Pinched (21 page)

To be effective, any potential remedies must alleviate the worst symptoms of the current weakness and also confront the problems that lie beneath them. They must bolster the economy now and clear the way for faster long-term growth, help the jobless get back to work and ensure that we are creating the kinds of jobs that allow for a more broadly shared prosperity in the future. I wish I could say I have a proven twelve-step plan to achieve these goals—quickly and without risks or side effects. But these are difficult and contentious issues, and many reasonable people will doubtless disagree with the solutions I propose.

Before proceeding to those remedies, let me make a few brief observations about the
nature
of the problems that the recession has caused or revealed, and how we’ve perceived—or in some cases misperceived—them. I believe these general principles must under-gird any serious effort to improve the nation’s footing. If we can agree on them, at least, we will be on our way to better, smarter action.

1. The problems created by the most-severe recessions are typically bigger and longer-lasting than they first appear. Indeed, the damage
that periods like this one do to people, families, and communities is in many cases permanent. The greatest treasure of any modern economy is its human capital, but long, deep slumps slowly drain that away. As we’ve seen, the life prospects, openness, and energy of young adults are diminishing with each year that economic weakness lingers. The ranks of middle-aged and older workers who’ve become unemployable by being sidelined too long are swelling. Families are fracturing, and the futures of the children within them dimming. Middle- and working-class communities are tipping into decline.

All of these developments are, above all, personal and local tragedies. But they also leave a national legacy, robbing the economy of human potential for decades. Every year that goes by while masses of people are trapped and idled due to housing woes and high unemployment is not merely one lost year—it’s a loss that’s paid forward into future years as well, an accumulating deficit of skill, character, and regenerative ability. It’s a loss that will restrain America’s growth potential and cause social problems for many years to come.

2. Again and again, our tendency in periods like this one has been to hunker down, retreat from one another, and wait for the bad times to pass. When bubbles pop and times grow hard, the animal spirits within all of us turn bearish, money-conscious, sometimes ungenerous, and deeply averse to risk. Some of these changes may be healthy in moderation. But they are of course emotional responses, and unchecked, they can bias our thinking and actions in ways that are just as dangerous and counterproductive as bubble thinking itself.

3. Historically, as a result of these first two factors, we have tended to underestimate the true cost of remaining in periods like this one, and to overestimate the risks of aggressive action to try to hasten recovery. The bias in periods like this one has usually been toward doing too little; if anything, it should be toward doing too much.

4. This was not a vanilla recession, and vanilla responses will not fully end it. Recovery from financial crisis is usually slow and painful. Today, government action is hampered by interest rates near zero, which hamstrings the Fed; and by a high and rising national
debt, which makes fiscal expansion more risky and contentious. Many American workers, meanwhile, are in the wrong places and in possession of skills that are no longer useful. Innovation, a critical engine of jobs, has been disappointing for a decade. Boilerplate responses—cut taxes, raise spending—are insufficient given the nature and variety of these problems, and potentially dangerous if only bluntly applied. We need a combination of actions—some time-honored, some novel—to restore our health.

5. True recovery is not simply a matter of jolting the economy back onto its former path; it’s about changing the path. We are in the midst of a major, global economic transformation, one that is steadily thinning the American middle class. The Great Recession has brought this into sharp relief, and in some ways has given us a preview of where America’s economy is heading. And while this preview is troubling, it is also clarifying. Many of the deepest economic trends that the recession has highlighted and temporarily sped up will take decades to fully play out. We can adapt successfully to them, if we start now.

6. Culture matters. Everything about this period underlines the connections between the economy and the culture—and the profound way that each influences the other. A cultural separation is accompanying and reinforcing the economic sorting of Americans. It is happening in Middle America and it is happening in Aspen. Much of the nonprofessional middle class is slowly coming to resemble the poor in its habits and values; the rich are simply floating away from everyone else, not just financially but emotionally too. Both developments are profoundly unhealthy. Solutions to the problems of this era cannot be only economic. They must be cultural as well.

