In today’s New York Times, Helene Cooper wrote a news analysis advocating that President Obama slash Medicare and Social Security even though it might cost him reelection. The reporter, however, offers no reason to think that reneging on the basic commitment citizens must have to one another would make anything better. In reality, damaging our basic contract might be highly profitable to Wall Street financiers (who hope to charge commissions for managing retirement funds that Social Security now manages for far less), hedge-fund managers (who can profit as easily by betting against the American economy as by betting for it), and insurance companies (which will profit from increasingly bloated medical costs until the cost of care gets so high that no one can afford it). But cutting back on the basic guarantees we offer citizens, like cutting back on the other essential governmental services that make successful economies possible, will only make our jobs crisis worse.
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The immediate cause of the unemployment and underemployment crisis is clear. After a generation-long, Reagan-inspired project of upward income redistribution in which virtually all the benefits of economic growth have gone to the wealthiest, the middle class has struggled to maintain its living standards. The housing bubble gave consumers (or at least the half of Americans who own homes) the illusion that they were far richer than they actually were. When it collapsed, people were forced to cut back to pay mortgage loans they had expected to roll over forever, and to save for retirements they thought would be funded by rising real estate prices. Reduced spending meant reduced demand, so businesses cut back as well, laying off employees and reducing investment. The resulting unemployment and uncertainty forced consumers to cut back still more. The result is a classic demand-deficit downward spiral of the sort we regularly suffered before the New Deal.
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The escape from this trap has been well understood since the New Deal, and it does not involve destroying our basic social contract or taking from the middle class to give to the rich. Right now, capital and labor are sitting idle because the private sector sees no way to use them to sell things that no one can afford to buy. As a result, the U.S. government can borrow at near-zero real interest rates. But we have vast and growing needs in education, transportation, energy infrastructure, and primary research and development—the basic underpinnings of all private-sector economic activity. And we desperately need to rebuild the regulatory agencies that ensure that markets benefit all of us and not just the most unscrupulous.
What the president needs to advocate is not suicide but salvation. We should take advantage of the free lunch the private sector is offering us—to borrow for free to invest in America.
More government investment means immediate jobs, as the government hires people who are not working right now. More people working means, automatically, more demand, making private-sector hiring more likely. Long-term government commitment to massive projects on the scale of Eisenhower’s highway project—creating a modern inter-city rail system, rebuilding our energy infrastructure to accommodate new and less-polluting sources that do not depend on Middle Eastern kings and dictators, building cities to bring the price of urban housing down—will create the demand that the private sector needs. More skilled and better regulation will reduce the market incentives to cheat and evade, and turn the market’s invisible hand from financial speculation to productive growth.
Cutting Social Security and Medicare are unpopular for good reason: those cuts would make people worse off; increase the chances that the current job shortage will last indefinitely; and make us an uglier, less just, and less equal society. What we need, instead, is for the federal government to create the jobs that will put America back to work, and, in the long run, to reverse the generation-long policies of upward income redistribution that have hollowed out the middle class.