We are currently running an annual deficit of about $1.4 trillion. $700 billion is because of reduced revenues and $300 billion is for increased expenses for unemployment and other services. In other words, $1 trillion of our problem is because of the recession and $400 billion a year is, well, about what deficits we run.
Our first job is to fix the economy. Austerity programs will hurt the economy, as any fool can see. Look at what we have so far – the city with the highest crime rate (Camden NJ) lays off half of its cops, and the city with the worst education (Detroit) lays off half of its teachers. A million cops, firefighters, and teachers have lost their jobs. Tell me how laying people off helps our unemployment problem.
What we have to do is put people back to work and the economy will heal, annual deficits will go down, and we can take some time to look at our long term problems. Let’s discuss just the $1 trillion part of the budget concerned with the relationships between employment and how it affects revenues and expenses, and how they drive deficits. The other $400 billion is a separate topic.
We are in a stagnant economy. The economy can go three ways, recover, stagnate, or decline.
Currently, we are not improving the unemployment situation, so the economy is stagnant. It is weak enough that a major shock, such as the breakup of the Euro, could throw it into decline. If it goes into decline, unemployment would rise, revenues would fall, expenses would rise, and deficits would grow to more than the current $1 trillion a year..
If the economy remains stagnant for several years, as in Japan’s Lost Decade, the federal debt will increase by $1 trillion every year.
If the economy recovers, unemployment falls, revenues increase, expenses fall, and deficits fall.
How can we raise employment? Let me make a proposal.
There are about 14 million unemployed at a 9.1% unemployment rate. To get revenues and expenses back to the old balance will require an unemployment rate of about 6%, or 9 million people unemployed. The much-maligned $800 billion stimulus created, if CBO is believed, 2.5 million jobs. A second stimulus, using lessons learned from the first, could be more efficient, so it seems logical that a $1.6 trillion stimulus would create 5 million jobs, which would cut the unemployment rate to 6%.
Let us now discuss the cost of the stimulus.
If we do nothing, in four years the debt will have gone up $4 trillion because of higher expenses and lower revenues.
If we do the $1.6 trillion stimulus over three years with declining amounts, such as $750 billion in year 1, $500 billion in year 2, and $350 billion in year 3, we should lower the unemployment rate to 7.5% after year 1, 6.5% after year 2, and 5.85% after year 3. Increased revenues and lowered expenses will lower the annual deficit each year, with projected losses in revenue and higher expenses (currently $1 trillion a year) being something like $530 billion in year 1, $220 billion in year 2, $110 billion in year 3, and $0 in year 4.
If we do nothing, at the end of four years we have an additional $4 trillion in revenue and expense debt, a lousy economy, continuing high unemployment and low revenues.
If we do the stimulus, we have an additional $2.4 trillion debt, high employment, high revenues, and low expenses. We fix the economy, avoid adding another $1.6 trillion to the debt, and can then view our economic problems in a clear light.
Any questions?