The Best and Worst Economic Ideas of This Election Season
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As the severe unemployment crisis drags into its third year, proposals for solving the crisis are proliferating. Still more ideas will be tossed into the mix as the 2012 election season intensifies.
These proposals include some good, some less good, as well as some truly awful ideas. The plan offered by President Obama last September included a mix of some good ideas, such as more spending on infrastructure and education, along with some bad ones, like cutting Social Security taxes (otherwise known as payroll taxes).
The single worst idea in the mix, supported by deficit hawks in both the Democratic and Republican parties, is that we are facing a fiscal train wreck and that we therefore, above all, need to cut government spending. At the same time, there are actually some major avenues still open for stimulating job creation—both because they could create lots of jobs relatively quickly and because they could do so cheaply—that most policymakers and politicians have thus far ignored.
There is No Federal Debt Crisis
The official debate over the economy shifted decisively last summer away from proposals for job creation to obsessing over the size of the federal government’s deficit (how much we are borrowing each year) and debt (how much we owe overall). The federal deficit has indeed been historically large since the recession began, running at about 10 percent of GDP for the past three years, as opposed to the historic average of 2 percent of GDP. But that is only because the jobs crisis itself is of historic magnitude. Solving the unemployment crisis would accomplish far more than any other measure toward bringing the federal deficit down. This is simply because when more people have jobs, they also pay more taxes and rely less on government support, such as unemployment insurance and Medicaid.
There is another point to emphasize here. Despite the historically large fiscal deficits, the federal government is now paying interest on the total outstanding debt at a rate that is historically low, not high. This is for the simple reason that the interest rates on U.S. Treasury bonds are themselves at historic lows, at around 2 percent. As such, while it is true that the government will need to reduce its borrowing once the recession is behind us, there is no immediate crisis whatsoever in terms of the government paying off the debt obligations it faces now or over the next few years.
Cutting Social Security Taxes as a Jobs Program is Perilous
Since its inception in 1939, the political right in the U.S. has been trying to kill Social Security. These efforts have failed up until now because the program has maintained overwhelming political support. The enduring popularity of Social Security follows from the fact that, over 72 years, it has succeeded in reducing poverty for retired people and those with disabilities, and has done so at minimal administrative expense.
The 2011 cut in the payroll tax from 6.2 to 4.2 percent that applied to workers is costing the system $112 billion, or 15 percent of total expected revenues for this year. Obama’s proposal for 2012 would reduce the rate further, which could bring the overall loss of funds for Social Security to more than 25 percent of committed outlays for 2012.
The Obama administration says that the lost Social Security revenues resulting from the payroll tax cuts will be replenished from general revenues. They are no doubt sincere in this intention. But cutting the traditional source of Social Security revenues, even temporarily, entails compromising the principle that Social Security is a self-financed, stand-alone program, whose funding is inviolate. If funding for Social Security starts being treated regularly in the same manner as other all other government programs, it then becomes vulnerable to the types of attacks that have already occurred over the past year with public education, public safety, and pension programs for state-level workers.