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We Have an Unemployment Problem, Not A Deficit Problem

The good news is that the Federal Reserve vowed to keep interest rates low until unemployment fell below 6.5%. The bad news is that they implied it would take until 2015 to get there. And it will take that long, if we continue to pull back on fiscal policy in the middle of a lukewarm recovery with mass unemployment.

It’s worth taking a step back from the cliff, if you will, and actually lay this out. Goldman Sachs CEO Lloyd Blankfein said at at conference today that any fiscal slope deal will be definition hurt the economy, because “any compromise will involve some dose of austerity… AKA deflationary policy.” And it’s worth wondering why we would do that. Even if you grant the obsession with the deficit even a tiny degree of credence, we know that the last time the deficit closed was during the full employment period of the late 1990s. And this makes sense, because tax receipts were high as people were employed, wages rose, and people availed themselves less of anti-poverty programs like unemployment benefits and food stamps. Economic growth is the best anti-deficit strategy there is.

I don’t really care about the deficit reduction potential of boosting employment and growth, I care about the amelioration of human suffering that would result from getting people back to work. But if you said all this in Washington, they would look at you like you sprouted a second head. Only in the rest of the country does this qualify as sound reasoning.

Above all, our business elites are worred that taxes will go up on wealthy people and investments, and that—at some point in the future—our entitlements might lead to a debt problem. That our economy has far more to fear from a persistent underclass of unemployable people does not even register to them […]

On a related note, this is why I have little confidence that Washington will do anything to further stimulate demand and employ idle workers—it’s just not a priority for elite opinion makers. Yes, they fear going over the “fiscal cliff,” but given the extent to which that conversation includes nothing about new continuing unemployment benefits or cutting payroll taxes, it seems their worry has more to do with the prospect of higher taxes than any concern for ordinary workers.

The White House has foregrounded stimulus in their offer sheets, but virtually nobody, and certainly not media commentators, takes that seriously. The only cliff anyone may fall off of in three weeks is the one 2 million long-term unemployed Americans will tumble from if they lose their only visible means of support, in the form of extended benefits. And yet the headlines concern permanent tax cuts for the top 2% and denying 65 and 66 year-olds Medicare.

It’s completely insane. Nobody in Washington ever tries to reverse-engineer a problem, if they correctly define the problem at all. We have unemployment which is too high, and despite plenty of money-printing from the Fed, they still expect it to remain elevated THREE YEARS FROM NOW. It’s hard to keep shouting the word “crisis” for years and years, but we’re still in the midst of one, at least for millions of Americans. Policymakers should, but won’t, act like it.

UPDATE: A case in point:

It’s necessary for us to come to a place where we will be able to adopt a fiscally sustainable credible path for this country. That will give great confidence to the American people and in my opinion will be the single largest stimulus package that we could get for the economy.

We are ruled by idiots.

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David Dayen

David Dayen