Politics & Law

Vicious cycles: Why Washington is about to make the jobs crisis worse

Robert Reich

We now live in parallel universes.

One universe is the one in which most Americans live. In it, almost 15 million people are unemployed, wages are declining (adjusted for inflation), and home values are still falling. The unsurprising result is consumers aren’t buying — which is causing employers to slow down their hiring and in many cases lay off more of their workers. In this universe, we’re locked in a vicious economic cycle that’s getting worse.

The other universe is the one in which Washington politicians live. They are now engaged in a bitter partisan battle over how, and by how much, to reduce the federal budget deficit in order to buy enough votes to lift the debt ceiling.

The two universes have nothing whatever to do with one another — except for one thing. If consumers can’t and won’t buy, and employers won’t hire without customers, the spender of last resort must be government. We’ve understood this since government spending on World War II catapulted America out of the Great Depression — reversing the most vicious of vicious cycles. We’ve understood it in every economic downturn since then.

Until now.

The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.

Yet the parallel universe called Washington is moving in exactly the opposite direction. Republicans are proposing to cut the budget deficit this year and next, which will result in more job losses. And Democrats, from the President on down, seem unable or unwilling to present a bold jobs plan to reverse the vicious cycle of unemployment. Instead, they’re busily playing “I can cut the deficit more than you” — trying to hold their Democratic base by calling for $1 of tax increases (mostly on the wealthy) for every $3 of spending cuts.

All of this is making the vicious economic cycle worse — and creating a vicious political cycle to accompany it.

As more and more Americans lose faith that their government can do anything to bring back jobs and wages, they are becoming more susceptible to the Republican’s oft-repeated lie that the problem is government — that if we shrink government, jobs will return, wages will rise, and it will be morning in America again. And as Democrats, from the President on down, refuse to talk about jobs and wages, but instead play the deficit-reduction game, they give even more legitimacy to this lie and more momentum to this vicious political cycle.

The parallel universes are about to crash, and average Americans will be all the worse for it.

Cross-posted from Robert Reich’s blog.

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Comments to "Vicious cycles: Why Washington is about to make the jobs crisis worse":
    • Lisa M.

      Thank you, Professor!
      If only these Congressional people would listen to people like you or Prof. Krugman perhaps the American economy would be getting somewhere good. I believe this is the same Congress that has passed bill after bill to spend these $. Why now all of a sudden – when so many years they have approved other ceilings of debt is this one so onerous?

      To those that bring up issues of global economy: what do you think will happen to the US when the bulk of our workforce is poorly educated? When our educational system no longer provides for those students with merit – only those with the $ to pay for a degree. What kind of jobs & income will the smaller, less-educated future population have to spend on products in the US? We know some 3rd world countries are growing to be 1st world countries. Where is the US going?

      [Report abuse]

    • Phoebe Baker

      I see the waste in CA State government….the massive salary hikes by upgrading jobs of management cronnies…the continuing use of retirees at upsurd salary levels…which just puts more dead wood in staff sitting around not really learning or engaging to the depth they should…a feeling of entitlement to higher salary levels is so ripe….I can only imagine what the federal government is like…cubicles where whatever duites are probably very well could be done without..but managers need staff to support their higher salary levels…and the unions like it cause in the end it ends up in their pockets by fair share fees….so when some of us shudder at government expanding in any way, be it my job creation agencies or anything that is a government program it’s because of this….and once something is taken on by governemnt it rarely sunsets….governmnet workers in CA have dumbed down so much…..given technology there should be fewer workers since they can cover more territory virtually.

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    • Alex Chung

      There is also a third universe where the rich is enjoying the lowest tax rate and earning three times more than they did 10 years ago. Also, large corporations are sitting on hundreds of billion in cash and giving the upper management raises and bonuses.

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    • disgusted

      This would sound good if the Democrats hadn’t set the base level of government social spending so far off the charts, then proposing to spend yet another couple hundreds of billions to kick start would have made some sense — but at some point, you have tapped out the well.

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    • believeinUS

      Americans are NOT doomed, I cannot and will not believe that American citizens would allow ‘thugs’ to steal the future of our children and grandchildren. Yes we made mistakes and we must acknowledge our part in this misery, but we cannot believe the ‘liars’ who tell us that this financial mess is all our fault, because it’s NOT.

      Lets honor our forefathers and foremothers by demanding that our government leaders listen to us, they must protect the vulnerable ‘elderly, frail and children’ and slam-closed any tax loop holes for corporations and wealthy

      Our generation has been blessed and now it is our turn to be a blessing to the next generation.

