infrastructure. The American Society of Civil Engineers puts the basic price tag for deferred maintenance at $2.2 trillion. That refers to collapsing water and sewer systems, roads, bridges, public buildings -- it doesn't even include 21st century infrastructure like smart-grid power systems, green energy, universal broadband and green energy.
But beside providing for basic maintenance needs, what the economy needs to fully recover is a massive -- and I mean massive -- infrastructure and jobs program financed by surtaxes on wealthy individuals and on windfall financial-sector profits, including taxes on profits from short-term financial trades. We could also get upwards of $200 billion a year from tax enforcement, mainly on trans-national evasion used by America's wealthiest. Some of the funds for this program could also come from winding down the gratuitous wars we're currently engaged in. And some could even come from a modest increase in short-term deficits.
The order of magnitude of the public investment program should be at least half a trillion dollars a year, for at least five years, and more if that doesn't solve the problem. We would not hesitate to spend this kind of money and levy surtaxes if America found itself in a serious war. It was the economic side-effects of the massive WWII program of tax, borrow, and invest that finally pulled America out of the Great Depression -- and powered the postwar boom.
But even though we face a national emergency, it seems impossible to summon up the political resolve for this kind of collective enterprise absent the total mobilization of a major war.
The jobs problem might seem intractable because we already have a deficit of around 10 percent of GDP, and the Fed has already pushed down short-term interest rates to close to zero. According to the conventional view, policymakers are out of tricks. Even worse, the policy elite is focused on the idea that deficit reduction will somehow produce more jobs.
We have some Republican politicians like Paul Ryan calling for huge spending cuts in the name of deficit reduction -- almost all of which would go for tax cuts, leaving the deficit largely unchanged. We have other Republican politicians like Tim Pawlenty calling for actual budget balance, which would drive the economy even further into a hole.
And on the Democratic side, we have inconsistent policy and messaging. In his important April 13 speech at George Washington University, President Obama devoted part of his remarks to brave words about the importance of fairness and social investment -- but the other half was the conventional plea for fiscal responsibility. Obama's budget proposal, at least, is a lot less draconian than that of the Republicans, but it will not be enough either to fix the economy.
This apparent policy paralysis is mainly a reflection of how much damage was done by the financial collapse.
What we face is not an ordinary macro-economic challenge of recovering from an ordinary recession. There is huge structural damage - everything from the loss of trillions of dollars of household net worth due to the housing collapse to weakened bank balance sheets to an epidemic of outsourcing as corporations try to cut their own costs. It all adds up to a massive deflationary drag. The proof is that neither zero interest rates nor double digit deficits -- which ordinarily would provide very rapid growth -- are curing the problem. But the government still has the remedy of large-scale, job-intensive public investment. Economic history shows that when the private sector is too traumatized to revive economic activity and employment, public investment is the only way to jump start a full recovery.
Obviously, the Republicans will never to agree to a program of large public investment. But Obama ought to propose one. It would be far better, both for Obama and for the country, to have the 2012 election as a referendum on jobs rather than an arcane and counterproductive debate about two brands of budget cutting.
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