Skip to main content

It's OK to add to debt to grow jobs

By Josh Bivens, Special to CNN
updated 8:56 AM EDT, Tue June 12, 2012
 President Obama and Congressional leaders meet last July to strike a deal to raise the debt limit while controlling spending
President Obama and Congressional leaders meet last July to strike a deal to raise the debt limit while controlling spending
STORY HIGHLIGHTS
  • Josh Bivens: Many worry about the public debt, and "fiscal cliff" the nation headed for in 2013
  • But to lower unemployment we should add to debt by financing job-creating measures, he says
  • He says fiscal hawks stall budget, fearing Congress will follow fiscal "policies," not law
  • Bivens: Because Congress can't trust itself to keep budget balance, stimulus is held hostage

Editor's note: Josh Bivens, an economist, is the research and policy director at the Economic Policy Institute, a think tank focused on the needs of low- and middle-income workers based in Washington.

(CNN) -- Casual observers of budget politics (that is, most voters) may know that the experts in such things are very concerned about rising public debt. They have also probably heard much talk about the "fiscal cliff" the nation is headed for in 2013.

What they might not know is the real danger is that public debt will stop rising quickly. That cutting spending and raising taxes to slow the growth of debt will cause spending to fall across the economy and bring about a new recession.

Conventional wisdom says simply that we need fiscal stimulus now, and long-term debt reduction later.

It sounds reasonable enough, and I may have even believed it myself a couple of years ago. But it turns out to be wrong.

Romney hammers President Obama on jobs
Obama: Romney has drawn wrong lessons
Next debt limit vote more of the same?

The two imperatives of immediate stimulus and long-run debt reduction are deeply asymmetric. Every day we don't act to bring down the unemployment rate quickly is another day of human misery and pure economic waste. Since the Great Recession began, the nation has foregone more than $3 trillion in potential income because of idled resources (people and factories). In 2011 this "output gap" exceeded $800 billion again, and the first quarter of 2012 saw us move nowhere toward closing it.

But the surest way to lower unemployment quickly is to add to public debt to finance job-creating measures like aid to distressed households and states and infrastructure investment. And so long as the economy is operating below potential, the additional debt does no harm to the economy.

Opinion: U.S. economy heading straight for the cliff

This is textbook macroeconomics. The danger that budget deficits theoretically pose to economies is that in order to borrow, government must find lenders, which means competing for the scarce savings of households and businesses with private firms looking to borrow money to invest in plants and equipment. This competition can bid up the price of borrowing (interest rates) and private firms will hence forgo some of these productive investments.

So why doesn't this story apply to the United States today? Because there is no discernible upward pressure on interest rates. And that's not a fluke -- remember that it was the scarcity of savings relative to desired investment that drove interest rates up in this scenario. But, savings today aren't scarce -- households continue to save and pay off debt (that "de-leveraging" that you may have heard about) and businesses have accumulated record amounts of unspent liquid assets. This glut of savings relative to desired investment has put relentless downward pressure on interest rates.

So, if today's deficits are doing no damage (and in fact are supporting job-creation), why the frequent insistence that further stimulus is allowed only if it is matched by long-run deficit reduction?

I don't know.

What makes it especially puzzling is that the current law of the land is completely sustainable from a fiscal perspective -- the long-term budget outlook released by the Congressional Budget Office this week shows falling debt to GDP ratios for most of the next 75 years.

Fiscal hawks will cry "foul" on this. I'm referring to the "current law" baseline. But, everybody knows that this current law will not be followed -- most of the Bush tax cuts, for example, set to expire at the end of 2012 will surely not. These hawks point instead to the "alternative fiscal scenario" baseline, which shows the scary-looking long-run debt trends that people are familiar with.

But step back a second -- the hawks insist that we legislate changes to make the long-run debt path look less scary. But we've done that -- that's the "current law" baseline. Yet this doesn't count as "doing something" about long-run deficits because nobody believes this law will be adhered to.

Fair enough -- I don't believe it either. But just what is the budget law that we will pass this year that will convince everybody it will hold 75 years from now (the projection period of the long-term budget outlook)? After all, doesn't the entire long-run budget problem today stem from people thinking that current policies instead of current law will continue; that is, isn't the whole problem that people think Congress can't help but change the law in ways counter to long-run budget balance?

Surely we can't hold stimulus hostage to the requirement that Congress promises to stop ever again acting like, well, Congress?

We've lived with high unemployment long enough that it may not seem like a crisis, but today's unemployment rate of 8.2% is just that. It may be a marked improvement from the recession's 10% peak, but it remains higher than at any point in the quarter-century before the Great Recession. Growth forecast over the next couple of years will not be sufficient to move it down quickly.

Maybe a dumb analogy will help: Your house has drafty windows and doors that may cost you money in higher utility bills, but it's also on fire. Somehow, though, you decide to douse the flames only after a contractor is lined up do some caulking. Does this make any sense at all?

The opinions expressed in this commentary are solely those of Josh Bivens.

ADVERTISEMENT
Part of complete coverage on
updated 9:42 PM EST, Fri December 19, 2014
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
updated 8:12 PM EST, Fri December 19, 2014
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
updated 12:09 PM EST, Fri December 19, 2014
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
updated 6:45 PM EST, Thu December 18, 2014
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
updated 4:34 PM EST, Fri December 19, 2014
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
updated 2:51 PM EST, Thu December 18, 2014
Jeff Yang says the film industry's surrender will have lasting implications.
updated 4:13 PM EST, Thu December 18, 2014
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
updated 7:55 AM EST, Wed December 10, 2014
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
updated 12:34 PM EST, Thu December 18, 2014
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
updated 8:42 AM EST, Thu December 18, 2014
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
updated 12:40 PM EST, Tue December 16, 2014
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
updated 11:00 AM EST, Wed December 17, 2014
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
updated 4:54 PM EST, Tue December 16, 2014
Gayle Lemmon says we must speak out for the right of children to education -- and peace
updated 5:23 AM EST, Wed December 17, 2014
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
updated 1:39 AM EST, Wed December 17, 2014
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
updated 3:20 PM EST, Fri December 12, 2014
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
updated 9:56 AM EST, Mon December 15, 2014
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
updated 4:01 PM EST, Mon December 15, 2014
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
updated 9:53 AM EST, Mon December 15, 2014
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
updated 5:53 PM EST, Sun December 14, 2014
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
updated 10:50 AM EST, Sun December 14, 2014
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
updated 4:23 PM EST, Sat December 13, 2014
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
updated 9:26 AM EST, Fri December 12, 2014
Anwar Sanders says that in some ways, cops and protesters are on the same side
updated 9:39 AM EST, Thu December 11, 2014
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
updated 12:38 PM EST, Sun December 14, 2014
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT