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Sunday
Jun122011

US Politics Special: Will the Democrats Fight Back over Jobs?

For the past several months, the major topic in Washington has been the national debt. Driven by the newly elected Republican House majority, with its strident conservative freshman class, the conversation has been dominated by the mantra of cuts, cuts, and more cuts. Dire warnings of impending doom if spending is not significantly reduced have become the rallying cry for a GOP eyeing the possibility of retaking both the Presidency and the Senate in 2012.

Along the way Democrats, running scared after their "shellacking" at the 2010 midterms, have quietly acquiesced in the Republicans' fostering of the crisis mentality. Conservatives of the Tea Party hue, or those coloured by the more traditional GOP cry for free markets and limited government, have won the battle of political messages. In a CNN poll last week, nearly 48% of Americans indicated they believed another Great Depression was either very or somewhat likely to occur next year.

The poll also revealed that an alarming 30% of Americans believed they might soon become unemployed. This stark picture of a forecoming economic catastrophe was compounded by the release of simultaneous reports showing that house prices are still falling, while jobless figures remain stubbornly around 9%.

The Democratic response to the twin problems of the stagnant economy and the successful Republican onslaught on "irresponsible" government spending has been to play defense. Little has emerged from Congress, and nothing from the Obama Administration, to suggest that the Democrats have vision of how to stimulate not only the economy, but also a liberal base feeling battered by the conservative resurgence.

But there were signs last week that Democrats are beginning to emerge from the bunker mentality re-engaging Republicans with the case that more should be done to invigorate the labor market through government investment.

The initiative follows the line persistently advocated by economist Paul Krugman in his "Conscience of a Liberal" blog at The New York Times. In a post on 2 JuneKrugman put out his refrain of "Debt crisis? What debt crisis?", maintaing that Public Enemy No. 1 is, and always has been, unemployment. The only means to recover from a recession is for the government to invest in creating jobs. Thus, the "mistake" of 2010 was the switch in concern from unemployment to fiscal austerity, "fed by scare stories about an imminent loss of market confidence in U.S. debt".

The Krugman position is that the 2009 stimulus was "both too small and too short-lived" to sustain a recovery that solved the unemployment problem. Fiscal support was withdrawn much too early, he contends, thereby "perpetuating high unemployment". As his historical warning, Krugman cites the "mistake of 1937", when President Roosevelt, believing the recovery from the Great Depression was under way, stopped funding many of the New Deal employment programs. The result was another slump in the economy that only the massive government spending involved in fighting World War II helped cure. Krugman ends this piece, written before the CNN poll was released, by noting:

Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we're experiencing may not be a full replay of the Great Depression, but that's little consolation for the millions of American families suffering from a slump that just goes on and on.

This is not yet the approach of the White House, which last week released a report by President Obama's Jobs and Competitiveness Council calling for moderate increases in government spending. But Democrats in Congress are becoming more bullish at calling for tax increases, whether by repealing Bush-era tax cuts for the wealthy or by ending some exemptions in the tax code, to fund an infrastructure investment program.

Underlying that renewed concentration on policies which  Republicans will deride as the old "tax-and-spend" liberal ways are figures in an April report by the Pew Fiscal Analysis Initiative.

Titled "The Great Debt Shift: Drivers of Federal Debt Since 2001", the short paper begins with the reminder, "In January 2001, the CBO projected that the federal government would erase its debt in 2006 and by 2011, the U.S. government would be $2.3 trillion in the black." This prediction was based on the law as it stood in January 2001. The Pew report then shows how legislative changes were the primary reason in that surplus being squandered.

The most significant cause for the change from surplus to debt has been the 2001/2003 tax cuts. They are responsible for 13% of the reversal, with growth in non-defense spending (10%) and the 2009 stimulus package (6%) also playing a role.

The tax cuts are up for renewal shortly after the 2012 elections. So the opportunity is there for a more muscular argument from Democrats that increased tax revenues, with a return to levels of January 2001 when the country was projected to be in surplus, and spending to rectify Krugman's "mistake of 2010" could simultaneously solve the unemployment and deficit problems.

There is a precedent. In 1999, Time magazine reported on "The Great American Budget Battle". That particular dispute, which Time described as "Washington's answer to professional wrestling...all roars and growls and theatrical blows to the head", concerned how future surpluses should be spent. Predictably, Democrats were looking to increase government spending, and Republicans wanted a $792 billion tax cut:

The most interesting thing about the phantom surplus is that by every indication, voters don't think it really exists either. But that has not prevented politicians on both sides from trying to woo them with proposals that Washington can't pay for. Republicans fanned out during their August recess to try to rally public support for their tax cuts --- Please, let us give you more money! --- but the polls showed a public unmoved. Voters said they would rather use the money, if it exists, to pay down the $5.6 trillion national debt. "People are genuinely fiscally conservative in this country," says Stephen Moore, an irrepressible supply-sider from the Cato Institute. Though personally he'd prefer deep tax cuts to spur growth, he finds in his travels that "a lot of people look at this mountain of debt and say, 'Gee, we really ought to start paying off the mortgage.'”

Republican calls for cutting government spending, rather than increasing taxes, as the means to pay off the country's mortgage have an undoubted emotional appeal. They might even be the correct course to take, although the news from Britain where cuts on the scale envisioned by Republicans in America are beginning --- as some House Democrats noted in a letter to President Obama on Friday --- to look an atrocious mistake.

But Democrats should trust that the electorate still have the same common sense as they did in the Time article. They should make the case for increased taxes, and further stimulus spending, more forcefully.

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