Directly after this financial reform bill finishes, Democrats plan to return to job creation strategies. Despite the surge in hiring last month, far too many Americans are out of work, and the situation remains in crisis mode. At the least, the millions of jobless need security that their benefits won’t be on a yo-yo string every month. And so there are a variety of jobs bills that will likely be combined into a fairly large package – perhaps $200 billion or more. The problem is that conservative Democrats don’t understand basic theories about aggregate demand:

Those disputes in turn are rooted in the contradictory demands of these unusual economic times, when the nation is sluggishly emerging from a recession just as it is entering a long-predicted period of rising debt due to an aging population and inadequate revenues.

Many economists agree that the economy needs a final infusion from the government to encourage skittish employers to hire, banks to lend to small businesses, and states and cities to keep their teachers and others on the public payroll.

Yet even before the European Union and the International Monetary Fund bailed out Greece to prevent another financial contagion, the mounting debt of the United States was prompting calls at home for major reductions in the budget deficit, including from the administration and some Democrats in Congress.

They simply don’t get it, or they want to please an electorate that doesn’t get it. Aggregate demand is too small right now. There’s a shortfall in the economy, which means productive employees are sitting at home. What will end that is job creation, and right now, that means that government must provide supports in the form of deficit spending. The only way to beat the deficit over the long-term is through low unemployment – there simply isn’t any other way to raise the required revenue. Mass unemployment now threatens the long-term career trajectory for millions and squanders revenue for workers and the government that they’ll never get back.

It is completely counter-productive to offset stimulus spending designed to increase aggregate demand. It would certainly be easier for Blue Dogs to explain themselves back home were that not so, but it’s so. And it’ll be much harder for them to explain why their constituents are all out of work.

The Times article suggests that some agreements have been reached.

And after weeks of backroom debates, Congressional Democrats say they tentatively have agreed that “pay-fors” will not be required to offset some safety net programs — an extension through this year of emergency unemployment compensation, subsidies for those who pay to keep the health insurance they had on the job, and perhaps Medicaid assistance for states.

Even so, the remaining costs for business tax breaks, especially for struggling small businesses, outstrip the sources of revenues that Democrats can easily agree to.

Yet so great is the election-year appetite to help small business, and to show toughness toward Wall Street, that Senate Democrats may drop their opposition to House Democrats’ repeated calls for higher taxes on managers of hedge funds and private equity firms.

There are at least a couple measures that could get instituted without too much economic disruption – closing the loophole on carried interest, for example, which simply makes the super-rich even super-richer. That’s money ($25 billion over 10 years, according to estimates) that sits in a bank account, or worse, gets churned into the destructive financial economy.

But more offsets may be needed to accomplish the small business lending measures, the “cash for caulkers” energy efficiency incentive bill, and the $25 billion needed to stop the layoffs of around 300,000 teachers. That teacher bill may get added to the upcoming war supplemental, which these same Blue Dogs are not clamoring to pay for, but that could lead all Republicans to oppose the emergency measure, threatening passage.

The larger point here is that the public at large, along with Democratic Blue Dogs specifically, still have no idea why stimulus spending is important, why it works, how it has saved and created millions of jobs, and why more is needed at this time. It’s a cavalcade of ignorance.

David Dayen

David Dayen