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  • Obama Accepts Debt a Bigger Threat than Recession

    Bob Pollin: Obama debt speech avoids recession and need for massive jobs growth -   April 16, 2011
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    Robert Pollin is Professor of Economics and founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the U.S. and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the U.S. Most recently, he co-authored the reports Job Opportunities for the Green Economy (June 2008) and Green Recovery(September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the U.S. He has worked with the United Nations Development Programme and the United Nations Economic Commission on Africa on policies to promote to promote decent employment expansion and poverty reduction in Latin America and sub-Saharan Africa. He has also worked with the Joint Economic Committee of the U.S. Congress and as a member of the Capital Formation Subcouncil of the U.S. Competiveness Policy Council.


    Obama Accepts Debt a Bigger Threat than RecessionPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Washington a couple of days ago, President Obama gave a speech on how he plans to tackle the deficit and the debt, more or less taking on the argument that the big problem facing us is the debt. Here's a little bit of what he had to say.


    BARACK OBAMA, US PRESIDENT: By 2025, the amount of taxes we currently pay will only be enough to finance our health-care programs Medicare and Medicaid, social security, and the interest we owe on our debt. That's it. Every other national priority--education, transportation, even our national security--will have to be paid for with borrowed money. Now, ultimately, all this rising debt will cost us jobs and damage our economy.


    JAY: Now joining us to talk about President Obama's speech is Bob Pollin. He's cofounder and codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us, Bob.

    ROBERT POLLIN, PERI: Thank you for having me.

    JAY: I should say, thanks for joining us again.

    POLLIN: Thank you.

    JAY: So what do you make of President's speech?

    POLLIN: Well, number one, the premise is wrong to begin with. He's confusing two things. He's confusing the aftermath of the Great Recession brought on by Wall Street, which created the massive fiscal deficit that we have now. The fiscal deficit is big. It's 10 percent of GDP. But at least half of that, from 10 percent to 5 percent of GDP, is just paying to try to prevent a recurrence of a double-dip recession.

    JAY: Well, let me just say that in his explanation of why we're in such trouble, he barely mentions the recession. Actually, we'll play another clip. This is President Obama's analysis of why we're in such trouble.


    OBAMA: America's finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt-free, and we were prepared for the retirement of the baby boomers. But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program. But we didn't pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts, tax cuts that went to every millionaire and billionaire in the country, tax cuts that will force us to borrow an average of $500 billion every year over the next decade.


    JAY: So President Obama says it's really about Bush policies during that decade. He doesn't actually mention the recession as part of the contributing factor.

    POLLIN: Right. As we've discussed before--but it's really important to focus on this--there are two separate problems. One is the deficit problem created by the more severe problem, which was the recession created by Wall Street. And then, second, we do have a long-term problem. That is, even once the economy's in recovery, we can debate as to how big the deficit should be, and it's probably true that it's too big. Now, in terms of the short-term problem, that is, the stuff that happened as a result of the deficit, if you've got unemployment to 5 percent--right now it's 9 percent officially, and of course it should be, if we measured people properly, it's closer to 20 percent. But if you even got the official rate from 9 percent to 5 percent, that alone would reduce the deficit to 5 percent of GDP as opposed to 10 percent of GDP, that alone. So we can't keep talking about this as, you know, the worst problem that's ever happened in the history of fiscal finances independent of the recession. And in that sense the deficit has worked to benefit us by keeping us out of the double dip and an even more economic crisis.

    JAY: But he doesn't defend that premise, even though it's a premise he was himself promoting a year ago.

    POLLIN: Of course, of course. He supported the stimulus program. We can debate whether the stimulus program was too big, too small. It probably was too small. But in any case, the fact is half of the problem of the deficit is the recession and getting us out of the recession. That is fully half the problem. And that's not my model; that's the model of the Congressional Budget Office. And if we want to talk about other people's research, it's the model of Olivier Blanchard, who's the chief economist at the IMF right now. So this is non-controversial. Getting us out of the recession, getting unemployment to 5 percent--of course, it should be well below 5 percent, but getting the unemployment to 5 percent cuts the deficit in half. Now, why? It's obvious why, if we think about it: because people have more incomes, so they're going to pay more income tax. Their property values are going to go up. Real estate taxes and sales taxes are all going to go up without anybody's having anybody, rich people as well, without anybody having to have a higher tax rate. If you can solve the 9 percent unemployment, you solve half the problem.

