Debt and Jobs Vying For Congress' Favor

Published Jun 7, 2010. By Clea Benson.

Until recently, the staff at the National Conference of State Legislatures thought it would be harder to convince the Senate than the House that states badly need a new infusion of federal aid to forestall draconian layoffs. The pattern at the Capitol for the past several years, after all, has been that the House was as likely to approve generous spending programs as the Senate was to pare them. But that changed on the eve of the Memorial Day recess, when House Democratic leaders stripped $24 billion in Medicaid assistance out of a package of tax breaks and social safety net spending in order to appease fiscal conservatives in their own ranks.

With Congress returning this week, the state legislators’ association has been busy instructing its members to lobby to get the aid added to the Senate version of the legislation. It won’t be easy. “From what we understand, there’s not any point of contention that the states need the money,” said Rachel Morgan, a policy specialist for the group. “But it’s how to pay for it and whether the budget can afford it.”

With 15 million Americans jobless and the unemployment rate hovering around 10 percent for the past 10 months, advocates for workers are pushing a new series of federal spending measures on top of last year’s $787 billion stimulus package. But as the recent House move shows, the political debate has reached a turning point: Concerns about the federal government’s mounting debt have begun to trump support for outlays to create or retain jobs.

Democratic deficit hawks hailed the House vote as a victory, even though many state governments are likely to shed workers if they don’t get the additional Medicaid dollars in the coming weeks. Meanwhile, a separate drive to include $23 billion in the midyear supplemental spending bill in order to prevent the layoffs of as many as 300,000 public school teachers appears to be in significant jeopardy despite White House support.

Fiscal prudence may be the new political paradigm this election year, but the labor market is still in a deep hole. The national economy will have to create more than 11 million new jobs just to get back to pre-recession employment levels. And things look particularly bad for certain categories of workers, including those on public payrolls and the young and inexperienced.

The question policy makers are being pressed to answer is whether using federal money — and thereby adding to the deficit — in order to forestall hundreds of thousands of layoffs is more of a risk to the economy than ballooning federal borrowing. Though a majority of lawmakers now appear to be acting as though the national debt is their bigger concern and insisting on offsets for any new spending, many progressive economists, the Democratic congressional leadership, the Obama administration and even one of the nation’s most prominent crusaders for fiscal discipline are all warning that the weak job market could still plunge the economy back into peril if the federal safety net isn’t extended.

Robert Bixby, the executive director of the Concord Coalition, is at the forefront of the effort to publicize the dangers of uncontrolled federal spending. But even he worries that the economy is not yet at a point where it makes sense to forgo extending unemployment benefits and certain other federal supports, as long as they are carefully targeted at preventing layoffs that would exacerbate the economic downturn.

“Right now, I think that there’s still a case to be made for some aid to the states if it is a pretty direct form of injecting stimulus,” Bixby said last week.

The need to rein in deficits and the national debt should not be confused with near-term problems such as the current unemployment rate, Bixby said: “There’s no question that we do have to turn our attention to fiscal consolidation, because we’re on an unsustainable track. That unsustainable track has nothing to do with the short-term economy.”

President Obama echoed Bixby in a speech last week on the economy at Carnegie Mellon University in Pittsburgh. “Now, the economy is still fragile, so we can’t put on the brakes too quickly,” he said. “We have to do what it takes to ensure a strong recovery. A growing economy will unquestionably improve our fiscal health, as will the steps we take in the short-term to put Americans back to work.”

In particular, some economists worry that layoffs of public-sector employees will ripple through the larger economy as they lose their incomes and spend less. “Here we go again,” said Ross Eisenbrey, vice president of the liberal Economic Policy Institute. “There’s demand being sucked out of the economy. What that means is that businesses hire fewer people, and you get into the spiral. To get out, we need to do a lot more than the government has been willing to do.”

Doing the Math

It’s easy to understand the political math: Republicans for months have been warning that federal spending has reached dangerous levels, and the public is beginning to respond just as midterm elections approach.

The economic argument against more state aid is that deficit spending will require the federal government to devote an increasing share of its resources to pay down the debt, reducing the amount available for exactly the kind of investments in workforce development that Democrats are pressing to make now.

In the current fiscal year, the federal government is projected to spend about $1.3 trillion more than it receives in revenues, or more than 9 percent the size of the national economy. The total national debt is at $13 trillion, or nine-tenths of the gross domestic product.

Democratic leaders are “missing a critical opportunity to stop out-of-control spending that economists say is hurting our economy and slowing the creation of new jobs in America,” Minority Leader John A. Boehner of Ohio said recently on the House floor.

Eisenbrey says such fears are misguided. “If they looked at where our deficit is coming from right now, they’d realize the greatest part of it is from the recession itself,” he said. “They would see that getting us out of the recession is going to be the thing that helps.”

