The State of the Economic Union

By Dan Kervick

On Tuesday night, President Obama will give the first State of the Union message of his second term.  Preliminary indications from Washington are that the President will attempt to shift some attention back to jobs and economic growth.  But similar White House moves to address jobs and the economy over the past four years have been half-hearted and politically feeble.  It is likely that the jobs message delivered by Obama will be overshadowed and weighed down by the endless and destructive partisan battles over our long-term budget position and Washington’s misguided plans for budget austerity and fiscal contraction.  Obama came into office extolling “the fierce urgency of now” – but Washington’s mystifying obsessions with the federal debt and impossible projections of future budget deficits have moved the beltway agenda from the fierce urgencies of 2013 to the unknowable contingencies of 2035.  The unemployed are trapped despairing and jobless here in 2013, choking on the spreadsheets of dueling beltway actuaries.

It is also likely that a host of deep and disturbing systemic problems will be ignored entirely in Obama’s speech.  Addressing these deeper problems, and even mentioning them in public, is very difficult in a Washington environment steeped in a culture of corruption, high-powered lobbying by vested interests, and elite indifference to the problems and aspirations of ordinary people.  But the problems don’t disappear just because the politicians are too embarrassed or aloof to discuss them.

The American union is held together not just by political institutions and traditions, but by an economic order that establishes the framework in which Americans strive to achieve their economic aspirations, both singly as individuals and collectively as families, communities and a nation.  It is important that in this moment of national reflection on the condition of the United States we take stock of the real state of our economic union, and put forward concrete proposals for addressing our most urgent economic problems.

The Most Urgent Problems We Face

1.  An Ongoing Employment Crisis

  • The unemployment rate is now 7.9%, and has never been lower than 7.8% at any time during the past four years.
  • The unemployment rate for young people aged 20 to 24 is 14.2%.  The unemployment rate for African-Americans is 13.8%.
  • The percentage of the population that is employed is 58.6 %, down from 62.5% in January 2007; the percentage of the labor force that is employed is 63.6%, down from 66.4% in January 2007.  These are the lowest rates in 30 years.
  • Altogether there are now over 26 million Americans who are willing and able to work but are unable to find full-time employment to support themselves and their families.

2. Working People and Capital Moving in Opposite Directions

  • Corporate profits are up 36% since January 2008, and up 200% since January 2001.
  • The share of national income going to working people has fallen 6.2% since January 2008, and 11.2 % since January 2001.
  • For the bottom fifth of wage earners, the number of annual hours worked increased by 22% between 1979 and 2007, but real hourly wages increased by only 7.7%.  For the period between 2000 and 2007, real wages in this group actually fell by 3.2%

3. An Unstable Financial Economy

  • Although household debt has declined since the peak of the recession, it remains very high by historic standards.  Total household credit market liabilities as a share of GDP are now over 81%.  This compares to 43% in 1970, 49% in 1980, 60% in 1990, and 67% in 2000.
  • The financial sector remains dangerously large, and growing, with an 8.4% share of GDP – bigger than it was just before the recession.  The US financial industry now accounts for 30% of all domestic corporate profits.
  • The total outstanding debt of the domestic financial sector is over 87%, down from 107% at the beginning of 2007, but still much higher than in January 2000 (80%), January 1990 (44%) and January 1980 (19%).

4. Socioeconomic Inequality

  • The after tax income of the top 1% of households, adjusted for inflation, has risen by about 130% since 1967.  The income of the next 20% has risen by 28%.  The incomes of all other income groups have fallen.
  • The richest 1% of Americans control 34.6% of Americans’ net worth.  The bottom 90% control 26.9% of net worth.

5. Government Dropping the Ball

  • After a promising but inadequate effort in 2009 to support economic recovery through expanded government spending, the federal government has since then neglected its responsibilities. Its inadequate economic contribution to the private sector is now a drag on economic recovery.  Consumption and gross investment by the federal government has fallen by 5% since the beginning of 2010.
  • Government has also dramatically failed to support America’s working people through direct government hiring.  Total government employment is down 3.25% during the Obama administration, the only four-year decrease during a presidential term over the past 60 years other than a 0.15% drop during Ronald Reagan’s first term.
  • Total employment by US state governments and local governments is down 3.3% and 3.81% respectively over the past four years.  This net loss is state government jobs is unprecedented over the past sixty years, since the growth rate was positive during each four year period going back to the Eisenhower administration.  The record of government support for employment during the Obama administration is abysmal.
  • Fear mongering over federal deficits has undermined the political will to run the strong public sector deficits that are needed to support economic recovery.