    JAY: Okay. But how do you solve the 9 percent unemployment? 'Cause the argument he seems to be accepting is that if you shrink government and if you take on the debt, somehow that leads to growth.

    POLLIN: No, exactly the opposite. Not when the economy is so weak. I mean, we can talk--look at what's going on at the states now. When the states are cutting their teachers, their health care workers, their cops, that's making the economy worse in those communities. I know in my own community, because in my own community the dominant employer is the University of Massachusetts. So when we cut the University of Massachusetts, it weakens the whole region. People who are thinking, for example, of putting up apartments for students don't do it. They delay it. They said [incompr.] university [crosstalk]

    JAY: But when you've got only two ways, as far as I can see it, of the federal government or state governments facilitating the growth of employment. Either you find some mechanism that gets the private sector investing and hiring people or the public sector does it directly. [crosstalk]

    POLLIN: 'Cause it's not an either/or. You need both. You absolutely need both. You need to increase public investment. And in words, Obama has said frequently--including in this speech--that he's for that, investing in the green economy, investing in education. Those are the central premises of the State of the Union [crosstalk]

    JAY: But if the math don't work, if you're going to do the kind of cuts that he's talking about--.

    POLLIN: You can't do it, of course.

    JAY: And he's not even really talking about it. Like, certainly, any kind of direct jobs program, it's--there's not a word of it in either of his last two major speeches.

    POLLIN: Right. And on top of that--we've also discussed this before--we need to leverage the power that we have, whatever it is, to get the financial system to push credit out into private businesses to create jobs. The advantage of doing that is that we don't have to spend, the government doesn't have to spend as much money. But we're giving away free money in terms of near-zero interest rates to banks, and the banks continue to sit on $1 trillion. I mean, if we move most of that $1 trillion into job creation, that alone would do far more than anything that would come out of the budget right now. So I know [crosstalk]

    JAY: Let's not do that point too quickly, 'cause that's so significant.

    POLLIN: Yes.

    JAY: The Fed moved $1 trillion into the banks. Supposedly, that would help the banks or get them to give liquidity and loans to small businesses and all this. And on the whole, the money's still sitting in the banks.

    POLLIN: The money is still sitting there.

    JAY: Whereas if that $1 trillion had simply gone into direct jobs program--.

    POLLIN: It should be headline number one, yes. The money has to move into the economy.

    JAY: So can the Fed say give it back?

    POLLIN: No. It's not their money anymore.

    JAY: Okay, so you'd have to tax it back if you want it back.

    POLLIN: Yes, you tax it back, which I favor, which would be a tax on the excess reserves of the financial [incompr.]

    JAY: So lend it or lose it.

    POLLIN: Lend it or lose it. And the arguments that the banks make as well, you know, the situation is still so tenuous, well, then, we shouldn't have been giving them the money in the first place. We shouldn't have had a zero interest rate policy, which we have to this day. We have to move. And the banking system then has to be aggressively looking, especially, for small businesses that are really cash constrained and get them opportunity to move forward and to create jobs. So that would solve half the problem right there--not all of it, but it would solve half of it.

    JAY: The image I think people have in their minds that's been sort of articulated by the Republicans and this whole kind of thesis is there needs to be a kind of purging. You need to purge inefficient companies and let them go down, including the banks, in the midst of crisis. You need to get the government out of the game so there isn't so much what they consider unproductive money coming from the government. And then that allows space for what they call real growth. So what do you make of that theory?

