Remarks by Gene Sperling before the Economic Club of Washington
Remarks at the Economic Club of Washington
October 31, 2011
My talk today is simple and direct. To achieve shared, sustained economic growth, we need: one, a bold, immediate jobs plan to inject demand, help this recovery take hold and create jobs over the next 12 to 18 months, and two, a balanced plan for long-term fiscal discipline that both combines savings from entitlements and revenues from the most fortunate, while ensuring we continue to invest in the potential of our young people and the economic dignity of working families.
I will start with the imperative for bold action to spark jobs and economic demand.
Those who argue against the need for an immediate jobs plan make the case that we should do nothing because the Recovery Act showed such efforts have no impact; that we cannot afford a jobs plan; that because we are coming back from a financial crisis-induced recession we must be more passive and patient, and that a bold immediate effort is inconsistent with focusing on longer-term structural issues in our economy.
I will address each of these arguments, but even combined, they fail in the current economic context because the unemployment rate is simply too high, the projections for near-term growth too weak, the risks to the economy too elevated, and the national crisis of long-term unemployment too profound to sit on our hands and do nothing.
To those who say the Recovery Act failed, I would highlight just a few basic facts about what we now know about the state of the economy at that time.
In November, when President Obama was elected, the Blue Chip forecast projected that the economy would contract in the fourth quarter of ’08 and the first quarter of ’09 at an annualized rate of 1.65%. By December, the Blue Chip was projecting a more severe contraction of 3.25% over that half-year period. What do we know now?
During that six-month period, the economy contracted at an annualized rate of 7.8% – nearly 8%. It was the worst six month period of growth since records of quarterly growth were first kept in 1947.
Other than the period of demobilization in 1946 after World War II, it was the worst six months on record since the heart of the Great Depression. And on the jobs front, our economy lost 2.3 million private sector jobs in the 1st quarter of 2009 – nearly 800,000 a month.
With the passage of the Recovery Act and the financial rescue package, growth returned to our economy by the third quarter of 2009. And private sector job growth returned in March 2010, a year after we lost nearly 800,000 jobs in a single month, and a year earlier than in the recovery from the previous recession in 2001.
Now, we are big boys and girls. We understand that President Obama’s opponents will continue to make the politically expedient argument that – since we have much further to go to dig out of the historic economic hole he inherited – the Recovery Act did not work.
But let’s be serious in one crucial regard: using the experience of the Recovery Act – which was critical to bringing our economy back from a contraction of nearly 8% at an annualized rate over a half-year and a loss of 800,000 private sector jobs a month – as an argument that any future effort to inject demand to create jobs is futile is as cynical as it is without merit.
It may be that “prevented a second Great Depression” does not read well on a bumper sticker. But it is an appropriate description of policy choices that dramatically helped tens of millions of our fellow working families and the global economy.
Now, some have also suggested to me that even if the Recovery Act was the right medicine for the economy in the winter of 2009, that today we should sit tight. They will argue, often citing the work of Ken Rogoff and Carmen Reinhart, that as a recovery following a recession induced by a historic financial crisis is inevitably going to be long, slow, and painful, we should simply be passive and wait for the slow process of healing to unfold, taking policy action perhaps only to improve structural aspects of our economy for the long run.
Now I’m not sure I would ever agree with this interpretation, but if we were projecting 3.75% growth next year and the issue was just about the pace at which unemployment was headed downward, we could at least have a conversation about how much could one reasonably expect to accelerate that fundamental healing of our economy.
But that is not the economic moment we face today. It is not the economic outlook we foresee over the coming year. We have an obligation to take a sober, non-political look at the state of growth and employment in our country today, the risks that it could get worse, and what it would mean for our country if we did nothing and simply allowed the consensus economic forecast to come to pass.
With regard to risks, everyone understands the value of taking out insurance against negative events in our personal lives. The same principle holds for our economy. Make no mistake about it: the Administration projects that our economy is most likely to keep expanding, adding to the 1.3 million private sector jobs that have already been created this year. Most economic forecasters agree with this assessment. And even though the Blue Chip Financial forecast found a 34.6% chance of a double-dip recession among the nearly 50 forecasters they survey,it is our hope that with the uptick of some recent numbers those odds might go down.
Nonetheless, it is still fair for all of us to ask: when you have 9% unemployment and 14 million people out of work, is it worth taking out some insurance against even the prospect that things could get worse? If you thought there was a one-in-three or even a one-in-four chance that your house was going to burn down next year, you would certainly find home insurance to be valuable.
Likewise, the value of taking insurance out against such a damaging outcome for our economy today is alone a strong basis for taking bold action on demand and job creation.