6. A Crisis of Accountability

  • The Justice Department has not yet tried and convicted any major financial industry figures for their role in the financial collapse of 2007 and 2008, despite overwhelming prima facie evidence of rampant criminality.  The Obama administration has yet to take meaningful steps to clean up the criminogenic environments that have been fostered by years of deregulation, de-supervision and de facto decriminalization during the neoliberal era.
  • The Obama administration and its Wall Street supporters have embraced a “too big to prosecute” philosophy toward elite financial sector crime, an approach that has established and legitimated crony capitalism and economic predation as standard operating procedure in the United States.  Failure to uphold the rule of law emboldens wrongdoers and paves the way for future criminality.
  • The revolving door between elite financial institutions and the regulatory agencies that are supposed to police them continues to revolve.

7. A Demoralized Nation 

  • According to the John J. Heldrich Center for Workforce Development at Rutgers University, 60% of Americans now believe the Great Recession has left us with a permanent change in what will henceforth be considered normal economic conditions.
  • Only 19% believe job and employment opportunities for the next generation will be better than for the current generation, and 58% of Americans say the ability of young people to afford college will never come back to its previous level.
  • 87% of Americans say workers’ feelings of security in their jobs either will not return to the way they were before, or will return, but not for many years; and only 15% say the lower unemployment rates of the past will return to the way they were before.

An MMT Action Plan

Many of the items in the above list represent deep problems that require complex and far-reaching solutions.   But the more acute problems can be addressed right now by bold and immediate measures.   MMT, or Modern Monetary Theory, shows the way to an activist fiscal approach to economic recovery and the restoration of full employment.  The approach is based on the following insights:

First, a federal government like the United States that controls its own currency can always pay any debts that are denominated in that currency, and thus can never face a problem with involuntary insolvency.   Spending by such a government is not constrained by its tax revenues, nor is it constrained by a need to sell debt instruments to private sector lenders in a private bond market at prices set the government can’t control.  The only public policy constraint on spending for such a government is the risk of destabilizing prices once excessive spending starts to produce an aggregate level of demand that exceeds the capacity of the economy to increase production to supply the demand.   But unemployment rates in the high ranges we are seeing now are a clear signal that our economy is nowhere near that spending ceiling.  Under the circumstances, the obligation of the government is to act aggressively to pursue full employment and promote healthy economic growth and progress by spending up to the level needed to restore a level of demand consistent with a fully employed workforce.

Second, MMT emphasizes that the deficit of the federal government sector is necessarily equal to the surplus of the combined non-government sectors of the economy.  During periods of high private sector saving caused by the need to service high private sector debt, or to satisfy above-normal savings desires sparked by economic insecurity, governments must necessarily run higher deficits to accommodate these higher saving desires, and to offset the drain on aggregate demand represented by the higher level of saving.

The federal government should take the following immediate actions:

1. Restore the payroll tax holiday.  FICA taxes are regressive taxes that are not needed to support the government’s Social Security commitments.  Suspending the payroll tax will add hundreds of dollars to the monthly take-home pay of American workers.

2. Provide federal funding to the 50 states on a per capita basis.  This will enable states to restore lost state jobs and create new ones to pursue their many unmet spending needs.  The boost to aggregate demand will also stimulate increased private sector employment and production, thus returning state tax revenues to their normal levels.

3.  Commit the federal government to a permanent program aimed at providing a government transition job to every unemployed American willing and able to work.  The provision of these jobs will restore and support private sector demand, boost the sense of security of the American workforce, stabilize the economy over time and both preserve and enhance the skills of working people.

4. Aggressively prosecute financial sector criminality.  The focus should be on the top malefactors, not whistle blowers and small fry.  The long term damage to the integrity and health of the US economy inflicted by failure to uphold the rule of law is incalculable.

5.  Break up the “to big to fail” banks.   A financial institution that is too big to regulate, too big to supervise, too big to manage and too big to exist.

President Obama must once again recognize the fierce urgency of now.  He must lead a campaign of immediate economic renewal on behalf of the jobless and the struggling, defend the rule of law and to implore Congress to fulfill its responsibilities to a nation in need.


The following data sources were consulted in preparing this statement: the Bureau of Labor Statistics; the Bureau of Economic Analysis; the Federal Reserve Bank of St. Louis; the Kauffman Foundation; the John J. Heldrich Center for Workforce Development at Rutgers University; and Mother Jones Magazine.

31 responses to “The State of the Economic Union

  1. I can already see one notable objection to this otherwise feasible program:

    Cutting the payroll tax would threaten Social Security and Medicare, because the payroll tax is the principal means of funding the programs out of deferred wages; and going into funding SS/Medicare out of general revenue or deficit spending (or the $60 trillion platinum coin, as Joe Firestone has suggested) would weaken support for the programs by transforming them into “welfare” programs subject to the usual attacks of “government dependency” and “weaking the work ethic”.