These six principles shape and inform the recommendations that follow. I am not a policy analyst by trade, and while I have spent many hours reading, thinking, and talking with experts about the nation’s problems, I offer this plan with humility. Collectively, these ideas make sense to me as a way of restoring America’s social and
economic health. They begin in response to the nation’s most-immediate problems and then move to longer-term concerns.

In 1937, as Franklin Roosevelt began his second term, the U.S. economy seemed to be on the mend. Unemployment was still very high, but it had come down greatly, from nearly 25 percent at its peak in 1933 (and nearly 20 percent in 1935) to about 14 percent. The economy was clearly improving, and the private sector seemed to be returning to health. And although worries about jobs and incomes remained intense, they jostled, increasingly, with concerns over government debt. In 1936,
after years of deficits, about 65 percent of the American population had said the budget absolutely needed to be balanced, many even supporting higher taxes to do it.
And so, in 1937, the federal government raised taxes and slashed spending. Demand plummeted, and in August 1937, the stock market collapsed again; the unemployment rate rose to 19 percent in 1938, and didn’t fall below its 1937 level until 1941. World War II and the spending it generated ultimately restored the economy to health.

Deficit spending intuitively feels irresponsible today. It nearly always does during a downturn: in the recession of the early 1980s, for instance, three out of four Americans were somewhat or very worried that government debt would choke off the recovery, although as a share of the economy, the debt was less than half what it is today. (
Debt kept rising as a share of the economy through 1995, and remained far above its early-’80s level throughout the boom years of the 1990s.)

The size of the debt really is a cause for serious concern today. The ratio of government debt held by the public to U.S. GDP, about 62 percent in 2010, is still substantially lower than it was during the World War II era (the debt ratio peaked at about 109 percent in 1946, and was above 70 percent from 1943 through 1950; average
debt for the 1950s as a whole was about 58 percent). But it’s higher now than it has ever been since that time, and it has been growing very quickly since the crash. There are no signs that investors fear an imminent fiscal crisis; they continue to buy U.S. Treasury notes that pay extremely low interest rates. And other countries have more recently carried larger debts than ours for many years without any crisis, although international comparisons are complicated and of limited value. No one knows exactly how large the federal government’s debt could grow before it would prompt a crisis—or at least a crippling loss of confidence.
Many observers believe that stabilizing the debt at no more than 60 percent of GDP, in the long run, is critical to maintaining confidence in the government.

Yet concerns over the national debt need to be put in their proper context. One reason the debt has grown so much as a share of the economy since 2007 is that the economy shrank and has bounced back only weakly. And lower-than-normal tax receipts, not extra spending, accounted for much of the deficit from 2008 to 2010; actual government revenues in 2010 were roughly $800 billion less than they had been projected to be back in 2007—that’s more than half of the 2010 deficit—and a sizable portion of the reduction resulted directly from the economic slump. Revenues will rise automatically, of course, as the economy returns to health.

In the short run, austerity, not deficit spending, would be irresponsible. One clear lesson from the aftermath of other major crashes is that incipient recoveries remain uncertain for a long time, and are vulnerable even to small shocks. When the economy is fragile, measures to cut the deficit can be highly counterproductive, setting off a chain reaction of reduced demand, lower growth, job cuts, and further reductions in the tax base—all yielding a more deeply troubled economy and another large deficit the next year.

Jobs are scarce and out-of-work applicants are plentiful across nearly every sector of the economy today; unemployment in 2010 was roughly double its 2007 rate, or more, in every major sector save for leisure and lodging.
The unemployment rate even for young
college grads—who have not yet yoked themselves to any particular industry and who have strong, generalizable skills—was 9.4 percent in 2010, nearly double its level in 2007. All of this suggests quite strongly that depressed demand is the biggest problem facing the economy in the near term. As much as Americans were overspending before the crash, they are underspending today as they rebuild their finances; once that process is complete, they’ll be able to spend more again. In the meantime, though, the long dip in demand is causing all manner of problems. To avoid economic backsliding and enable a faster, more broadly shared recovery, we will probably need to run large deficits for the next two or three years.

