Obama’s Latest Plan
“American Jobs Act” $447B Tax breaks
Half payroll tax cuts for workers & employers Additional tax breaks for employers who hire new workers
Infrastructure investments (school buildings; transportation projects)
Aid to state and local governments (rehire teachers) Extend unemployment benefits Raise taxes for those above $250,000
Hoped for economic result
Create 50,000 jobs/month By comparison: 35,000/month for last 3 80,000 net jobs for October
“Fully paid for as part of the President’s long term deficit reduction plan”
But …. Should the deficit be reduced in the short term?
Indeed, can enough of it get passed by Congress?
Deficit basics
Federal Budget Deficit Annually, it is the amount of money the federal
government spends minus the amount of money it takes in [Deficit = G - Tx]
Treasury must borrow the shortfall -- issues bonds National [or Public] Debt
Cumulatively, amount of money the government has had to borrow throughout our nation’s history
Interest Interest costs reflect both the amount of money borrowed
and the interest rate.
USA born (Jan 1, 1791) $75,463,476
Lowest ever (Jan 1, 1835) $33,733
Pre-Reagan (Oct 30, 1980)
$907,701,000,000
Debt milestones – born into debt
FY 2011 (currently) $15,476,000,000,000
Pre-Reagan $1.0T
Reagan $1.9T
Bush II $6.1T
Obama $2.4T
Who holds the debtWhen the debt was accumulated
Are these debt numbers worrisome?
Two common measures of the national debt: Net debt
Debt held by the public Borrowing from the private sector (including banks and
investors) and foreign governments.
Gross debt Net debt plus the debts the Treasury owes to U.S.
government trust funds [like Social Security]
Interest payments
As noted earlier, interest due depends not only on the size of the debt ….
But also the rate of interest It has been low recently The amount of interest paid on the rising debt is
actually falling! [absolutely and % of GDP] Comparisons (as % of GDP)
USA – 1.5% Germany – 2.0% UK – 2.6%
Actual, total tax revenues paid as % of GDP in 33 OECD countries [2008] Highest:
#1 Denmark = 48.2% #2 Sweden = 46.3% #3 Belgium = 44.2%
Lowest: #33: Mexico = 21.0% #32: Chile = 22.5% #31: Turkey = 24.2% #30: USA = 26.1%
Unweighted average = 34.8%
What causes unemployment?
Structural [long term] unemployment: Free trade of goods [China] Free movement of capital [“runaway”] Technological change
Mismatch of skills with jobs available
Cyclical [ups and downs over business cycle] “Job creators” -- only private enterprise? Taxes too high – The O’Rielly Factor? Weakened overall demand for goods & services
The unemployment rate understates the larger problem
Discouraged workers Those who have given up looking for work They are no longer counted as unemployed
Involuntarily unemployed Those working but preferring a full time job Walmart employees, UPS, etc.
These can add half again as much or more to the unemployment rate: 9% + 4.5% = 13.5%
Also the “underemployed”
Output
(Y)
Income
(Y)
Spending
(Aggregate Demand or AD)
Spending stimulates firms to produce
Production generates incomes
Incomes give actors the ability to spend
Why are there jobs? Key concept is “aggregate demand” [AD]
Think of “AD”
as “GDP”
This means jobs
Why recessions? Because “leakages” occur in the spending
stream
Production generates income tohouseholds
saving (S)
leakage
intended investment ( II )
injection
firms decide how much to invest
households decide how much to consume and save
Output (Y)
Spending (AD)
Income (Y)
consumption (C)?Sufficient to sustain output at a steady level
If not, workers are laid off
leakage
injection
Production generates income
Spending stimulates firms to produce
saving (S)
equlibrium in the market for loanable funds
intended investment (II) is equal to S
9.8
output (Y*)
consumption (C)
income (Y*)
Spending sufficient to sustain full employment
AD = Y*
The market solution
output (Y*)
income (Y*)
Insufficient spending
AD < Y*
Production generates income
Income goes to households
If leakages are larger than injections…
lower income
lower spending
AD = lower Ylower output
What if markets don’t adjust?
Savings
Why recessions? Because “leakages” occur in the spending
stream
Production generates income tohouseholds
saving (S)
leakage
intended investment ( II )
injection
firms decide how much to invest
households decide how much to consume and save
Output (Y)
Spending (AD)
Income (Y)
consumption (C)?Sufficient to sustain output at a steady level
Tx
Government spending (G)
Short term solution if the market fails: Government “Pump priming”
If investment spending is weak (I<S) so there is a net leakage from the spending stream
Then government “stimulus” is called for to inject spending back into the spending stream Key to recovery: create a deficit! (G>T)
If overall demand is up, sales improve, output increases, hiring improves, unemployment decreases, income increases – and demand goes up again “In the long run we are all dead” [Keynes]
Conclusion
The immediate problem is not the deficit or the public debt In fact the solution is to increase it, at least for a
time The job crisis is far worse
It can be mitigated with fiscal stimulus lasting, say, 5-7 years.
But this will not solve what’s fundamentally wrong with the US economy
And there’s a paradox ….
Central paradox
Why has the deficit debate taken precedence in the midst of massive,
destructive unemployment?
The Austerity War
James Crotty, “The Great Austerity War” (on web site) Richest and most powerfully segments of society, in
concert with conservative political forces …. Have and are demanding that (Federal and State)
deficits be eliminated by public-sector austerity. “Starve the beast;” redirect funds to the private sector
Attack on spending programs that support the poor, and the working and middle classes
Began in the 1970s and 1980s
Austerity class war rules Washington today
Read Ari Berman’s The Nation article on web site (November 7, 2011)
Members of the class include: Wall Street titans [Pete Peterson; Rbt Rubin]
Deficit hawk groups [Ctr for a Responsible Federal Budget]
Budget wonks [Alice Rivlin]
Red state Democrats [Mark Warner]
Pundits [Tom Friedman, David Brooks of NYT]
Blue-ribbon commissions [Bowles-Simpson]
Consistent focus: cut, cut, cut public spending
They exercise power thru
Congressional testimony Constantly quoted in media Issue policy reports Advocate “balanced” solutions, often wildly
out of step with public opinion & reputable economic policy Imposing cutbacks on social security & medicare
benefits Eliminating mortgage interest dedications No tax pledges by politicians
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