Jobs and the “Fiscal Cliff”

My relief that Mitt Romney was not going to be our president, with a Republican Senate along with the House of Representatives, barely lasted through Tuesday night.  By my lights, a lot of terrible stuff and a completely wrong direction in our policy and politics have just been avoided.  Whew!  But after months of both Republicans and Democrats talking about the lack of jobs being produced by our lackluster economy, with political reporters, operatives, and pundits hanging on the next unemployment report as if it might be vitally important for the future of the republic — by the end of the week our 8% official unemployment rate (and Romney’s oft-repeated “23 million unemployed and underemployed workers”) was again just one of those inconvenient realities that we’re going to have to live with.

President Obama’s victory speech Tuesday night looked ahead to his second term and promised to focus on “reducing our deficit” along with some other things (“reforming our tax code, fixing our immigration system, freeing ourselves from foreign oil”), with no mention of getting our economy growing at a rate that can reduce our debilitating unemployment and the damage it is doing to all of our lives, some of us much more than others.  Then, as the Wall Street Journal headlined two days later, “Political Focus Shifts to ‘Fiscal Cliff’,” and it’s all about budgets and the need for “shared sacrifice” and a “balanced approach” to easing the economy farther downhill rather than going off a cliff.

The fiscal cliff is not just about deficits.  It’s about jobs – jobs in an economy where there are not nearly enough of them for everybody who wants and needs them.  If the spending cuts and tax increases currently scheduled to take effect January 1st actually would take effect and then remain in place for all of 2013, it would reduce the federal deficit, at least at first, by more than $600 billion – that is, “cutting the deficit in half,” as the President once promised.  But it would also throw us back into recession and eliminate more than 4 million jobs.

Jobs and deficits are related.  Federal budget deficits (spending more than you take in in taxes) fuel economic growth and create jobs.  Likewise, stronger, faster economic growth creates jobs and, thereby, reduces federal budget deficits.  Without the annual $1 trillion deficits the federal government has been running since President Obama took office, we would still be in the Great Recession – or worse.  Right now, we need those deficits.  Cut them substantially, and you reduce economic growth and kill jobs.

Even though some Republicans deny it and almost no Democrats will say it, all the political players, including what is euphemistically called “the business community,” know these basic principles of macroeconomics.  They know that rapidly cutting the deficit in half – whether by cutting spending, increasing taxes, or some combination of the two in a so-called “balanced approach” – will send the economy back into its 2008-09 tailspin.  That’s why all the political players fear the fiscal cliff, and that widespread fear is also why we will not go over it.

But how we avoid the fiscal cliff matters.  And just avoiding it will at best leave us where we are, with a stagnant economy growing at 2% a year and with an official unemployment rate near 7% as far as the eye can see.  We also need to stimulate the economy immediately, get it growing fast enough so that it is creating 300,000 or 400,000 jobs a month (versus the recent trend of 150,000 a month).  This will increase the deficit in 2013, but it will also do more to cut the deficit in the long run than any spending cut or tax increase could do.

For a guide on how to avoid the fiscal cliff, see the Economic Policy Institute’s September policy brief, “A fiscal obstacle course, not a cliff” by Josh Bivens and Andrew Fieldhouse.  It’s very wonky and can be hard to follow in spots, but it’s only 13 pages of text.  And it has a wonderful table on page 7 that lists the various laws that expire at the end of this year and shows both how much each expiration will reduce the deficit AND how many jobs it will kill.  The fiscal cliff is not just the Bush tax cuts – which will lop $64 billion off the 2013 deficit if only the high-income cuts expire, but will also cut 102,000 jobs.  The cliff also includes Obama’s special recession-fighting unemployment compensation program (whose expiration will reduce the deficit by only $39 billion but will eliminate 448,000 jobs) and the expiration of the payroll tax cut (which will reduce the deficit by $115 billion but at the cost of killing more than one million jobs).

Bivens and Fieldhouse use these calculations to show how a jobs-sensitive strict cost-benefit analysis would lead to renewing (and even enhancing) federal government spending programs rather than renewing any of the tax cuts, while also showing that tax cuts targeted to lower- and middle-income workers create more jobs than those going to the wealthy and other high-income earners.  Tax increases do kill jobs, just as Republicans always say, but cuts in government social spending kill many, many more.

There is a lot of complicated economics here, and the politics of avoiding the fiscal cliff may be even more complicated.  I sympathize with the President and Congressional Democrats for having to work through these daunting problems while dealing with House Republicans.  But the President started on the wrong foot Tuesday night by focusing on “reducing our deficit.”  That’s a job killer if you do it now and if you do it the wrong way.  With an economy growing at 2% (at best) and an unemployment rate hovering around 8%, the very last thing we need now is to reduce our deficit.  Rather, first we need to preserve our deficit and the jobs it is supporting.  And then we need the President’s American Jobs Act with its increased spending for infrastructure and for state and local governments to hire and rehire “teachers, cops, and firefighters” – namely, the stuff he campaigned on, the promise of “Forward.” Reducing our deficit and a long-term plan for managing our accumulating national debt are for later, not now.  Right now we need jobs, millions of them.  And we need our newly elected President paying attention to that in a way he has not since February of 2009.

