Why the US must not abandon fiscal stimulus

The Senate’s stimulus bill would alleviate unemployment and speed progress towards economic recovery

"O Lord, grant me chastity and continence -- but not yet!" So reads an oft-quoted prayer from St Augustine's Confessions, a pithy reminder of the difficulty of reining in one's impulses in favour of a far-from-appealing sense of pious restraint.

Such a conflict between profligacy and austerity is certainly familiar not only to 4th-century Roman theologians grappling with religious conundrums, but also to economic policymakers in Great Britain, the United States, and indeed any country still struggling with macroeconomic policy targeted at recovering from the worst recession the world has seen in a generation.

The conflict over spending versus restraint, closely divided along partisan lines, is framing this week's debate before the Senate over a $127bn job stimulus bill, the American Jobs and Closing Tax Loopholes Act 2010.

Opponents of the bill point to recent hopeful indicators, such as an increase in wages (now 3.2 per cent higher than in December 2007 at the beginning of the economic downturn) and the addition of 431,000 jobs in the month of May, as signs that the economy may have turned the corner.

They argue that America is enjoying a strong enough recovery to allow policymakers to focus on "chastity and continence" in spending to address the nation's crippling budget deficit, projected to exceed $13trn for the first time in history. (The deficit comprises a whopping 89 per cent of GDP.)

Proponents of the bill, who range from Senate Democrats to think tanks such as the Economic Policy Institute to the editorial page of the New York Times, have united in a chorus of: "Not yet!" According to the bill's supporters, unemployment has remained too persistent -- and its effects too pernicious -- to shift attention and federal money away from job creation so soon.

Faster, faster . .

The stimulus bill includes $7bn in loan guarantees for small businesses, a $6.6bn research and development tax credit, $24bn in additional Medicaid funding, $1bn to create summer jobs for young people, and $2.6bn to extend the TANF emergency jobs fund, among other provisions. Most importantly, it extends unemployment compensation and a tax credit allowing jobless workers to continue their health insurance for 35 per cent of the original rate until the end of 2010, providing a gross $55bn in additional support for the jobless.

Approximately one-third of the bill's expenditures will be funded by increased taxation on high-income individuals and private equity earnings, while the remainder must be borrowed.

It is easy to understand why deficit hawks may be wary of this second iteration of the much larger February 2009 stimulus package. However, America's unemployed desperately need the American Jobs and Closing Tax Loopholes Act to pass; the bill would also smooth the road to recovery for the economy as a whole.

To begin with, even though US GDP has improved, growing at a 3.0 per cent annual rate in the first quarter of 2010, unemployment remains a severe problem. Although an additional 431,000 workers found employment in May, this is attributable mostly to temporary census hiring by the federal government, which accounted for 412,000 of those jobs.

The national unemployment rate remains an uninspiring 9.7 per cent, with 15 million jobless Americans looking for employment and as many as six jobseekers for every open position. Without outside stimulus, the prospect of returning to pre-recession employment prosperity is slim. For reference, in its current state, in order to return to the 5 per cent unemployment rate of December 2007, the economy would have to add more than 300,000 jobs a month for the next four years -- a growth rate faster than in any four-year period, faster even than in the job boom of the 1990s. It's bound to be a long, tough slog, even with government intervention.

Worse yet, these less-than-ideal numbers do not even capture the full extent of the unemployment challenge facing the nation. The unemployment figure does not account for earners forced to work part-time because they are unable to find full-time employment -- currently at 8.8 million, a meteoric rise from the December 2007 benchmark of 4.7 million. In addition, it only measures joblessness as a fraction of those actively seeking work, discounting figures for "discouraged workers", or people not looking for work because they have given up on finding employment, which have risen 291,000 on the previous year. Projections for the gross number of Americans who are unemployed, underemployed, or discouraged have reached a record high of 25 per cent.

And inequality widens

Economically speaking, this is quite bad enough. What senators ought to find even more worring are the social consequences: the staggering inequalities of US employment that the recession has unearthed and exacerbated. Compared with previous recessions, such as the dotcom bubble of the late 1990s, which primarily affected white-collar workers, the biggest losers in the Great Recession of 2007-2009 have most worked in less well-compensated jobs such as construction and auto manufacturing.

For example, as of May 2010, the unemployment rate among college graduates is a relatively sunny 4.7 per cent, compared to high school graduates' 10.6 per cent and high school dropouts' 15 per cent. Income inequality has always been a fact of America's economic landscape, but it typically narrows during a recession. In 2007-2008, it widened.

Another social danger of the current state of American unemployment is the unique threat posed by long-term unemployment, which hits the least-educated the hardest. The average joblessness duration has reached 31.2 weeks, the longest stretch since the Bureau of Labor Statistics started collecting data of this kind in 48 weeks.

Long-term unemployment is especially damaging for a nation's economy, because it removes the resources necessary for workers fully to develop their own -- or their children's -- financial and human capital, implicit in activities as schooling, skills training and investment, all necessary for starting a business. And with a 20 per cent unemployment rate for those under 25, many of whom don't qualify for unemployment insurance at all due to their limited work history, we risk alienating an entire generation of working-class youth.

The Senate's stimulus bill would alleviate some of the most crushing problems in US unemployment and also speed the road to economic recovery. Drawing on experience, the Congressional Budget Office has estimated that 1.4 million to 3.4 million workers who are currently employed would be jobless, were it not for the February 2009 jobs bill, but warns that the force of the previous stimulus has largely expired.

Not only would the bill provide a safety net to some of the most in-need workers, but extending unemployment insurance stimulates demand as well. The unemployed tend to spend money immediately to address pressing expenses such as groceries, health care and automobile/home payments, thus circulating money back into hard-hit local economies. In fact, on average, every $1bn of unemployment insurance money issued generates between $1.63bn and $2.15bn of additional GDP, due to this circulation factor.

