By Dean Baker
Millions of Americans are still suffering from the Great Recession. People across the country are struggling to find jobs, and families nationwide have had banks foreclose on their homes. It is against this backdrop that President Obama gave his speech on the budget.
While he did make the point that the wealthy can afford to pay more taxes, the speech confirms the administration’s agenda of deficit reductions. But with an 8.8 percent unemployment rate, a budget agenda that stresses jobs is what the nation needs.
To understand why the focus should be on jobs instead of deficit reduction, it is important to remember how we reached this point.
Two years ago the economy was in a free fall as a result of the collapse of the Wall Street-fueled housing bubble. In the four months between December 2008 and April 2009 alone, the economy lost more than 3 million jobs; it would go on to lose nearly 5 million more.
Almost $8 trillion in housing bubble wealth disappeared as house prices plummeted.
The private sector lost more than $1.2 trillion in annual demand, roughly half of this due to lost construction demand and the other half due to lost consumption demand.
President Obama rightly proposed a second stimulus package — the first was passed in February 2008 and signed by President George W. Bush — to try to make up for lost demand from the private sector.
Government stimulus was the right path because private sector spending would not increase on its own. There is no magical potion that can somehow generate $1.2 trillion in new demand from the private sector alone. Businesses invest and hire when they see demand for their products. They all had huge excess capacity in 2009; this meant that there would be little new investment.
Similarly, consumers were heavily indebted now that they had lost so much housing wealth. This meant that they would not consume.
If the government did not spend money, no one was going to. This would have meant high unemployment rates long into the future, just as happened during the Great Depression.
The stimulus package helped to reverse the economic decline, but it was not nearly large enough. The package came to roughly $300 billion a year in tax cuts and new spending, roughly one-quarter the size of the shortfall created by collapse of the housing bubble. And much of this stimulus faded out by the end of last year.
This is where President Obama’s plan should have stepped in to make up for the lack of demand in the economy. Spending by the government has, in the past, helped to stimulate demand.
But instead of explaining to the public the need for the government to make up the spending gap until the private sector recovers, President Obama is now pushing the line from Wall Street that we have a huge deficit problem. Remarkably the same people who wrecked the economy in the first place are again dictating our country’s economic policy.
The reality is that cutting the deficit means cutting demand in the economy and fewer jobs. There is no storeowner or factory manager anywhere in the country who is going to hire people because the government reduced its deficit.
President Obama is apparently prepared to abandon the tens of millions of unemployed and underemployed workers who are the victims of Wall Street’s recession in order to please Wall Street bankers and Washington pundits. This is not a good day.
This article originally appeared on CNN and is reprinted with the author’s permission.