The State of the Economic Union

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.

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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.

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