Deficits and Unemployment: Solutions, Any One?

At first blush, the announcement that emerged from Washington DC this past weekend sounded fairly reasonable.

What was the announcement? U.S. House Speaker John Boehner declared that the $4 trillion government deficit reduction target that he had established with President Obama was a bit too ambitious. He suggested that they shoot for a more modest goal instead, perhaps a streamlined plan worth $2 trillion.

$2 trillion still sounds like a impressive number, doesn’t it? In an absolute sense, it certainly is. Nevertheless, when compared to the scope of the overall budgetary challenge, $2 trillion is only a drop in the bucket.

Simple Arithmetic

It doesn’t require any advanced mathematical knowledge to understand why a $2 trillion debt reduction package, or even a $4 trillion plan, isn’t much to get excited about. The accumulated total debt from past and current deficits has already hit its legal ceiling of $14.3 trillion. And according to the Congressional Budget Office, this year’s deficit — which simply will be added to the accumulated total debt — will reach $1.5 trillion.

Furthermore, the $4 trillion debt reduction package originally proposed by President Obama and Speaker Boehner was itself designed to be spread over a ten year period. In other words, its annual impact on the budget deficit would have averaged less than half a trillion dollars per year. Likewise, the impact of a $2 trillion package would only average two tenths of a trillion dollars annually.

So here is the “long and short” of the budget debate. America’s total accumulated debt has now exceeded $14 trillion. It’s still increasing at a rate of $1.5 trillion per year. And a proposal to reduce the rate of increase to an amount that continues to exceed $1 trillion per year has been cast aside because it is purportedly too ambitious.

The Line Lengthens

Complicating the deficit reduction analysis, of course, is the economic scourge of unemployment. The size of the proverbial line of jobless citizens who are actively seeking employment opportunities increased to 9.2% of the work force last week; in addition, the true rate of joblessness, including citizens who have given up entirely on the job market and those who are employed on a part-time basis but who would prefer full-time employment, has now exceeded 16%.

The complexity of the relationship between government deficits and unemployment revolves around the fact that budget reductions usually involve employee lay-offs, which can lead to more joblessness and less economic activity. The 7,500 civil servant layoffs proposed by the Governor of Connecticut, for instance, are expected to increase the Nutmeg State’s unemployment rate from 9.1% to 9.4%.

In other words, any serious attempt to reduce the government budget deficit will likely worsen the employment picture. And that, in turn, can dampen economic growth prospects and thus drive up (yet again) the government budget deficit.

It’s quite a conundrum, isn’t it? Solutions, any one?

The Long View

When faced with such dilemmas of historic proportions, it is often helpful to look back at history itself to identify possible solutions. In these circumstances, though, it is difficult to ascertain whether we should be optimistic or pessimistic about America’s long range prospects.

First, a note of optimism: the American economy has experienced similar periods of extended decline in the past, and has always rebounded eventually. In fact, the 12 year Great Depression that ended with America’s entry into World War Two wasn’t close to being the longest depression in the nation’s history. No less an authority than Wikipedia has proclaimed the era from 1873 to 1896 to be the time of the Long Depression, a 23 year slog that was punctuated by financial crash after crash after crash. Yet America always recovered from these debilitating crises.

A pessimist may note, though, that our mature and aging American population of the early 21st century looks little like the youthful and vigorous emerging nation of the late 19th and mid-20th centuries. As Japan is now learning while it attempts to rebuild from its recent tsunami, an economic bounce-back is extremely difficult to engineer on the shoulders of a geriatric population.

A Matter Of Time

The ultimate solution to America’s economic malaise may simply come down to a matter of time. American consumers will need time to pay down their unprecedented levels of personal debt, and their government will also need time to do the same. Furthermore, the massive demographic bulge of the aging baby boom generation will remain with us for decades to come, a biological and sociological certainty that must inevitably impact our nation’s costs of Medicare, Social Security, and other programs for the elderly.

In the meantime, we can expect to continue to hear a wide variety of proposed “quick fix” solutions, ranging from the privatization of Medicare to the expansion of free trade agreements. Each of these proposals may justify serious consideration, but none is likely to represent the “magic bullet” of a solution to the deficit – unemployment problem.