    POLLIN: Well, that theory was propagated in 1929 by the then Treasury secretary, Andrew Mellon. You know, liquidate the banks, liquidate business, let all the deadwood, you know, go float off the river. And, you know, the result is that we had a more severe depression. We can go into a depression. I mean, if people are okay with that, that's--that is--as a solution, obviously, I don't favor it. I mean, obviously I think what we need to do is push job creation as the number one priority. That's not just a discussion for this week and then next week we talk about the debt as the problem. The number one problem is the lack of job opportunities. That's the problem for people. It's also the problem for the deficit. We should--every time we talk about the deficit, we should talk about it in relationship to unemployment.

    JAY: Okay. So be concrete, then. So if you could advise the government and say, here's what to do, how to create jobs, what does that mean concretely?

    POLLIN: Well, number one, as I said, we have to move the private financial system into job creation.

    JAY: But how do you do that? The [crosstalk] real demand there, they don't want [crosstalk]

    POLLIN: Yes. The simple ways--I propose two simple ways. Number one, which I just mentioned: tax excess reserves of banks. They will scream bloody murder, but tax them. They've gotten the money for free. And tax them until they start moving credit into the economy. And number two, give them a carrot, which is to say, expand the Small Business Administration loan guarantees, because the argument of the banks is there's too much risk in the economy. So lower the level of risk by giving out loan guarantees that target the guarantees to job-creation activities. This is not that hard to do, it can be done, and, actually, we have the administrative apparatus to do it right now. And that will not be the whole answer. We also do--.

    JAY: Have you modeled this? Like, let's say those two things happen. What's the consequence?

    POLLIN: Well, the consequences depends on, of course, how much money flows out of the financial system but into the economy. But let's say we're sitting on $1 trillion of cash in the financial system--which we are. Let's say you move $700 billion out of the $1 trillion and $300 billion just stays there--which is probably too much, but let's say--if you could move $700 billion, that could then get the economy on a path where employment would grow at about 4 percent a year, which--.

    JAY: So this is $700 billion that banks would start loaning to business, and in theory small business particularly.

    POLLIN: Well, because the big businesses already have cash. They're also sitting on cash. So, you know, give it to the people, people who have lost their jobs and want to start their own businesses. I was in a discussion about this with the president of the Federal Reserve of Boston just a couple of weeks ago. He didn't disagree with me. I don't know that he's promoting it openly, but he did not disagree with [crosstalk]

    JAY: Okay, so that's a way to try to get the private sector actually moving, especially small business. So what's part two?

    POLLIN: And part two is we've got to stop the cuts to state and local governments, period. I mean, that is pushing the economy back into recession. And there's some interesting research out of the National Bureau of Economic Research which finds that whatever the stimulus has done over the past couple of years--and, again, we can debate how good it was, but whatever it was done is completely counteracted by cuts in state and local governments. So the net impact: we've had no stimulus. The net effect has been zero. So no surprise that the economy [crosstalk]

    JAY: 'Cause the best at what it did do was protect some state and municipal jobs, and that's now gone, and now they're starting [crosstalk]

    POLLIN: Exactly. So every time we talk about the stimulus at the federal level we should also remember that it was completely counteracted by cuts at the state and local level. And so when we keep--when we're cutting jobs at the state and local levels, state and local governments are the biggest single employer in this economy. So if we want to create jobs, you don't start by cutting the biggest institutions that do create jobs.

    JAY: And some people advocate a direct jobs program. If you envision that, would it be federal or done through the states and municipalities? Or I suppose it could be all of the above.

    POLLIN: Well, I mean, a direct--let's be real simple. I mean, my institution and many other institutions in universities and state and junior colleges just let their budgets expand. That's a direct jobs program. They're there. They're sitting there. They're strapped. Give them the money to grow at a reasonable rate. Direct jobs program. It's an education program. It's a community development program. We can do it tomorrow. But we have to stop talking about the necessity to cut for vital things that go on, for example, at the state and local level.

    JAY: Thanks for joining us.

    POLLIN: Thank you.

    JAY: And thank you for joining us on The Real News Network. And don't forget the donate button, 'cause if you don't do that, we can't do this.

    End of Transcript

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