The high-unemployment budget

President Barack Obama’s proposed federal budget for 2015, which he sent to Congress on March 4, pushes the debate in a positive direction in several areas. For that, he should be given credit. However, on the most important issue, a budget that would get us back to full employment, his proposals fall way short.

Let’s start with the positives. President Obama proposes a four-year infrastructure program that would cost just over $300 billion. This comes to $75 billion a year, or roughly 0.4 percent of GDP. This idea could go far toward improving and upgrading our infrastructure and is much needed for this purpose. It would also provide a boost to the economy. Assuming the typical multiplier of 1.5 times the amount spent for the expected stimulus, the program would create more than 800,000 jobs.

A second item on Obama’s agenda is universal pre-kindergarten. This idea would provide a boost to many children from low- and moderate-income families, whose lack of early education can stunt their prospects for social mobility, according to several important studies. It would also make it much easier for their parents to work, since arranging for quality child care is often difficult and expensive.

The price tag for this proposal is surprisingly low: only $76 billion over the next decade. That amount comes to 0.18 percent of projected spending over the period. The relatively small price tag for this program would be more widely known if reporters covered the budget in a way that was intended to inform their audience by contextualizing numbers in terms of overall spending.

There are two other items in the president’s budget that deserve attention because they now appear to enjoy bipartisan support. The first is an increase in the earned income tax credit, which favors low- to moderate-income families. The budget proposes to double the maximum credit for childless adults, from $500 to $1,000. It would also modestly increase the benefit for families with children. Several Republicans have recently put forward similar proposals (discussions of minimum-wage hikes appear to generate Republican support for the EITC as a counter), so movement on this issue may prove possible. The cost over the decade comes to $60 billion, or 0.14 percent of projected spending.

The other item enjoying bipartisan support is ending the carried-interest tax deduction, also known as the fund managers’ tax break. This is the quirk in the tax code that allows managers of hedge funds and private equity funds to have most of their income taxed as capital gains income rather than normal income. As a result, many of the richest people in the country are taxed at just a 20 percent rate on their income, compared with the 25 percent rate that tens of millions of middle-income families pay, and the 39.6 percent rate the wealthy would pay without special treatment.

This tax break stands out in a tax code chock full of breaks because it has no argument in its favor. The lower rate is there simply because hedge fund and private equity managers are rich and powerful people who don’t feel like paying the rates that others pay. 

In recognition of this fact, Rep. Dave Camp, R-Mich., the chair of the House Ways and Means Committee, proposed getting rid of the tax break in his recently released proposal to overhaul the tax code. Under Camp’s plan, hedge fund managers and private equity fund managers would have their income taxed in the same way as ordinary workers. The rest of the Republican leadership has not signed on, but such an important defector in their ranks certainly increases the likelihood that the tax break may someday be eliminated.

On these items, and others that could be mentioned, Obama’s budget definitely goes in the right direction. Where it utterly fails is in pushing the case for full employment. To get anywhere close to full employment in a reasonable period of time, we need to run considerably larger deficits than his budget proposes, let alone what is now projected. The unemployment rate is currently 6.8 percent, but this does not include another 6 million who have given up looking for work and are not counted as unemployed.

This is a simple economic fact. The economy is still operating at a level of output that is almost 5 percent below potential GDP, according to the Congressional Budget Office. The private sector cannot generate the demand needed to fill this gap.

Before the economic downturn in 2008, America saw extraordinary levels of consumption and construction demand from the housing bubble. When the bubble burst, this demand disappeared. Unless we reinflate the housing bubble, an event no sane person could want to see for fear of a repeat crash, we will not see consumption or construction return to anywhere near its pre-recession level. Investment has mostly recovered the ground lost in the downturn, but plausible further increases in investment will not make up for the large shortfall in demand.

The only component of private-sector demand that could plausibly fill the demand gap is net exports. However, this will happen only if the dollar’s value falls relative to that of trading partners’ currencies, making our goods and services more competitive internationally. This is a process that would take time, with the dollar falling over a period of years and trade flows taking a year or two to adjust to changes in currency prices. This also assumes that the president has made reducing the trade deficit a priority, which does not appear to be the case.

The only path for getting the economy back to full employment, then, is via government spending, which requires larger budget deficits. Of course Republicans will block any efforts to increase growth and employment through increased government spending, but that does not change the reality. If a second-term president can’t speak the truth on this issue, who can?

This point is not academic. Millions of people are seeing their lives needlessly ruined because we have a high-unemployment budget. It shouldn’t be too much to ask the president to call attention to this fact in the hope that he can open up political space to change the reality at some point in the future.