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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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.