Few would deny that the U.S. government was reckless with its finances during the aughts. And it would be just as reckless to keep running big deficits without highly credible reassurances that the government will begin to balance its books the moment the economy is healthy again. Ultimately, it is not this year’s deficit, or next year’s, that poses a significant risk to the economy. It is the prospect of endless large deficits—and fears that the government lacks the political will to close them. Those fears have little to do with recession-fighting. The problem has not been deficits during times of economic weakness, but rather their continuation during times of good health. Even more so,
fears are driven by the continuing, runaway growth in spending on Medicare—the overwhelming reason why our budgetary future looks grim.

To restore confidence in the federal government without undermining the recovery, we must tie current deficits to binding measures that will close the budget gap and stabilize the national debt in the near future. By early 2011, several bipartisan plans had been developed to do just that, including the Bowles-Simpson plan, developed at the behest of the White House, and the Bipartisan Policy Center’s Debt Reduction Task Force’s plan. We should immediately pass legislation that requires aggressive deficit cutting, beginning in two or three years and containing automatic triggers that will impose across-the-board spending cuts and tax increases if Congress cannot
come to agreement on a budget that conforms to the law. Better still, we should pass a binding commitment to a budgetary balance or surplus whenever the economy is objectively healthy (for instance, whenever unemployment is below, say, 6 percent, and economic growth exceeds a certain threshold). Every category of spending must be on the table for cuts, including defense and entitlements. We should also embark on tax reform to broaden the tax base and close distortionary loopholes.

As painful and contentious as it will be,
we should also focus immediately on the real source of our long-term budgetary problems: Medicare. The health-care-reform bill of 2010 contained measures designed to reduce the growth in health-care costs over time, and they may, but it’s difficult to take that to the bank today. We should either provide more authority to the new Independent Payment Advisory Board tasked with reducing growth in Medicare spending, or consider converting Medicare into a system of vouchers with which seniors can buy health insurance, with the growth in annual voucher payments strictly limited to a rate below that at which medical costs have historically grown.

Fiscal policy as a means of raising or sustaining demand is inherently leaky—some of the money injected into the economy just flows right out as people use it to buy imported goods, and some people don’t spend the extra money in their pockets at all, saving it instead. The initial stimulus, of necessity, was something of a shotgun blast, showering cash into the economy in any way possible at a time when the economy was in free fall. Today, we need rifle shots—targeted efforts that can deliver maximum impact for each dollar spent.

Aid to the states is one good example. Bound by balanced-budget requirements and facing huge tax shortfalls, many state and local governments have begun firing teachers, police, and other employees by the thousands. Initial stimulus funds helped these governments cover shortfalls, keeping people employed. But those funds have largely run out. In early 2011,
the city of Camden, New Jersey, laid off 168 police officers—46 percent of its police force—along
with 67 firefighters and more than 100 other municipal employees. A resumption of federal aid to states would preserve some of these jobs until tax revenues rise again, and keep more money circulating in local economies throughout the nation. Further measures to support the unemployed would likewise bolster demand efficiently and immediately; the unemployed typically spend their benefits quickly and entirely—they can seldom afford to save.

One of the best targets for spending today—with both jobs and competitiveness in mind—is infrastructure. For years, the United States has let its infrastructure age and deteriorate; in 2009, the average age of public infrastructure was at a forty-year high.
The American Society of Civil Engineers gave U.S. infrastructure a D grade overall in its 2009 Report Card for America’s Infrastructure, down from a C about twenty years ago; public transit, roads, airports, dams, levees, schools, and energy infrastructure all received D grades.
Over the past decade, the United States has slipped considerably in the World Economic Forum’s global ranking of physical infrastructure, and it’s not hard to see why.
China spends about 9 percent of its GDP on infrastructure each year, and Europe 5 percent. The United States, by contrast, spends about 2.5 percent; we’ve been underinvesting for years.