Meanwhile, there are nascent signs that the economy may be turning around, undermining the sense of urgency that enabled many fiscal conservatives to swallow their misgivings in 2009 and vote for the stimulus bill. Employers have added almost a million net positions since the beginning of the year, and 431,000 of those jobs came in May— the largest one-month increase in a decade. Job offers to new college graduates are up about 5 percent over 2009.

But beneath the hopeful signs are other indications that the labor market is still very fragile. Almost all of the new jobs created in May came from federal hiring, primarily workers for the 2010 census. The unemployment rate for the youngest workers — those ages 16 to 24 — reached a record high of almost 20 percent in April, and people in that age group account for about a quarter of the Americans who are out of work. Meanwhile, a significant percentage of the unemployed have little hope of finding jobs quickly. At last count, some 6.8 million Americans had been on the jobless rolls for more than 27 weeks. And without more aid to states and local governments, according to some estimates, an additional 900,000 public workers could lose their jobs in the coming year.

Though politicians still argue over whether last year’s stimulus package helped or hurt the economy, the truth is that federal spending has stopped the bleeding somewhat. The latest report from the nonpartisan Congressional Budget Office estimates that without the federal spending of the stimulus law, at least 1.2 million and perhaps as many as 2.8 million more people would have been jobless in the first quarter of this year.

Federal Impact

The vast range of that estimate indicates just how hard it is to calculate the effect of even such an enormous infusion of government cash into the national job market. But the CBO suggests that all that money washing through the economy is not only causing private and public employers to add to their payrolls once they receive government checks, but is also boosting hiring when those new workers go out and spend their cash on goods and services.

Much of the money provided by the stimulus is still being spent, but many programs will expire in December, leaving open the question of whether to extend them. Knowing that it’s a tough sell, Democratic leaders and the White House are focusing on narrow pockets of the job market that may need extra help or serve a greater purpose beyond providing paychecks.

“I don’t think framing the question in terms of a stimulus is helpful,” Lawrence H. Summers, the director of the National Economic Council at the White House, said recently when asked if Congress should consider another recovery spending package. “Do we need to extend unemployment insurance? Yes. Do we need to continue to provide support for state and local governments to maintain and prevent large-scale layoffs of teachers? Yes.”

But, Summers added, “is this the moment for some major new experiment in Keynesian economics? Absolutely no.”

Supporters of providing an infusion of federal money to preserve teachers’ jobs — at least for the next academic year — argue that the spending would be economically justified not only because it would increase employment in the short run, but also because it would help the employment picture over the long term, through helping children receive a potentially better education with lower class sizes in public schools.

“We can’t say, oh, let’s put this kid on hold for two years until the economy recovers,” said Appropriations Committee Chairman David R. Obey of Wisconsin, who included the $23 billion for retaining teachers and public safety employees in his draft of the midyear spending bill, swelling its size to $84 billion. There is no such money in the version passed by the Senate two weeks ago, totalling $59 billion and focused mainly on paying for the wars in Iraq and Afghanistan into the fall. The Obey bill’s future in the House is problematic.

But Democrats succeeded in adding nearly $4 billion for jobs programs targeting young people and welfare recipients to the House-passed package of tax cuts and social spending. Supporters say the money would kill two birds with one stone: boosting employment while giving young workers better skills in the long term. “I think it’s worth doing,” said Harry Holzer, a professor of public policy at Georgetown University. “If nothing else, it helps build job readiness.”

Still, some opponents of this targeted aid argue that even though stimulus spending may have saved jobs, it wasn’t always spent wisely. Arthur Rothkopf, an education expert at the U.S. Chamber of Commerce, says much of the money was spent to support failing policies when it should have been aimed at reform efforts. “What you’re doing is basically throwing money into a system that’s not working very well,” he said. “We think that this is not the best way to spend money, and money ought to be spent in helping small businesses create jobs and real tax relief for business.”

Others say the current proposals, even if they gain traction, may be coming too late to have much of an impact. Timothy Bartik, a labor economist at the W.E. Upjohn Institute for Employment Research, a nonprofit think tank in Kalamazoo, Michigan, says Congress may have delayed too long to avert new pain in the job market. “This could still be useful to do,” he said, “But it would have been nice if it had been done three months ago.”

The Senate plans to take up the House-passed tax and safety net bill, and it remains to be seen whether efforts to add aid to states will gain more traction. House leaders will be pressed soon to either move their own midyear spending bill or clear the version passed by the Senate, which doesn’t include teacher money.

Despite the odds, Democratic leaders plan to push ahead: “The economy is still in trouble, and we have an obligation not to let up in the effort to save or produce jobs,” Obey said.