Unemployment or Debt?

Two Mondays ago, The New York Times offered a contradictory message on America’s ballooning budget deficit.  A front-page article, “Wave of Debt Payments Facing U.S. Government,” warned that higher future interest rates will soon add heavily to the cost of funding the national debt.  Meanwhile, economist Paul Krugman, in his column published the same day, referred to the fear of massive long-term debt as an over-exaggerated “Phantom Menace.” He argued that Congress should continue deficit spending in order to boost the economy.

One might conclude from these articles that America is stuck between a rock and a hard place.  If Congress takes Krugman’s advice and passes an ambitious jobs bill, it risks pushing the deficit to even greater heights.  But if Congress eschews further recovery spending, employment and growth will remain anemic.  However, the situation is far from hopeless; it is possible to take meaningful action on both the jobs and the debt front.

America’s economic performance in 2009 seems to be a RINO: recovery in name only.  Though third-quarter GDP growth was positive at 2.8 percent, this figure is lackluster compared to GDP growth in post-recessionary periods in the 1980s and 1990s.  Worse, unemployment has reached 10.2 percent, a 25-year high, and is still climbing.  Economists expect it to peak early next year, but it is likely to remain elevated for some time; the Fed expects an unemployment level of 8 percent in 2012.

With economic figures this moribund, a wise strategy would begin by attacking joblessness.  Congress should treat high unemployment as its most immediate concern and enact robust jobs legislation, even if it increases the short-term budget deficit.  Though this might seem counterintuitive, fighting unemployment is a necessary precursor for curbing the national debt’s growth.  Returning people to the workforce will increase GDP, which replenishes the federal government’s tax revenue and shrinks the budget deficit.  As House Speaker Nancy Pelosi put it, “We’ll never have deficit reduction until we have job creation.”

Fortunately, Congressional Democrats, fearing the wrath of voters in the upcoming midterm elections, are seriously considering passing legislation to fight unemployment.  Potential policy measures include fiscal aid to the states (so that they can avoid firing public sector workers), business tax credits for new hires, and greater infrastructure spending.

The spike in joblessness could not have come at a less opportune time, as it coincides with the budget deficit reaching levels unseen since World War II.  Funding for the Troubled Asset Relief Fund, the stimulus package, and other recovery measures have pushed this year’s deficit to $1.4 trillion.  The total national debt stands at around $12 trillion, or 80 percent of GDP.  Furthermore, the White House projects significantly smaller yet persistent shortfalls throughout the decade.

Deficit hawks believe that this much debt places the economy in jeopardy.  Right now, much of the national debt is financed at low interest rates.  As the economy recovers and interest rates rise, investors will demand higher rates to continue lending to Uncle Sam.  The cost of servicing the debt will increase, making it that much harder to escape constant budget deficits.  Worst of all, this will happen as the baby boomers retire, placing additional pressure on Social Security and Medicare.

For these reasons, President Barack Obama should propose a well-defined deficit reduction plan at next year’s State of the Union address.  This policy should reverse the Bush income tax cuts on the wealthiest one percent of taxpayers, eliminate many tax deductions, form a commission to recommend binding changes to entitlement program funding, and sharply reduce wasteful subsidies to agribusinesses.  However, he should promise that the plan will take effect late in 2011.  By then, the economy (and, by extension, tax receipts) should be growing at a respectable pace.  Announcing this pledge today will demonstrate a commitment to long-term fiscal health, assuaging America’s creditors. Delaying its implementation will give Congress enough time to use its fiscal firepower for economic recovery.

In Homer’s Odyssey, the Greeks are forced to cross a narrow channel between Scylla, a six-headed monster, and Charybdis, a whirlpool.  Similarly, President Obama must safely navigate the treacherous waters between unemployment and the spiraling national debt.  The success of his first term, and his prospects for a second, may depend on it.

Anthony P. Dedousis ’11 is an economics concentrator in Leverett House. His column appears on alternate Thursdays.