Made-by-Obama Cliff Debate Hides Jobless Toll Dwarfing In
President Barack Obama and House Speaker John Boehner are engaged in negotiations over shrinking the budget deficit even as high unemployment is taking a greater human and financial toll on the nation’s economic health.
By depressing tax revenue and inflating mandatory social spending, unemployment is costing the government more than twice the $220 billion taxpayers will spend this year paying interest on the debt, according to data compiled by Bloomberg. Chronic joblessness is also leaving scars on society, crippling the earning power of millions and hamstringing future growth.
Less than 59 percent of working-age Americans are employed, near a three-decade low, while the cost of servicing the debt as a percentage of economic output is no greater than in 1970.
“The labor market crisis has been going on for some years now, is still with us, is receding only slowly and is doing damage every single minute,” said former Federal Reserve Vice Chairman Alan Blinder. “The debt crisis is for the future.”
Washington’s debt preoccupation is at odds with financial- market sentiment -- the yield of about 1.70 percent on the 10- year Treasury note is near historic lows -- as well as with public sympathy for the almost 23 million people unable to find full-time work. In a Bloomberg National Poll conducted Dec. 7- 10, 34 percent of respondents said “unemployment and jobs” was the most important issue facing the country compared with 19 percent who chose the federal deficit.
The 7.7 percent jobless rate is down from its 10 percent peak in October 2009. Still, the 40-week average joblessness spell is almost three times the post-1948 average, according to the Bureau of Labor Statistics.
The Federal Reserve for the first time explicitly linked monetary policy to economic conditions, saying yesterday that interest rates would remain near zero “at least as long” as the jobless rate exceeds 6.5 percent and inflation is under control, which the central bank expects will be the case until mid-2015.
“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke told a press conference.
The capital’s debt focus is the consequence of both a White House strategy to inoculate the president against political attack and the unpopularity of the $833 billion economic- stimulus program he used to battle the recession, say veterans of this and past administrations.
With private-sector demand still depressed, only increased government spending could create sizeable numbers of jobs, many economists say. The Congressional Budget Office estimates that the 2009 stimulus increased employment and growth, with peak impact in 2010 of 900,000 to 4.7 million jobs. Any similar new proposal would be rejected by House Republicans, who regard the stimulus as a failure and say government instead should ease tax and regulatory burdens on business.
“The measures we would employ to create more jobs are quite discredited in much of the public today,” said Jared Bernstein, a former top economic adviser to Vice President Joe Biden. “People recognize we can reduce the budget deficit with higher taxes or less spending. They don’t believe we can create more jobs with Keynesian spending. That’s the straitjacket the president finds himself in.”
It’s a straitjacket Obama helped tailor. In 2010, he established a debt-reduction commission headed by Erskine Bowles, a onetime White House chief of staff to President Bill Clinton, and former Senator Alan Simpson of Wyoming. The president opened the panel’s first meeting warning of “exploding deficits” and an “already severe fiscal crisis.”
Robert Reich, who served as labor secretary in the Clinton administration, said Obama sought to deprive Republicans of the deficit issue and instead “legitimized” their argument.
“The Republicans have been successful at imposing their frame on the central economic debate of our time,” said Reich, now a professor of public policy at the University of California at Berkeley. “This is an entirely Republican discussion.”
The president in September 2011 proposed a jobs package including infrastructure spending and aid to state and local governments, which Republicans opposed as a rerun of the stimulus. Bernstein, now a senior fellow at the Center for Budget and Policy Priorities, says the jobs issue deserved a more forceful push from a White House too worried that high deficits would provoke a bond-market reaction.
“If you’re suggesting that we pivoted to deficit reduction too soon, I don’t disagree,” he said.
Left in Lurch
Even with Obama’s efforts to co-opt the issue, Republicans made his trillion-dollar deficits a centerpiece of their losing presidential campaign. One month after being re-elected with 332 electoral votes, Obama echoed their argument in a Bloomberg Television interview, saying business leaders need “a deal on long-term deficit reduction” before they will increase hiring.
That’s left millions of people like Patricia Johnson- Stewart in the lurch. In October 2009, Johnson-Stewart, 53, lost her job as an accounting manager in Bridgeport, Connecticut, four days after closing on the purchase of a new home.
Since then, the mother of five says she’s applied online for more than 1,000 jobs, receiving perhaps 40 interviews, and burned through her savings of $15,000. Her husband, Clarence, 50, disabled after a heart transplant, had to return to his job as a warehouse manager to make ends meet.
“It’s been tough,” she said. “I believe in my faith. God has a plan for me. I just don’t know what it is.”
The 4.8 million Americans like Johnson-Stewart who have been out of work for more than six months risk losing their skills and becoming unattractive to employers. Minorities and those without a college education are disproportionately likely to find themselves among the long-term unemployed, according to a study by the Center for Economic and Policy Research in Washington.
Even if they find a new job, they can expect to earn substantially less than before. Workers who lost jobs during the 1982 recession earned 20 percent less than colleagues who had remained employed even 20 years later, according to a 2009 study by economists Till von Wachter, Jae Song and Joyce Manchester.