    I know that MMT advocates like Stephanie Kelton have suggested that this can be reconciled with a guarantee that Social Security be fully funded with no decrease (and indeed, with an INCREASE) in benefits, and that a conversion of Medicare to a universal single payer system (Medicare for ALL) funded by increased revenue would fill in the gaps suitably. However, given the severe distrust among seniors and SS/Medicare.Medicaid recipients, and the fact that the Obama Administration is more than willing to sell the existing system down the river though partial privatization and “chained CPI” (and, of course, the alternative Republican/Tea Party model of full privatization and complete looting of the system), it would still be a hard sell for giving up the payroll tax at this time.

    Also…what would be done for those who do not make it into the job market, even with the “job guarantee”?? Shouldn’t there be a decent floor of social welfare benefits (as iin SNAP/Food Stamps or WIC or Unemployment Insurance or even TANF) that could be delivered to the hardest hit econiomically folks in a much less punitive and desultory fashion? This is where I would propose a guaranteed income system that would supersede the existing welfare system and compliment both the increased Social Security and job guarantee proposals with a streamlined but far less punative system of provision for the poorest, in addition to the increased government jobs.

    I’m by no means knocking the current MMT proposals, which are spot on and desperately needed as an alternative to the two shades of austerity being pushed on us by the Obama-Boehner dipoly and the neo-supply side fantasy of the TeaPublicans. I simply think there should be more open discussion on whether even this is enough, or whether more radical measures are warranted.

    • Yes, I agree that in addition to the job guarantee, some sort of basic income guarantee is needed. But I do think that the job guarantee floor should be higher than the basic income floor.

      I also used to be a skeptic about the payroll tax elimination, for the reasons you state. Funding Social Security through the supposedly self-sufficient trust fund and dedicated tax is a sacred cow to a lot of people who have grown accustomed to that system. But I have lately come to think that Social Security is doomed to death by a thousand cuts and slow-motion privatization if people continue to view it as a sort of individual savings plan rather than a socialized retirement plan. The savings plan paradigm brings out the debt hawks and generational warriors who argue that generational equity has something to do with balancing the amount retirees get out with the amount they personally paid in. I think this is very much wrong, and so it is time to get started on transferring the whole program to a more progressive system – and expanding it.

      • Thanks, Dan…those were the answers I was hoping to hear.

        It goes without saying that any job guarantee should be at a livable wage set much higher than the present minimum wage; I’d even say higher than $12/hr, indexed for both inflation and job experience, with vastly increased protections for workers to form unions to further improve their economic position. But, the floor for the guaranteed income should be set at a reasonable level so that if a corporation does attempt to take back wage gains of their workers through shortened hours or layoffs, the people affected would have a solid footing to fall upon until they got back in the workforce.

        Also, I think a suitable compromise on the payroll tax would be to keep it, but lift the ceiling on taxable income from businesses and then rework it to be more progressive, withholding less (and in the lower levels, nothing) from wage earners. General revenue could then be used to fill in any spending gaps remaining.

        One other thing…this may not be an MMT issue per se, but what would you do about the massive debt issue? Without directly confronting the problem of illegitimate debt servitude in all its forms, from the sub-prime and secondary loan/rent-to-own market, to student and credit debt, much of the increase in wages will simply be redistributed back into the back pockets of the Wall Street brokers and fixers. Wouldn’t nationalization as well as “trust busting” be a suitable solution to prosecuting the crimes of Wall Street?

        • You know, Anthony, I really don’t know what to do about all of the private sector debt. The problem is that our contemporary society is not divided into humble proletarian debtors and evil bankster-capitalists. As a result of the “ownership society”, we’re all the capitalists now. As far as I understand it, every one with a 401K is in some way invested in the debts of others, including student loan derivatives. I don’t see how we get an orderly “jubilee” of debt cancellation that unwinds debt without collapsing the economy again. After all, the 2008 collapse was itself a disorderly unraveling of the complex web of mortgage-backed debt.

          Maybe some program for the government to buy the debt over a certain amount, and then forgive it, while at the same time swapping expanded Social Security benefits for existing private plans. What we need people to get is that private sector retirement obligations, no less than public ones, will ultimately be paid in the future from the incomes of people alive in that future. The money isn’t literally “saved”.

          • Dan, here’s an idea to consider. Have the Federal Reserve issue mortgages at current values for each underwater mortgage it buys through QE, and require banks selling said mortgages to limit their size to say $500 B in assets for the privilege of being able to sell uw mortgages to the Fed. Just a thought.

          • I don’t see how we get an orderly “jubilee” of debt cancellation that unwinds debt without collapsing the economy again. Dan K

            Which is why, instead of forgiving the debt, we enable people to more easily service it with a universal and equal bailout with new fiat of the entire population, including non-debtors. And to maximize the amount of new fiat that can be distributed without causing price inflation, we ban new credit creation (at least for the duration of the bailout) and meter the bailout so that it counters the deflation of existing credit debt (“Loan repayment DESTROYS deposits”) until all bank deposits are 100% backed by reserves.

            The above would help everyone from the bottom up, including the banks, but without disadvantaging non-debtors and without significant price inflation risk.

            Steve Keen suggests something similar in his “A Modern Debt Jubilee” found in

    • AK, I suggested in an earlier post to Joe that the resumption of the SS tax holiday should be accompanied by a one time (or recurring if necessary) payment to the SS Trust fund out of the proceeds of High Value Platinum Coin Seigniorage. This would probably take Congressional action, but might get some Republican support because it both reduces taxes and strengthens SS for future beneficiaries. Of course SS does not really need to be funded by tax payments according to MMT, but most SS beneficiaries and workers don’t understand this point, so some type of fig leaf seems desirable.

  2. Well put Dan. The problem is that Obama doesn’t recognize the road out of the woods even though it is clearly marked and populated with MMT’s pointing the way. The obstructionist, crony capitalists, and deficit hawks just keep throwing debris and gold dust in his eyes, and Obama thinks these are solutions. I see only a rough road ahead for the next four years.

    • I agree that the road looks hard. We can only hope for a change in the popular Zeitgeist that forces all politicians to reassess. Stranger things have happened. Look how rapidly the Obama euphoria and landslide of 2008 turned into a 2010 election debacle for Democrats and progressives. Perhaps we can spark a progressive movement that gets things going in the opposite direction this time.

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  5. The continuing saga of Neo-Liberal economic ideology holding nations economic development hostage with the exception of China.

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  7. “Second, MMT emphasizes that the deficit of the federal government sector is necessarily equal to the deficit of the combined non-government sectors of the economy.”

    Shouldn’t it read: […] deficit […] surplus […] ?

  8. Great stuff, Dan. Here’s what I’ve got (worked off of your plan) :
    1. Eliminate the FICA tax and raise the federal minimum wage to $12.
    2. Prosecute the banksters. Go after the Michael Corleones, not the Lefty Ruggieros. Splinter the big banks “into a thousand pieces,” just like JFK planned to do to the CIA.
    3. If 1 and 2 aren’t enough to create at least 300k jobs per month, spend massively on infrastructure.

  9. Dr. Kervick,
    Thanks for the helpful summary of issues, and suggestions for remedies.
    A small question comes to me frequently: How are various statistics discovered? Specifically, you said that financial industries (FIRE?) generate 30% of corporate profits now. Simon Johnson, in a May 2009 essay in Atlantic, said that number was 41%. Is the number decreasing? How do you gentlemen find trustworthy data, and how can I, an old philosophy prof, know how to confirm, or whom to trust?
    Yours, Justin

    • Justin, I have also been told that the FIRE sector generates over 40% of corporate profits. However, I relied on this table from the Bureau of Economic Analysis:

      Looking at lines 2 and 3, and looking at the last reported quarter, which is Q3 of last year, I get 29.7 percent.

      I just looked at Johnson’s article, and what he says it that FIRE profits reached 41% this decade. It does look like the numbers were that high for earlier time periods in the decade. For example, the BEA stats show that for Q4 of 2001 they were over 40%.

      I wanted my state of the union to be as up to date as possible.

      • Besides the BEA stats, the other ones I relied on most were from the Bureau of Labor statistics and the FRED data tools at the Federal Reserve Bank of St. Louis – both available online.

  10. I’m sure he will be in his new clothes and his printed paper with a mess of invisible digital zeros. Seems the printing more thing did not work well for LBJ so why do they think this is a solution for today?

  11. Great article, Dan.

    Also, check out Martin Wolf’s article over at today, “The case for helicopter money”. Great to see the MMT-ish perspective getting more and more mainstream attention.

  12. you forgot the most important crisis of all.

  13. johnsteinsvold

    An Alternative to Capitalism (since we cannot legislate morality)

    Several decades ago, Margaret Thatcher claimed: “There is no alternative”. She was referring to capitalism. Today, this negative attitude still persists.

    I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to my essay titled: “Home of the Brave?” which was published by the Athenaeum Library of Philosophy:

    John Steinsvold

    “Insanity is doing the same thing over and over and expecting a different result.”
    ~ Albert Einstein

  14. God help us if Rubio and Jindal are the GOP’s future and savior. Imo, Obama was underwhelming and self-contradictory, but these fellows were something else.

    • I missed Rand Paul’s “reply” entirely.

      Which means I missed nothing.

    • It is Obama’s and the New Democrats right-wing economic agenda that has provided the opportunity and energy for cretins such as Rubio and Jindal to operate. Without a challenge from the Left, why should the New Democrats or the GOP act differently?

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