Time to Take Action on the Recession

The warning signs are everywhere: Unemployment is increasing, the housing market collapsing, new construction declining, retail sales disappointing, manufacturing stalling, and credit markets convulsing. Rightly enough the nation's political leaders are considering how to contain the damage from a recession many observers believe has already started.

In many ways, the discussion reflects the debates that have shaped economic policies for the past three decades. The Bush administration and its conservative allies are arguing for more of the same policies that helped get the economy into the condition it's in: long-term tax cuts tilted toward the wealthy that reduce the revenues of the federal, state, and local governments and make it more difficult to address the nation's needs. Progressives are calling for a different focus – on creating good-paying jobs, increasing the purchasing power of working Americans, and investing in urgent national priorities, such as repairing crumbling bridges and public schools.

Today, I'll be testifying before the first Joint Economic Committee hearing, chaired by Sen. Charles Schumer, on what the government can do to get the economy out of reverse gear. I'll be presenting the Strategy for Economic Rebound, the Economic Policy Institute's blueprint for federal action to generate jobs, increase incomes, and make our communities and our country better places to work and do business.

Our focus needs to be on rising unemployment, which Goldman Sachs now projects to hit 6.2 percent in the last three months of 2008. This will mean unemployment exceeding 12 percent for minority communities. And, for every 1 percentage-point rise of unemployment we can expect middle-income families to lose 1.4 percent -- the rise from 4.6 percent last spring to 6.2 percent next winter is a hit of 2.5 percent to incomes. Considering the context -- families have less income now than they did at the end of the last recovery in 2000 -- this is quite a bad outcome. The economy has been broken so we need a major effort to reconnect economic growth with broad-based living standard improvements. An anti-recession program, as discussed below, does not address these larger economic issues: Rather, it addresses the impact of rising unemployment that only makes matters that much worse.

Reasonable people can debate the details, but first we need to agree on the principles for an anti-recession plan (or as the national media and public policy-makers like to call it, a "stimulus package"). If the goal really is to get the economy moving again, then public policies should serve five fundamental goals:

First, promote growth and, thereby, create more jobs. Second, take effect as soon as possible before the economy plunges into a deep downturn. Third, increase fiscal deficits in the immediate future but not for years to come. Fourth, invest in the nation's unmet priorities, such as the huge backlog of repairs in schools and bridges and the need for new sewage-treatment plants and energy-efficient public facilities of all kinds. And, fifth, put the money in the pockets of those who need it most, not only because the last thing America needs is more economic inequality but also because hard-pressed, hard-working families are the folks most likely to spend their money on the necessities of life, bolstering consumer demand, boosting business activity, and preserving and producing more jobs.

To advance these goals, EPI's Strategy for an Economic Rebound pumps $140 billion of stimulus into the economy, targeted to essential public investments and middle and low-income families. This will generate between 1.2 million and 1.7 million new jobs.

At a time when joblessness is increasing, our plan helps the nation's rickety Unemployment Insurance system keep its promise to offer a helping hand to every American who seeks suitable work but cannot find it. In the last recession, national unemployment grew by 2.7 million from December 2000 to March 2002. But this growing need failed to trigger the national program that would have extended benefits under the current law to the hundreds of thousands of jobseekers who needed help. By the time that Congress finally enacted a special program of additional benefits -- Temporary Extended Unemployment Compensation -- in March 2002, the official recession had been over for four months.

How can the nation do better this time? The better choice is to replace the Extended Benefits Program, which only lengthens the benefit period by 13 weeks and splits the cost equally between state and federal governments. Instead, we propose a new, 100 percent federally funded program that would go into effect immediately, given that unemployment is already higher than it was when the last recession started. This program would extend benefits by 20 weeks, and by another 13 weeks in states when unemployment reaches 6.0 percent, with the federal government paying the cost. After all, when the economy slows down, state budgets are already burdened with declining tax revenues and increasing social needs. Why stretch state budgets to the breaking point? In addition, Congress should increase every unemployment benefit check by $50; the average weekly benefit today is a paltry $285.

Of course, the best response to rising unemployment is to put Americans back to work. As every parent, every commuter, and every environmentally conscious citizen knows, there is a huge backlog of work that needs to be done fixing schools and bridges and building energy-efficient facilities of all kinds.

Nothing sums up the problem as well as a few facts: The average age of public schools is about 40 years, and these buildings need a total of at least $17 billion a year in maintenance and rehabilitation. Meanwhile, the U.S. Department of Transportation has found more than 6,000 major bridges that need to be repaired or replaced. On the environmental front, more than $4 billion of wastewater treatment projects are ready to go to construction, if funding is made available. Let's provide the money for all these needs – schools, bridges, sewage treatment plants, and more. Every $1 billion of construction spending generates from 14,000 to 47,000 new jobs -- and up to $6 billion in additional economic activity.

State and local governments also need emergency assistance so they won't have to take actions that slow down the economy even more: raising taxes, cutting services, and laying off workers. On the federal level, tax reduction should be targeted to those most likely to spend it immediately -- low and moderate-income people whose family budgets are already squeezed.

Yes, these ideas will cost money. But the price tag is nothing compared to the costs of waiting too long, doing nothing, or doing the wrong things. During the last recession, earlier in this decade, the Bush administration and Congress did too little and did it too late. The economy and the job market were very slow to recover, with the result that job growth, workers' wages, and family incomes all stagnated well beyond the "official" end of the recession.

Meanwhile, the Bush administration is prescribing more of the quack remedies that helped the economy weaken and the federal deficit widen. More tax cuts for the wealthy will end up in the bank accounts of those least likely to spend the money and will reduce federal tax revenues years after the economy no longer needs a jumpstart. Without a rise in consumer demand, corporate tax relief and other supposed business incentives will not be effective in promoting growth. Meanwhile, the administration and its allies are neglecting real needs, such as repairing schools and bridges, generating "green jobs," and helping the unemployed get assistance and new jobs.

Everyone's talking about taking action against the recession. Let's do it now. And let's do it right.

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