The stock market may have bounced back and America's GDP growth looks fairly solid, but lingering unemployment is still the ball and chain dragging economic recovery back to earth. The staggering extent of unemployment, underemployment and reductions in the workforce has especially damaged the long-term prospects of America's least privileged, and exacerbated the social tensions created by income inequality.

It is imperative that the Senate continue to assist the US on its path to full recovery by passing the American Jobs and Closing Tax Loopholes Act, and by continuing its commitment to job creation and to alleviating the negative effects of unemployment.

O Lord, grant us fiscal austerity -- but not just yet.

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Why the past 12 months have been the worst of my lifetime

We desperately need a return to calm and moderation.

Twitter is a weird phenomenon: a deeply selective, wholly unreliable Survation or YouGov in your pocket, with an even bigger margin for error. I’ve been tweeting for a year now, but I’m still useless at guessing what is likely to attract attention; so I was taken completely by surprise at the end of last week when a comment I jotted down received thousands of Likes and retweets. “It’s a year since Jo Cox was murdered,” I wrote: “the worst year for Britain in my lifetime. We badly need a return to Jo’s concept of moderation now.”

Fairly anodyne, you would have thought, but it seems to have touched a nerve. Clearly many other people feel that the past year, with its violence and disasters and wholesale political instability, has been a bad one. For days afterwards, my phone kept buzzing as more people retweeted it. There were, as always, a few contrarians who objected that other years since 1944 must have been worse; some said “much worse”. But that isn’t really true.

After D-Day, we knew the war was going to be won. Despite the bombs, the country was proud of itself and pulling together, and the likes of my father were hoping for a better world as soon as it was finished. The year of the Suez crisis, 1956, was pretty bad, but Anthony Eden was gone directly, and Harold Macmillan’s phoney self-confidence convinced people that things would be all right – and anyway the economy was growing impressively.

The period of the Heath government had awful moments: 1972, the year of Bloody Sunday and IRA attacks, was especially bad. Yet there was nothing like the appalling Grenfell Tower fire to divide the nation. And 1974 was humiliating for the government, but our membership of the European Economic Community offered a certain stability. We had a different, more forelock-tugging relationship with our political leaders then. The news bulletins used to talk reverently of “the prime minister, Mr Wilson”; now they just say “Theresa May”.

Today we have a prime minister who is held to have been mortally wounded by a series of personal failures and miscalculations; a governing party that has been self-harming for years over the question of ­Europe; an opposition that, until just recently, was regarded as hopelessly incompetent and naive; an economy that could be damaged by an ill-judged Brexit agreement; and a new vulnerability to terrorism, in which one atrocity quickly overlays the memory of the last.

There’s a newly hysterical tone in British society, which had always seemed so reassuringly reliable and sensible. The crowd that stormed Kensington Town Hall as though it were the Bastille or the Winter Palace mistook a man in a suit for a Tory councillor and beat him up. It transpired that he was an outside contractor who had spent much of the week helping the Grenfell Tower victims.

Above all, what was until recently the world’s fifth-largest economy has suddenly found itself on the edge of a trapdoor in the dark. “Back to the Thirties”, some people are saying. “Venezuela”, say others. Even Brexiteers who feel liberated and excited at the prospect of getting out of the EU can’t know if it’s going to work. Friends of mine who voted Leave because they were fed up with David Cameron or thought things needed a shake-up now show a degree of buyer’s remorse. Perhaps, like Boris Johnson in the BBC2 drama Theresa vs Boris, they thought the country was so stable that nothing bad would actually happen.

We’ve entered a period of sudden, neurotic mood swings. The opinion polls, unable to cope, tell us at one moment that Jeremy Corbyn is regarded as dangerous and useless, and at the next that a growing number of people see him as the national saviour. The Prime Minister’s “safe pair of hands” are now deemed too shaky to carry the country’s china. Ukip polled over 10 per cent in 450 seats in 2015, and in only two seats in 2017.

If any further evidence of neuroticism is needed, there is the longing that people have to be enfolded in the arms of a comforting authority figure. For some, it was the Queen, calming everyone down with a message of unity, or Prince William, hugging a grieving woman after the Grenfell Tower fire. For others, it was Corbyn doing the right human things while Theresa May walked past the tower ruins awkwardly, not knowing what to say.

It feels like being back in 1997, with the huge crowds in the Mall or outside Kensington Palace demanding to be comforted after the death of Diana. Then, the Queen was blamed for not being the mother figure we seemed, disturbingly, to want. Tony Blair had the right words at that time, and no doubt he would have had the right words after Grenfell Tower. But is it merely words and gestures we need?

It’s a bad sign when countries feel that they need an individual to sort them out. It’s because of its system, based on openness, inclusiveness and the rule of law, that Britain has grown strong and wealthy. Jo Cox said in her maiden speech in June 2015: “While we celebrate our diversity, what surprises me time and time again as I travel around the constituency is that we are far more united and have far more in common than that which divides us.”

She was murdered by a fanatic who screamed, “This is for Britain! Britain will always come first!” The year that those words ushered in has indeed been the worst in my lifetime. The government slogan “Keep calm and carry on” was invented in 1939, when all-out German bombing seemed imminent. It is easy to lampoon but when it was rediscovered a few years ago it became popular, because it spoke directly to our national consciousness. We’ve never had more need of calmness than now.

John Simpson is World Affairs Editor of BBC News, having worked for the corporation since the beginning of his career in 1970. He has reported from more than 120 countries, including 30 war zones, and interviewed many world leaders.

This article first appeared in the 22 June 2017 issue of the New Statesman, The zombie PM

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