The Progressive Budget Reminds Us That Government Can Create Jobs

Mar 17, 2014Nell Abernathy

Unemployment is still a major problem in the U.S., and the best solutions involve a more aggressive government response.

The Congressional Progressive Caucus budget, released last Wednesday, is forecast to create more than 8 million jobs by 2017 – a claim that is bound to stir up an argument about the government’s role in job creation. It’s not a new argument – progressives and conservatives have been having it explicitly since 2008 and more implicitly for years before that – but it is worth revisiting, because progressives are losing, and it’s a battle we cannot afford to surrender.

First, some might wonder if we even need to worry about jobs anymore. Unemployment is falling, GDP has expanded, and the stock market has rallied. The political debate has shifted away from a focus on growth and toward the consequences of our failure to stimulate growth: rising inequality and poverty. But in the face of federal paralysis, the labor participation rate remains down, wages remain stagnant, and productivity continues to decline. Now more than ever, the government must restore the dream of dignified work to all Americans.

Even if we agree that there is a problem, the skeptics will argue that the government is too inefficient and bureaucratic to effectively create middle class jobs and support economic growth. But the 2009 stimulus package provides a prime example of effective government intervention. Economists of all stripes, including Alan Blinder, former vice chair of the Federal Reserve, and Mark Zandi, Chief Economist at Moody’s and former Economic Advisor to John McCain, agree that the ARRA succeeded in creating the 2-3 million jobs it was designed to create. In their analysis, Zandi and Blinder found that without the stimulus, the economy would have contracted 6 percent and unemployment would have hit 11.6 percent. Instead, at its worst, GDP declined 2 percent and unemployment hit 10 percent.

The problem was that the ARRA could not protect the U.S. from a shock that cost the economy 12 million jobs, because the $825 billion package was too small and tapered too soon to plug the $1.2 trillion drop in private demand.

Acknowledging the success of the stimulus, some conservative analysts argue the challenges we now must tackle are not remnants of the recession, which would be amenable to government intervention, but rather are the product of insurmountable structural trends – automation, globalization, financialization. But even if that is true, it’s not an excuse for the U.S. government to abdicate its role as a driver of economic growth. Indeed, a changing economic landscape requires an adaptive government to ease the transition. Increased automation requires reformed and renewed investment in human capital to allow American workers to dominate the information age. Globalized supply chains demand new labor laws to recognize the rise of sub-contracted work. A growing financial sector requires an enhanced regulatory regime to ensure capital is allocated toward productive uses.

Then we have the deficit scolds, who are likely to claim that the CPC’s proposals are fiscally unfeasible. While hysteria about the government debt has prevented lawmakers from passing an additional large-scale stimulus package, new U.S. debt projections, and the clear failure of Europe’s austerity measures, prove these threats to be overblown. The danger associated with deficits, rising interest rates, and run-away inflation are far from a reality in the current climate of below-target inflation and non-existent interest rates.

In fact, the U.S. budget deficit fell to 4 percent of GDP in 2013, according to the CBI, and was projected to decline to 3 percent, the average for the last 40 years, in 2014. At about 73 percent of GDP, the federal debt remains high; however, the most effective way to reduce the debt to GDP ratio is to grow GDP, not shrink debt. National debt topped 118 percent of GDP immediately following World War II, and then the debt doubled over the next 30 years. But because the economy grew rapidly, debt fell to a healthy 30 percent of GDP by 1981. Europe’s experience with austerity reveals the danger of valuing debt-reduction above growth. As spending reductions slowed rising debt, they also cut GDP and increased the relative cost of debt payments.

The CPC’s budget will create new jobs, improve job quality, and invest in future job growth. The ideas are not new; many, like investment in infrastructure and workforce training, have been proposed in bills currently sitting in Congress. Nor are they necessarily bold; for example, funding R&D and using fiscal stimulus were considered common-sense government policies in previous generations. The problem up to this point has not been a lack of good ideas. It’s lack of political will. Let’s reopen this debate and use the vast number of policy tools we know to be effective.

Nell Abernathy is the Program Manager for the Roosevelt Institute's Bernard L. Schwartz Rediscovering Government Initiative.

Image via Thinkstock

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