Remember that in December 2010, when we passed temporary payroll tax relief, the price of gas was at $3 a gallon. We did not know that events outside our control were going to push gas prices over $4 a gallon in some parts of the country. But there is little doubt that the insurance we took out in the form of payroll tax relief has provided a crucial cushion to prevent consumer spending from falling, and put us in a stronger position than we’d be in otherwise.
But even if one decides that the need to take insurance out against unexpected negative economic events at this time of high unemployment is not persuasive, the case for action even if standard economic projections bear out is overwhelming.
Right now the Blue Chip is projecting 2% growth for next year, 2012. The Conference Board is projecting 1.1%, and JP Morgan 1.7%. The IMF World Economic Outlook finds 1.8%. As such growth would be below the economy’s trend growth rate, it would hardly be projected to be strong enough to bring the unemployment rate below 9%. This type of growth should be unacceptable and unsatisfactory at any point in any recovery. But in our current context, it constitutes nothing less than turning a blind eye to our national crisis of long-term unemployment.
While Washington today is focused on political punditry over the ups and downs of the American Jobs Act, it is long past time for all of us to fully realize long-term unemployment is a true national crisis and that choosing to play politics as usual or sit on our hands in the face of this crisis is irresponsible and inexcusable.
The depth of the recession this President inherited and the difficulty of recovering from a financially-induced economic crisis have led our nation to now experience the worst long-term unemployment in any of our lifetimes.
Consider the following:
- There are now 6.2 million Americans who have been unemployed for longer than 27 weeks – or 44.6% of the unemployed, higher than at any point prior to the most recent recession. Of these, over 4.3 million have been unemployed for a year or longer.
- The average length of time the unemployed have been out-of-work is 40.5 weeks. That is the worst on record – and almost twice the length of the high prior to the most recent recession of 21 weeks, reached during the painful downturn of the early 1980s.
This is a matter of the highest economic importance. We know that very long spells of unemployment cause harm to workers, harm to families, and harm to our long-term economy that shorter, more typical bouts of unemployment do not. Economists have used the term “hysteresis” to describe a situation in which elevated periods of unemployment can generate their own momentum and persist for long stretches of time, ultimately reducing the economy’s productive potential.
Being out of work for extended periods of time makes it harder to reenter employment. If you lose your job today, your likelihood of being employed in three months is about one in two. By contrast, if you lost your job six months ago, your likelihood of being employed in three months is about one in four.
Andrew Oswald, an economist at the University of Warwick, has found that there is no circumstance that has a greater negative impact on mental health than being unemployed for six months or more. Economists Daniel Sullivan and Till Von Wachter have found that permanent job loss results in a 50 to 100 percent increase in mortality rates the year following displacement and 10 to 15 percent increases in mortality rates for the next 20 years. And then to add on top of that the National Employment Law Project found in a four-week survey over 150 examples of companies explicitly saying if you are unemployed, “do not apply.”
Of course, concerns about the costs of long-term unemployment lead to one of the other rebuttals in the case for inaction – which is that long-term unemployment is purely a structural problem.
For example, some have argued that the fact that there are 3 million job openings shows the rise in unemployment is due to a mismatch between the skills needed to fill current openings and the skills possessed by unemployed workers.
But – as recently described by those like Dan Tarullo, David Wessel, and Harvard economist Larry Katz – there is little evidence that this is the case. With 14 million people looking for jobs and 3 million openings, there are nearly five times as many unemployed workers as openings, far higher than the ratio of two unemployed workers per opening that existed prior to the recession. The “skills mismatch” is no doubt an important long-term issue, but recent research by the New York Fed shows it only explains around one-fifth of the rise in unemployment in the recent recession. Furthermore, as Harvard economist Larry Katz has argued, the lack of stronger wage growth amongst those employees whose skills are most desired indicates that the problem is not structural.
What this suggests is that the overwhelming cause of the unemployment crisis we face is a lack of demand. The real irony is that while our long-term unemployment problem is not mostly structural, if we fail to act, we will create a new and deeper structural unemployment. We will be sitting by as legions of our colleagues, our friends and our neighbors are out of work for a year, two years or more, leaving them disconnected from the workforce and at risk of a more permanent loss of potential to contribute to their family’s economic security and their nation’s economic growth.
And that takes me to a final point: a lot of what we do in economic policy is seeking to prevent vicious downward cycles that create unnecessary loss of value. We have bankruptcy laws that prevent credit rushes that would unnecessarily destroy the value of companies or the future of an entrepreneur who has failed once. We have deposit insurance to prevent the vicious cycle of a negative run on banks. And we try to promote policies like the Project Rebuild initiative in the American Jobs Act to prevent downward cycles in neighborhoods hit by blight and foreclosure.