Jack Metzgar

Chicago Working-Class Studies

Who Creates Jobs? Taxes, Spending, and Class War

Republicans oppose spending for unemployment compensation and for plugging holes in states’ Medicaid and education funding, but they fight to extend the Bush tax cuts for the top 2% of income-earners—those making over $200,000.  This, according to the Wall Street Journal, is not “class war,” but President Obama’s proposal for increasing taxes on that top 2% is.

The Journal opposes the President’s proposal because it “means raising [taxes] on the Americans most likely to take the risks that spur economic growth.”  The Journal pointedly asks: “Mr. Obama and Nancy Pelosi think they can play their usual class war card to justify raising taxes on the rich, but that’s risky political business with unemployment at 9.5%.  Who do they think will create new jobs—people making less than $200,000 a year?”

Rich people create jobs by investing in companies (little ones they own themselves or big ones they own stock in), and it’s these companies who actually hire workers and pay them a wage.  This is true.  But it’s like saying that the light coming from the ceiling of my office is caused by the light switch on the wall.  Without turning the switch on, there will be no light, but the ultimate creator of that light tracks back to a power station and a national electric grid that hooks into the wiring behind the walls of my building.  In an economy, consumer demand is the power station, the grid, and most of the wiring.  If there is not enough consumer demand, businesses have no reason to hire new workers—just as there is no reason to switch the light on if nobody is using the room.

The reason companies aren’t hiring more now isn’t that they don’t have the money.  It’s the lack of consumer demand.  Businesses are currently sitting on huge piles of cash.  According to Bloomberg Businessweek, the 3,000 largest publicly traded U.S. companies “have $2.9 trillion in cash and short-term investments” they don’t know what to do with.  Workers and consumers (and most state governments), on the other hand, are struggling to pay last month’s bills and to provide for basic necessities.  The latter is the primary cause of the former.  That is, not enough money in the hands of workers and consumers means a lack of profitable investment opportunities for business and rich folk.

That’s why extending unemployment compensation, among many other things, will create more jobs than any tax cut.   Using the Congressional Budget Office’s estimates of the job-generating capacity of different policy options, here’s the proposed cost and predicted job growth for the three policies currently in dispute:


Amount passed or proposed Number of jobs likely created in 2010-2011
Increased aid to the unemployed $34 billion 300,000 to 600,000
Increased aid to states $26 billion 80,000 to 180,000
Tax cuts for top 2% $70 billion 70,000 to 210,000

Thus, given that the tax cut desired by the Journal is twice as big, extending unemployment compensation creates from 6 to 8 times the number of jobs as the tax cut would.  Aid to states creates about 3 times as many jobs.

You can turn this around and say that a $70 billion tax increase on the top 2% could lead to the loss of as many as 210,000 jobs, and that would be true (given the CBO estimates).  But if the government used that $70 billion in new revenues for increased aid to the unemployed, it would create more than 1.2 million jobs–or a net gain of about a million.  Why wouldn’t we as a nation want to do that?

On the other hand, you might note that the Obama 2010 “stimulus” package, totaling $60 billion, is predicted to produce a maximum of 780,000 jobs.  That’s helpful for some of the 14.6 million who are currently unemployed (as officially calculated), but it’s not enough.  Democrats are doing the right things to stimulate the economy, but not nearly at the magnitude necessary to get it growing strongly enough to reduce unemployment anytime soon.

As I pointed out in March, the Obama White House was dismissive of a much stronger 2nd stimulus plan proposed by a coalition of unions, the National Urban League, and the Center for Community Change.  That one would have spent $400 billion (on the same kind of things the administration is spending it on) and would have created 4 million jobs.  The White House dismissed it on political, not economic, grounds.  Something of that magnitude would never pass Congress, they said.

The problem with strictly political calculations is that it’s often politically stupid to propose and pass something that is not substantively adequate to the size of the problem.  After bitter fights with Republicans, the President added more accomplishments to his resume this summer by passing one more temporary extension of unemployment benefits and a state bail-out package that will leave states still woefully under water.  After his impressive string of legislative “victories,” however, he now owns the current state of the economy, which the majority of Americans see as “on the wrong track.”

The President should take advantage of recent bad economic data on GDP growth and unemployment to admit his mistake.  That by itself is always refreshing in a president.  And if he’s going to be accused of “class war” for merely restoring Clinton-era tax rates on the top 2%, why not do enough taxing and spending to deserve that charge?

As the Institute for Policy Studies and others have shown, the top 5% are good for at least $500 billion in various tax increases that could be put to productive uses in a wide variety of ways.   As the CBO estimates show, taxing the rich kills some jobs, but not nearly as many jobs as are created by bailing out the unemployed, state governments, construction workers, autoworkers, transit workers, homeowners, and many others.  With that kind of increase in consumer demand, the businesses currently sitting on trillions of dollars would start hiring to produce all the things they could profitably sell.  In other words, ironically, a more robust class war would be very good for business.

Jack Metzgar