Sunday, February 20, 2011

It's the Unemployment: Now is Not the Time To Tackle Deficit

The following letter written with the help of my friends Duane and Don appeared in the Albuquerque Journal this morning.

"Contrary to all the deficit hype, federal deficit austerity will not restore prosperity in the wake of our recession.  Unnecessary attention to the deficit has overshadowed the real problem, unemployment.
Instead of deep federal budget cutting, we must focus on getting people back to work even if it means more government spending.  Deficits will decrease as employment is restored.
Product demand is what keeps companies in business and employment high.  Demand has several well known components.  Specifically, total demand is the sum of household spending, government purchases, private investment, and net exports.  When demand is in balance with production, the economy is healthy, there is full employment, and everyone is happy.
In the current recession, demand destruction started when huge private investment firms on Wall Street went belly up.  Indeed, the entire banking system would have collapsed without massive infusion of federal funds.  People and companies found themselves in debt, so household spending and private investment plummeted.
As demand fell companies laid off workers, which reduced the household component of demand further.  As the bad news spread, more companies followed suit.  As the unemployment increased, household demand continued to decrease and the recession deepened.  Without a dramatic increase in exports, the only recourse to reverse the vicious downward cycle is for the government to increase spending to prop up employment.  

There are those who believe that a recession is necessary to reallocate resources more productively.  That is, let the free market take its course.  To them, an observation attributed to John K. Galbraith applies, 
They are often applauded for the old-fashioned soundness of their views and their courage in committing other people to hardship. 
For every $100 billion cut from the federal budget a million jobs are lost.  These are not just federal employees; they include private sector crafts and professionals across the country.  This reduces total demand further and reinforces the vicious demand cycle.  
Politicians, who want to decrease the deficit now, should hold that thought until nearly full employment is restored.  Policies that increase the deficit in good times and decrease it in bad times are just plain wrong."  

1 comment:

  1. Wonderful letter, Dan. I hope you send letters to NY Times. They could use some like this one. All the best, Bob Wallace