But if we see projections of 1.5 to 2% growth that inevitably mean the crisis of long-term unemployment will get even worse and decide to take no immediate action – we are in essence saying that we know millions of our friends, neighbors and fellow citizens are destined to a downward cycle of lost economic opportunity that will cause long-term damage to them and our economy, and we are choosing to simply sit back and watch. A great nation facing the worst crisis of long-term unemployment can certainly do better.
The President’s American Jobs Act tries to deal with this long-term unemployment in two fundamental ways.
First, it has a smart demand-oriented plan for next year – one that independent economists have projected could result in up to 1.9 million more jobs and up to 2 percent higher economic growth. It includes elements like the payroll tax cut, which leverages an existing structure to get a significant amount of money into the pockets of workers every two weeks in 2012, while providing more customers and more capital for the small businesses who have been hit hardest by the financial crisis.
Further, at this moment, there is no sound reason not to make a major investment in our infrastructure. There is nothing fiscally responsible about deferred maintenance. If I choose to cancel my DirecTV NFL subscription, I save $230 in consumption. If I decide not to fix the pipe in my basement, I will just pay more later. At this moment, with interest rates at a historic low, with an overflow of unemployed construction workers anxious to get back to work, when the macroeconomic impact would be the best imaginable, how can we pass by this moment to address the deferred maintenance in our schools, roads, railways and airports? What is the rationale for not acting?
The second thing the President did when he announced his American Jobs Act on September 8, 2011 is put a national focus on addressing long-term unemployment by making it one of the four major planks of his plan.
That meant including every responsible idea we could identify, from outlawing hiring discrimination based on employment status, to tax credits for people who had been unemployed for six months or longer – with extra incentives for hiring veterans who are facing long-term unemployment or have service-connected disabilities. We proposed the most sweeping reform of unemployment insurance in 40 years. Every aspect of the reform is designed to make unemployment insurance more effective as a bridge to work, empowering people to use their UI to connect to the workforce through temporary jobs, to start their own business, to use their unemployment insurance as wage insurance to help them get back to work, and to encourage companies to engage in work-sharing that can prevent layoffs in the first place.
We are no doubt disappointed that the Republicans have blocked the American Jobs Act. But what should be the greatest disappointment to everyone is that they have not even felt compelled to come forward with an alternative plan that any top independent forecaster could estimate as spurring growth by 1 to 2% next year or adding 1 to 2 million new jobs. At the moment, the Republicans’ main alternative to our plan is really just a package of long-term measures, some good – like trade agreements and patent reform – and some not so good, like repealing the Affordable Care Act. But none of these represent anything close to a serious effort to increase demand and spark growth and jobs and help this recovery over the next year.
These plans are, therefore, not really jobs plans at all – they are plans to sit by while our national crisis of long-term unemployment gets worse. President Franklin D. Roosevelt argued during the Depression that when facing national challenges, our obligation was to try and try, experiment and experiment again until we get it right. And yet the Republicans’ approach so far does not even live up to Teddy Roosevelt’s admonition to at least get in the arena and give it a shot.
Now, there is no question that the right package for fiscal policy at this moment is to combine strong demand in the short term with a balanced, long-term plan for fiscal discipline and debt sustainability. The two together are not contradictory – indeed, they are as complementary as good hitting and good pitching.
Done together, they are exactly what we need to maintain confidence that the economy is going to pick up, that America remains the place for companies to make long-term investments and that we will not face a debt crisis in our country in the near-term future. Those who suggest we cannot afford a strong American Jobs Act are being penny-wise and pound-foolish. Nothing will hurt our current efforts to get our debt path to sustainability more than if the economy stays weak or if we allow long-term unemployment to weaken our economic projections and even our economic potential.
Furthermore, when you pay for a jobs plan – as the President has proposed – the long-term cost is just the lingering interest from the jobs plan, while the ongoing offsets lead to net deficit reduction year after year for the foreseeable future. There is a reason that even the Rivlin-Domenici plan – one of the most ambitious deficit reduction plans – included the most robust new injection of temporary demand to ensure the recovery takes hold.
But if we are to succeed in achieving strong, long-term deficit reduction, the single most critical ingredient will be Washington reaching the consensus that we must have balance in our deficit reduction plan. There is no single barrier that stands in the way more of sane fiscal policy than the fact that a sizable portion of Republicans have taken a pledge that there cannot be a single penny of revenues in any significant deficit reduction act.
This absolute pledge against any sense of balance is not a historically Republican position. In 1982, Ronald Reagan raised revenues to help deal with the deficit. In 1983, revenues were part of the Social Security deal between Ronald Reagan and Tip O’Neill. In 1990, the elder President Bush worked together with Democratic leaders to get a bipartisan agreement that included a combination of revenues and deficits. While the balanced package of 1993 included only Democrats, the Bipartisan Balanced Budget Agreement of 1997 was achieved with a Republican majority agreeing to leave in place the revenue increases from both the 1990 and 1993 deficit reduction plans.
Every independent, bipartisan plan has called for a mix of revenues and entitlement reform. A letter calling for deficit reduction from former CEA Chairs, Republican and Democrat – among them Greg Mankiw, Glenn Hubbard and Martin Feldstein – endorsed as a starting point a plan that included a mix of revenues and entitlement cuts. Prime Minister Cameron averages nearly one-third revenues in his package.
It is only in the U.S. House of Representatives where progress is repeatedly blocked by what is a pledge to do something other than sound and fiscal economic policy. And this blocks us from making progress for a few critical reasons.
One, everyone knows that the way you achieve bipartisan deficit reduction is through people holding hands and jumping together. But when one side refuses to budge even when mechanisms are created for bipartisan, bicameral agreements – when one side opts to stay with an absolutist position – then divided government becomes dysfunctional government.
Secondly, you need to have shared sacrifice. Nobody likes deficit reduction plans. Successful deficit reduction plans are agreements that everybody hates equally in an even and fair way.
You cannot ask a military retiree, a federal worker, a Medicare beneficiary, a doctor, a hospital that gets Medicare payments to take a little sacrifice as part of a national effort to bring our deficits down, at the same time you are spending hundreds of billions of dollars increasing our deficits by extending tax relief for the most fortunate among us. Americans are willing to engage in shared sacrifice for the common good. But when contributions from those who are most fortunate are not part of the package, it is not just that the math does not add up, it is also that the sense of social compact and shared sacrifice needed to forge a national plan is weakened.
Next, you cannot repeal the aging of the population. When I left at the end of the Clinton Administration in 2000, there were 45 million people on Social Security. In 2020 there will be 70 million, up 25 million. Medicare will go from 40 to 64 million over the same time period.
You cannot have the population of Medicare and Social Security recipients growing by around 60 percent in two decades and then say we should cap things at historic levels. Capping spending at the historical averages of past decades is nothing less than proposing to repeal the aging of our population. It is simply a backdoor way to argue for cutting deeply into our fundamental social safety net for the cause of adhering to an absolutist pledge most of the public opposes.
And while it is, of course, true that the baby boom retirement is a major fiscal challenge for our nation, it is simply untrue that the new deficit challenge that has arisen this decade is because of the projected costs of Medicare and Social Security. Virtually all of those costs were projected a decade ago when we had taken steps to balance the budget and even run debt-reducing surpluses as far as the eye could see.
Part of what has changed since then – in addition to the financial crisis and the cost of two wars – is that we passed a series of tax cuts that were not offset or paid for and that – over this decade – will be responsible for an extra $500 billion of added deficits on average each and every year. Anyone who suggests that revenue is not part of the problem and that revenue from our most well-off citizens should not be part of the solution has a serious case of budget amnesia.
Finally, if you go back 20 to 25 years to many of the people who first sounded the alarm on the need to get control of our fiscal situation because of the retirement of the baby boom, much of their argument was based on fear that our nation would end up spending too much on older Americans at the expense of maintaining our investments in younger generations. Yet when the desire to return to sustainability on our national debt turns into a dictate to cut public investment without any differentiation as to its impact on our economic potential, we turn that aspiration on its head.
Today, even after we have put domestic discretionary spending on a path to historic lows, there are still too many who simply want to cut it deeper and deeper, as proposed in the House Budget proposal put out this April. But let us remember that this is precisely the area where some of our most critical investments in our future are needed. This is the area where we promote early childhood education, so that we live up to our aspiration that the accident of your birth should not determine the outcome of your life. It is where we must strive to make college more affordable, to improve worker training, to invest in basic medical research at NIH, and to spur innovation to ensure the next great inventions are creating jobs here on our shores.
If we turn that desire to ensure entitlement spending is under control so that we can invest in the future into a dictate to cut public investments no matter the form, we will be a poorer, less just and less prosperous country.
And so to conclude: it is with this one-two punch – strong demand in the short term to tackle our problem of long-term unemployment, along with a balanced fiscal discipline plan to build confidence that we can address our long-term deficits while still investing in our future – that we can best move our nation toward the shared prosperity that should always be our aspiration. Thank you very much.