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    • Lisa Stockwell

      What will it take to get this message heard? We expected this administration to come out with a WPA-type program aimed at infrastructure upgrades, but there’s been no action. What part, as individual Americans, can we play in changing the conversation?

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    • Baylink

      I am a Democrat, mostly, Lisa, but the more I watch this, the more I think that those “Second Amendment Remedies” the Republican pundits like to bandy about on talk radio and Fox News will be the only long term solution.

      believeinUS, up there, can’t believe that we would allow thugs to detail the future of our children.

      Why not? We let them steal two presidential elections in a row…

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    • Bud Brewer

      I believe some of what you say is true but like so many who express Liberal thought, comparing today to the period following the “Great Depression” when the massive government spending during the World War II pulled America back to full employment and economic growth, there was a single and common purpose for every individual – winning the war. There was no discretionary consumer market driving employment. There was only one principal source of capital-U.S. Treasury using borrowed funds from its citizens. War bonds, savings bonds, etc. The GDP was made up mostly of materials for war and the labor costs were a small fraction of those costs.

      What really turned our economy around happened when the Marshall Plan (a real government investment) was put into effect and a substantial foreign market for goods and services utilizing the knowledge and skill of humans anxious to rebuild their countries. This plan was initiated at the same time as America was converting its massive manufacturing plants and trained labor back to peace driven economy. The pent up demand by its citizens and those in Europe having buying power from savings built up during the war created a huge consumer demand for the new technologies, automobiles and housing given the 5-7 years of austere living standards forced by the war.

      The U.S. Government did create useful institutions to provide financial organizations with guarantees backing up loans private mortgage companies made to finance home purchases. The GI Bill for helping veterans get an education was constructive toward further long term growth of our economy. But there is no real comparison of that period with today’s world. In this Global economy, funding massive excessice entitlements to those who would otherwise be dependent upon their personal responsibiity or that of their family is bankrupting the U.S.A.

      Government has not only become too big it is terribly inefficient and wasteful. Corporate managements are confused and uncertain of what this government is going to do next to constrain their otherwise normal aspitrations to grow their companies. The unknown costs of Obama’s healthcare and consumer proptection legislation is making them defensive. It isn’t lack of demand for their product that is causing them not to increase employment and expand operations. Many corporations are showing record revenues. With Foreign markets surging ahead in less regulated environments, they can focus their expansion by investing in those emerging countries. Their ability to produce the same or a higher level of domestic production with fewer employers is due to the technology that has been developed in recent years.

      The real bugaboo in the domestic economy is the real estate market and its affect upon new home construction. All this, is the consequences of a Real Estate speculative bubble caused by both government and the financial Mortgage industries responding to unrealistic expectations of individual. This housing industry will have to find its base before that part of our economy gets back on a “new Normal” path and the building trades start hiring again. No matter how much you throw at the housing market, it will not stick until the Market clears.

      Government spending more and more in excess of its revenue is exacerbating the problem. We are in for a very difficult time. Hopefully President Obama and his advisors like you will be retired next year from influencing the path to our eventual recovery.

      One Man’s Opinion-Bud Brewer

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    • Camellia Lane

      I agree with most of what you said, including “Government spending more and more in excess of its revenue is exacerbating the problem.” The thing is, you implied Government spending is in fact the problem, when in reality it’s the lack of revenue that is the bigger problem. Corporations that even you state are experiencing record revenues, aren’t paying taxes. Billion dollar companies are getting all the tax breaks and not putting those record revenues back into the system. When the Bush tax breaks for the Rich are finally reversed, THEN, and only then will we see recovery.

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    • Vic Arouza

      “As more and more Americans lose faith that their government can do anything to bring back jobs and wages, they are becoming more susceptible to the Republican’s oft-repeated lie that the problem is government — that if we shrink government, jobs will return, wages will rise, and it will be morning in America again. And as Democrats, from the President on down, refuse to talk about jobs and wages, but instead play the deficit-reduction game, they give even more legitimacy to this lie and more momentum to this vicious political cycle.”

      Once again how right you are Professor Reich! ….but with a completely gullible and brainwashed citizenry there is simply no hope in my opinion!

      [Report abuse]

    • Erik Smitt

      We tried never-ending government spending and massive consumer debt over the last dozen years. As we know, the bubble collapsed. If deficit spending is so good, why did it bring us to this economic outcome?
      I support cutting government spending because it is not productive … waste is our problem … we need to spend money that makes money, only … add value. Just printing money for more debt will not fix the economy.

      [Report abuse]

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