Lengthy spells of joblessness have been a characteristic of this recession. The percentage of unemployed without work for more than six months peaked at 46 percent in March 2011 compared with the previous postwar high of 26 percent in June 1983.
“We are developing in the United States something that we’ve never had, although Europe has had for decades, which is a pool of the permanently unemployed,” said Blinder, an economics professor at Princeton University.
The Obama administration has cited the 4.6 million jobs created since February 2010. As part of his plan to reduce deficits by $4 trillion over the next decade, the president has proposed $200 billion in new spending to spur growth, including on infrastructure and extended unemployment insurance.
This approach will ultimately lead to more jobs, the White House says. “The reason to pass a deficit-reduction package that is balanced and allows for economic growth and job creation is to put our economy on a sustainable fiscal path, which then itself produces positive economic benefits and growth and jobs,” Obama spokesman Jay Carney told reporters on Dec. 6.
While acknowledging the need to create more jobs, deficit hawks say the gap between government spending and revenue must be closed for the economy to thrive. The best way to spur hiring is through tax and entitlement reform, said economist Douglas Holtz-Eakin, an adviser to Senator John McCain’s 2008 presidential campaign.
Without changes to retirement programs, baby boomers’ medical bills will swell publicly held debt from about 70 percent of gross domestic product this year to more than 90 percent by 2022, according to the Congressional Budget Office. Beyond that level, indebtedness has historically crimped growth, according to economists Kenneth Rogoff and Carmen Reinhart.
“We are in the danger zone,” says Holtz-Eakin.
Peter Diamond of the Massachusetts Institute of Technology, a Nobel Prize-winning economist whom Obama nominated three times for the Fed board, disagrees. Diamond, who withdrew his name amid Republican opposition, says the U.S. has at least a decade to address the mismatch between government revenue and spending.
“I call unemployment a crisis because the current high unemployment has such high costs not just for the economy today but for the future,” he said.
Creditors show little concern about the nation’s ability to pay its bills. The 1.70 percent that investors demanded yesterday to lend to the government for 10 years is less than one-third the average 5.43 percent yield over the past 25 years. And it compares with the 2.56 percent yield on Aug. 5, 2011, when Standard & Poor’s downgraded U.S. government debt.
Labor market problems call for urgent action, Diamond said. Three-and-a-half years since the recession ended, the market remains 4.2 million jobs shy of its January 2008 peak. And many of the jobs that have been created don’t pay as well as the positions they’ve replaced. Adjusted for inflation, average hourly earnings in October were 3.1 percent below the same month two years ago.
“We clearly have some huge, ongoing jobs problems that are at least as important and certainly more pressing in the short run than the long-run debt problem,” said economist Larry Katz, a labor market specialist at Harvard University.
It isn’t just the jobless who suffer from high unemployment. The $15.8 trillion economy is about $2.2 trillion smaller than the Congressional Budget Office forecast in January 2007 before the recession. The missing output is equal to more than $19,000 per American household, according to economist Dean Baker, co-director of the Center for Economic Policy Research.
Future growth also will likely be slower than economists forecast before the crisis, and unemployment will be higher. The jobless rate won’t be able to fall below 6.7 percent without igniting inflation, up from 4.8 percent before the crisis, according to a Nov. 6 note from the Federal Reserve Bank of San Francisco.
The pervasive unemployment is taking a human toll.
Some 4,750 suicides over three years are linked to fallout from the recession, including 1,330 caused by high unemployment, according to research published last month in The Lancet, a British medical journal.
On April 30, 2009, attorney Mark Levy, 59, shot himself in his Washington office after learning he would lose his job, according to The Washington Post. Two years earlier, Huy Pham, 29, a city maintenance worker in Costa Mesa, California, jumped from the roof of city hall after receiving his layoff notice.
“The fear of losing your job can be a psychologically distressing experience which could increase the risk of a major depressive episode,” Aaron Reeves, one of the study’s authors and a research associate in the sociology department at the University of Cambridge in the U.K., wrote in an e-mail.
Protracted periods of unemployment are adding to the misery.
For Michael Leahy, 59, whose $75,000-a-year position as a bank branch manager in Milford, Connecticut, was eliminated in March 2010, the search for a new job lasted two years and eight months. To cut expenses, he and his wife, Pat, a systems manager for an equipment rental company, canceled vacations and watched the odometer on their 1993 Volkswagen Passat pass 140,000 miles.
“After nine to 12 months, just being out of work became an issue,” Leahy said. “The idea that you’re damaged goods or you would have found something -- that became a tough situation.”
This fall, he entered a program at The Workplace, a Bridgeport agency that helps move the long-term unemployed into jobs. Even as he finally landed a job as a retail bank branch manager, for 20 percent less than his previous salary, Leahy says he’s watched Washington in mounting frustration.
“There’s nothing about jobs,” he said. “The entire news cycle is enveloped by the issue of the fiscal cliff. It’s like a noisy child. It’s getting all the attention.”
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