When the Benefits Run Out

Dark clouds are gathering as Congressional leaders meet with the President to consider raising the debt ceiling in exchange for the implementation of a list of austerity measures that will take billions of dollars out of the economy. On July 10^th, the President indicated an unwillingness to sign a short-term extension demanding an all-encompassing bill instead. If the leaders fail to agree on such concessions, and the United States defaults on its bond obligations as a result, the effective higher interest rate required by the international markets for U.S. debt will increase dramatically, necessitating even more taxes or a higher deficit. The International Monetary Fund’s new head, Christine Lagarde, said in a July 9^th interview that there would be “real nasty consequences” stemming from a U.S. default, and noted, “If you draw out the entire scenario of default, yes, of course, you have all of that — interest hikes, stock markets taking a huge hit and real nasty consequences, not just for the United States, but for the entire global economy, because the U.S. is such a big player and matters so much for other countries.”

The Tea Party goal that seems to prevent a compromise from happening – avoiding tax rate increase – is a particularly strange argument as the basis of stimulating more jobs. Keeping taxes low for the upper classes may seem like a good idea, but these well-heeled Americans didn’t get that way by randomly employing new workers because they have lower tax rates. Without some sign that consumers are actually ready to spend real money to buy the increased output that results from having more workers, reality dictates that employers have no rational basis to increase their workforce. With the government withdrawing in significant part as the “replacement consumer,” if anything, employers may have to implement greater job cutbacks, as recent employment numbers suggest.

But those clouds are darkening still as jobless benefits expire across the land: “Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government… By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.” New York Times, July 10, 2011.

There is no doubt but that an uncontrolled deficit will continue to assert inflationary pressures, an economic reality that can only get worse as India and China increase the level of their own consumption, pushing oil and food prices ever higher. Clearly, that deficit must be managed more adroitly, but when people advocate “wrong policies” and severe austerity as a job-creator, the illogic of that choice is inescapable: “Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve’s program to pump money into the economy and the payroll tax cut, scheduled to expire at the end of the year.

“‘If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,’ said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm… Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and [July 8^th’s] unemployment report showed that employers added an anemic 18,000 jobs in June.” NY Times. One must clearly differentiate between budgetary expenditures that constitute revenue-generating values – like infrastructure and education – and those that are pure expenses – such as agricultural subsidies and fighting unwinnable wars. America is at a crossroads, and we app ear to be on the precipice of a very bad decision.

I’m Peter Dekom wondering whatever happened to common sense.