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High Rates of Joblessness and the Deficit

Although the November jobs report suggests that the recovery is beginning to affect jobs in a more positive way, the unemployment rate is still very high and pressures to do more on the jobs front are strong. 

Yesterday President Obama gave a speech at Brookings in which he proposed a new job-creation initiative that would extend or amplify the original stimulus package. My view is that such efforts are badly needed to insure a stronger recovery.  

Many people are concerned about the effects of any new jobs initiative on the deficit. These concerns are, in my view, misplaced. First, deficit spending is exactly what the doctor ordered in the face of a deep recession and high rates of joblessness. With consumer spending, business investment and exports all expected to be weak over the next year, the only sector that can keep the recovery going in the near term is government itself. Although the stimulus package will continue to spend out through 2010, the amount of fiscal stimulus is expected to decline over this period, and this decline will be a drag on the health of the recovery unless private sector activity picks up very soon. Put differently, the problem is not current deficits which are a tonic for the economy: it is the deficits that are projected to remain once the economy has recovered. 

Second, contrary to what many conservative talk show hosts would have you believe, most of the recent increase in the deficit is not the result of increased spending. Instead these deficits primarily reflect the sharp drop in revenues associated with declining corporate and personal incomes. In the absence of that drop, current deficits would still be high but far below current levels. 

In short, current deficits are not the problem: they are both a consequence of the problem and a part of the solution. This means that any effort to pay for new short-run but temporary initiatives—such as the cost of the war in Afghanistan or a new jobs program—would be counterproductive because it would slow the pace of recovery, keeping incomes—and thus revenues—seriously depressed.    

The real concern should be not current deficits but the possible effects of future projected deficits on interest rates and thus the pace of the recovery. The right response is to take steps now that would reassure financial markets both here and abroad that we are committed to getting our fiscal house in order over the longer term. Such steps should include stronger cost containment measures in the health reform bill currently being debated in the Senate and new revenues that could come from a value added tax or from limiting deductions in the top income tax brackets as proposed in last year’s budget. Greater spending restraint must be on the agenda as well, including reforming Social Security, modernizing military procurement and scrubbing the budget for other savings. By proposing and then enacting such fiscal restraints now but gradually phasing them in as the economy recovers, there need be no tension between the two objectives of keeping the recovery going and restoring fiscal discipline over the longer-term. As President Obama put it yesterday, this is “a false choice.” 

  • Isabel V. Sawhill is a senior fellow in Economic Studies at the Brookings Institution. She served as vice president and director of the Economic Studies program from 2003 to 2006. She has been a co-director with Ron Haskins of the Center on Children and Families. Prior to joining Brookings, Dr. Sawhill was a senior fellow at The Urban Institute. She served in the Clinton Administration as an Associate Director of OMB, where her responsibilities included all of the human resource programs of the federal government, accounting for one third of the federal budget.