President Obama seemingly has two entirely incompatible tasks. One is to move the economy on a path toward faster recovery with increased stimulus spending. The other is to address the problem of rising deficits and the escalating long term public debt.
He is holding a White House Jobs Summit next Thursday to signal concern for the high rate of unemployment while he is being lobbied by the deficit hawks. His economic team is parsing the tradeoff between these two goals. But a tradeoff is the wrong way to think about it. Recovery is a short term imperative, while the debt is a long term challenge. There are, however, important choices to be made.
Obama's team underestimated the degree of stimulus that the economy would need, and prolonged the period of payout. Council of Economic Advisers Chair Christina Romer estimated that the unemployment rate would peak at 8.9 percent. Today, unemployment is 10.2 percent and rising -- and over 17 percent if you include discouraged and involuntary part time workers.
On paper, the stimulus, at $787 billion, was about 2.7 percent of GDP over two years. But in fact, it is being paid out over three years, with about 30 percent of the money not being spent until 2011. Meanwhile, the loss of state and local revenues, now projected at more than $450 billion over three years, undermines about two-thirds of federal stimulus spending. So the real net stimulus is well under one percent of GDP per year.
We need about half a trillion dollars in new stimulus spending in 2010 alone, and more if that doesn't do the trick. There is no shortage of worthy things deserving of public funds.
I look around my home town of Boston. I see crumbling bridges and subways, social programs being shut down for lack of funds. Our progressive Democratic governor, Deval Patrick, just increased the regressive sales tax -- in a recession! Our pioneering near-universal health program is running in the red and cutting coverage. All of this is just nuts. Let's get some emergency fiscal relief to the states.
And let's also remember the WPA writers project and theatre project. Here in greater Boston, where Equity actors qualify for food stamps, two regional theatre companies have closed for lack of funds. How about one percent of the next stimulus program for the arts? And how about an emergency direct federal jobs program?
The usual suspects are making the usual noises about the long term debt. President Obama recently met with North Dakota Senator Kent Conrad, who is planning to hold the next routine vote to increase the debt hostage for a deficit commission. The idea is that a commission would create a budget balance plan that would be subject to little debate and an up-or-down vote. The supporters of this idea are also big promoters of the idea that Social Security and Medicare need to be cut back.
The fact is that Social Security will be in surplus for at least another generation. It is not contributing to the deficit. Medicare is heading for earlier deficits, but the cure for that is to shift to a more efficient health system across the board, otherwise known as national health insurance. Obama's health insurance plan, though far from ideal, actually reduces the net deficit.
It also misleading to blame the enlarged deficits mainly on the stimulus. The prime culprits are the recession itself (which reduces tax revenues), compounded by the legacy of Bush tax cuts and a war that was financed mostly off-budget. On the list of causes of the rising deficits, the spending of the American Recovery and Reinvestment Act (the stimulus) comes in fourth.
It's reasonable to worry that this recession will increase the long term public debt, and that this could be a problem down the road. But a deficit commission is anti-democratic. We elect Congress to make the laws. And the sponsors of the commission and their outside supporters, such as the Peter G. Peterson Foundation and the Concord Coalition, begin with an animus against social insurance and use the current crisis as a pretext to take whacks at our already threadbare welfare state. For an antidote to the hysteria and social insurance bashing of the Peterson Foundation, have a look at fiscalhighroad.org.
We do need to reduce the ratio of debt to GDP. But we need to do it after the economy is back in recovery. And we need to do it using the normal legislative process. And above all we need to use progressive taxation rather than program cuts.
Two good candidates as revenue raisers are a tax on all financial transactions, and a serious program of tax enforcement aimed at wealthy investors and corporations who use offshore tax havens. Supposedly, we are helpless in the face of the ability of capital to move offshore. And we dare not tax financial transactions for fear of driving the business to Caribbean tax havens. But this is just self-serving rationalization.
Congress could easily pass a law requiring any financial transaction where the investor does business, lives, or holds assets in the United States to be subject to U.S. tax law. We could harmonize our tax enforcement with nations that currently cooperate in the exchange of tax data. Right now, other so called advanced nations in the G-20 are more willing to tax financial transactions than we are.
Congress could also prohibit financial institutions that do business in the U.S. from doing business with ones based in tax havens. Does this sound draconian? After 9/11, we got very creative about cracking down on cross-border money laundering for purposes of terrorism. Now, we need to get equally smart about financial terrorism.
The national debt will be a challenge in the years after about 2013, but that is no reason to give up on the recovery. On the contrary, it should force us to get more serious about the recovery to get economic growth back on track so that the debt is less onerous.
Why is a debt approaching 100 percent of GDP a problem at all? It was larger after World War II, on the eve of a 25-year economic boom. When I was studying economics, we were taught that the national debt was no big deal because "we owe it to ourselves."
That was then, back when China was not a global financial power. Today, the debt is a lot more serious because we owe it to China and other nations that are not exactly democracies. You could feel the tectonic shift in President Obama's recent trip to China. Our creditors had the upper hand. As our friend Jeff Faux writes, a large foreign debt is a problem because our friendly creditors could loose confidence in the dollar.
But the answer is not to sentence ourselves to debtors' prison. We need, once again, to finance most of our own national debt. In the World War II years, my parents, who were barely middle class, put some of every paycheck into War Bonds. How about a surtax on windfall Wall Street profits, with the proceeds invested in U.S. Treasury Recovery Bonds? Normal people, who don't have access to insider trades, are earning about two or three percent on their savings. Turnabout is fair play. It would be salutary if the high rollers who caused the crash were made to put some of their wealth into Recovery Bonds, at two percent.
When John McCain rather pitifully proposed to suspend his campaign and duck a presidential debate so that he could help persuade Congress to enact Hank Paulson's Wall Street bailout legislation, candidate Barack Obama lethally quipped that a president needs to be able to do more than one thing at a time. Now, President Barack Obama needs to demonstrate that it's possible to do economic stimulus in the short run and the right kind of deficit reduction over the long term.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. He is author of Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency.