The Allure of Dysfunctional Finance and the Power of Agenda Setting

Here are today’s big pieces of economic policy news:  (1) net job creation in the month of March (+88,000) was too low to keep up with population growth; (2) the president’s budget proposal will reportedly include cuts to Medicare and Social Security (or as the latter will be described in most newspapers, “adjustments to the way inflation is calculated for the purposes of determining Social Security benefits”).

These two items may seem unrelated, but in reality they form the basis of an unhappy remarriage.  In theory, a proposal for long-term cuts to Social Security and Medicare need not necessarily rule out short-term action on the jobs crisis.  In reality, however, it will likely mean at least another six months of nothing but “grand bargain” drama; all of which will make it a little less likely that any progress will be made on addressing unemployment.

In the last State of the Union address, there were some initial indications that the administration was pivoting (back) to the jobs crisis: declaring, for instance, that “deficit reduction alone is not an economic plan” and making the case that, with federal budget cuts over the last few years effectively stabilizing the government debt-to-GDP ratio, the task of deficit reduction was essentially complete.  Granted, it was never going to be the case that everyone would simply forget about the budget deficit if the administration moved on to addressing other languishing problems, but “changing the subject,” as it were, can make some small difference to the way our economic priorities are perceived.  And due to the mass rhetorical appeal of the budget hawks’ message, agenda setting is just about the only effective tactic remaining for those who don’t think the deficit should rank very high on a list of current or looming economic problems.

The allure of austerity-speak is strong (at a sufficient level of generality.  “Cut spending” appeals to the public, while “cut X,” where X refers to any government program other than foreign aid, does not — which is why the administration should expect to be roasted by Republicans, in a single breath, for doing nothing about “entitlements” and for slashing Social Security).  Rhetorically, you saw this in the back-and-forth last month over the dueling budgets of House Republicans and Senate Democrats, with headline writers finding it significant that the latter did not balance.  And you saw it again recently when the NRCC dropped this apparent bombshell:  “Breaking:  Obama Adviser Admits White House Budget Will Never Balance.”

One of the clearest explanations of why balancing taxes and spending over the course of budget year should not be regarded as an end in itself is Abba Lerner’s 1943 “Functional Finance and the Federal Debt.”  However, I think it’s safe to say that this message — that balancing the annual budget is not a high-priority goal and is, at present, actively damaging to the economy — is not one that has been successfully distilled for public consumption.  Until deficit doves and owls find a way to make that message palatable to the broader public, agenda setting is crucial.  Even if it’s true that the the President’s budget is not a statement of the administration’s ideal preferences for taxes and spending, or even an opening bid in a new grand bargain negotiation, but is merely an attempt to convince the media that the President is “serious” and willing to compromise, the problem is that, given the state of our public dialogue, long-term entitlement reform and short-term employment creation are in a zero-sum competition for our attention.  A hard pivot to the real crisis in unemployment and stagnant incomes may not get Congress much closer to passing any meaningful job creation measures, but it may at least help shift the conversation, even if only by a little.

One of the first challenges that needs to be met in terms of raising public consciousness is to describe what’s actually happening to the budget and the consequences for the macroeconomy; and in particular, to find some way of calling attention to the degree to which the government has been directly withdrawing jobs from the economy.  As noted in the Levy Institute’s latest Strategic Analysis, this problem isn’t likely to improve much in the near future:  “deeper government job cuts lie ahead, with the congressional sequester threatening to lop off well over one million more federal jobs. This is a substantial loss, compared to, say, the number of [net] new jobs generated in the entire private sector last year—only two million, or twice as many.”