Job creation and economic growth is a key to deficit reduction. (More)
The chattering classes in DC typically act as if the US is facing an either/or choice between cutting the federal budget deficit on one hand and working to reduce unemployment on the other. But, as the new commercial from the American Federation of State, County, and Municipal Employees (AFSCME) union succinctly notes, this is a false dichotomy, as one of the best ways to address the short term deficits facing our country is through government policies that would create jobs
Job creation reduces deficits in two ways. First, it increases government revenue by having more people working, paying taxes, and spending money that will create additional jobs. While conservatives pretend like today’s deficits are due to overspending, the reality is that reduced revenues caused by the Bush Recession play a critical role in those deficits. For example, total federal government revenue fell from $2.567 trillion in 2007 to $2.162 trillion in 2010, a decline which represents nearly one-third of the 2010 federal deficit. Increased employment would help address this significant portion of the deficit by generating more revenue.
Second, job creation helps address the expenditure side of the deficit ledger by reducing the amount of social spending that is needed. Spending under many government social programs – such as unemployment insurance and Medicaid – are linked to either unemployment or poverty rates as the total amount spent automatically increases as more people become eligible due to circumstances such as losing a job. Increasing employment, therefore, will decrease demand for such social spending thereby shrinking total government expenditures.
A 1995 study from the Congressional Budget Office estimated the impact of unemployment on federal government revenue and spending. That study concluded that every one percent increase in the unemployment rate would lead to a $51 billion decrease in revenue and a $10 billion increase in spending in 1996. Extrapolating out to 2010, when revenue was 48.8% higher than in 1996, and expenditures were 121% higher, leads to a total budgetary impact of $100 billion from an extra 1% point of unemployment. Given that today’s 9.1% unemployment rate is approximately 4% points higher than the 5% that is typically aimed for, the heightened unemployment from the Bush Recession is adding roughly $400 billion per year to the budget deficit. Underemployment, which is over 16%, is likely having an additional impact on the deficit.
The above data shows that tackling chronically high unemployment could play a critical role in reducing our nation’s short term deficits. That is why it is important that any budget deficit plan include President Obama’s American Jobs Act, why the AFSCME commercial above is right on target, and why we all need to write letters to the editor and call the members of the deficit super committee (along with our own members of Congress) to urge that job creation be the number one priority for our political system.