The Recovery That Could Have Been

Ask any macroeconomist what the most important role of the government is, and they will answer, ​‘matching aggregate supply and demand.’ From an economic perspective, federal fiscal policy is simply a tool that helps us make sure the United States has the $16 trillion in purchasing power to buy the $16 trillion in goods and services that we, as a country, can produce each year.

So why are we so bad at this?

It is now six years since the Great Recession, and employment numbers are still dismal. In every other recession since World War II, employment bounced back in four years or less. Why hasn’t that happened this time? Because a large gap exists between the country’s productive potential — what we could produce if all of those unemployed people were working — and the aggregate demand for goods and services.

In 2009, there was enormous right-wing wailing and gnashing of teeth over the fact that the American Recovery and Reinvestment Act (ARRA) doled out some $800 billion, with nearly half going to infrastructure, education, healthcare and renewable energy projects. But in retrospect, that wasn’t enough. The U.S. economy was in cardiac arrest. It needed a defibrillator shock. Instead, it got a cherry Life Saver.

Admittedly, $800 billion is a lot of money. If well spent, it ought to be able to solve almost any problem. Try this math, for instance: There are currently 11 million unemployed Americans. A job at the minimum wage would cost $15,000 each year, for each one. That means that $165 billion, spent that way, would eliminate unemployment in the United States for a year.

If we wanted to be less miserly, we could pay each unemployed American $10 an hour, which adds up to a salary of $20,000 a year. That would cost, in total, $220 billion. That’s just one- fourth the cost of the ARRA — and little more than one-third of the annual military budget. That’s right: For the cost of one-third of the military budget, the United States could have full employment.

What would all those new hires do? Back in 1936, British economist John Maynard Keynes suggested this to solve woes about joblessness:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note- bearing territory), there need be no more unemployment.

Monetarist economist Milton Friedman made a similar observation: that price deflation could be prevented by dropping money out of a helicopter.

On a more serious note, the Emergency Jobs Act (H.R. 1617) proposed by Representative Jan Schakowsky (D- Ill.) would put people to work building and fixing schools, maintaining parks, providing healthcare, teaching, providing child care and rehabilitating housing. In its ​“Better Off Budget” released this month (see page 30), the Congressional Progressive Caucus proposed creating an infrastructure bank to update our aging infrastructure and put Americans back to work.

Are initiatives like these possible? Of course. It has already been done. During Franklin D. Roosevelt’s administration, the Civil Works Administration hired four million unemployed workers in two months to build roads, schools, privies and playgrounds.

Instead, our federal government has thrown huge amounts of cash in all directions, in the vain hope that some of it might trickle down to the average American. The fundamental problem with that approach is that not all government spending is created equal.

Moody’s Chief Economist Mark Zandi detailed the differences in congressional testimony. He noted that every dollar in infrastructure spending adds $1.59 to aggregate demand. After all, you have to hire Americans to build that infrastructure. That worker then spends money on rent; his landlord spends that money in a restaurant; her short-order cook spends that money in a barber shop, and so on. Spend a dollar to build a school, and you get your dollar back in aggregate demand, plus a 59-cent bonus — and when you’re done, you have a school, too.

Unemployment insurance and food stamps boost aggregate demand to an even greater degree by directly giving Americans the means to purchase products; unfortunately, neither form of aid actually employs the recipients or results in long-lasting, tangible public investments such as roads or hospitals. Still, though, it’s funding that goes back into the American economy.

By contrast, every dollar in corporate tax breaks adds only 30 cents to aggregate demand. Most, if not all, of that 30 cents goes to shareholders rather than U.S. goods and services or U.S. jobs. (So much for the myth of the ​“job creators.”) Spend a dollar on corporate tax breaks, and 70 cents of that dollar lines the pockets of corporations.

According to the Government Accountability Office, corporations enjoyed $180 billion in corporate tax breaks in 2011, a number that actually exceeded corporate tax revenue. By using Zandi’s calculations, if the government had instead spent the same amount of money on infrastructure, that spending would have increased aggregate demand by approximately a quarter of a trillion dollars.

Or consider military spending. Most studies of military spending suggest that every dollar spent on the military increases aggregate demand by only 60 cents. The war in Iraq took 9.5 percent of our annual national net worth and dropped it into the sands of Mesopotamia. U.S. military spending peaked at more than $700 billion in 2010 during the wars in Iraq and Afghanistan. Though the sequester is bringing that number down to $500 billion, the entire $200 billion annual difference has been used for deficit reduction—which, again, actually reduces aggregate demand by cutting government spending.

Or there’s the matter of quantitative easing. The Federal Reserve has been monetizing government and mortgage debt to the tune of as much as $1 trillion a year for several years now. A dollar ​“created” by the Fed and used to buy government debt and mortgage debt appears to have even less effect than a dollar borrowed and ​“spent” by the Treasury on corporate tax breaks. If the Fed had taken the same $3 trillion expended on quantitative easing over the past five years and used it instead to fund infrastructure projects across the nation, then that would have added approximately $1 trillion a year to GDP and reduced unemployment to a level very close to zero (which is, in fact, the Fed’s legal responsibility, together with price stability).

The American economy has enormous structural problems. We have run a trade deficit of at least $350 billion every year since 2000. Because we are the only industrialized country without universal healthcare, many people who should be in the American labor force are too sick to work, our productivity is lower than it ought to be and our life expectancy is substantially shorter. We have the fifth-most unequal distribution of wealth in the entire world, and the rich spend a minuscule proportion of their income on U.S. goods and services.

And despite that, all that stands between us and a healthy economy with full employment is a few tweaks in federal spending policy. Spend more on the things that boost aggregate demand. Spend less on the things that don’t.

What are we waiting for?