Rx for Recession: An Economic Strategy that Works

By Lawrence Mishel, President of the Economic Policy Institute

Jobs.

That’s the word that has been missing from the debate about how to contain the damage from the recession that members of the nation’s political, corporate and media still stubbornly deny has already begun.

But the recession is about paycheck economics—jobs, wages and family budgets. When most Americans don’t have the cash or the confidence to continue the spending that keeps the economy running, demand for goods dries up, businesses lay off workers, corporate bottom lines flat-line and the economy plunges into a downward spiral.

On Jan. 16, I testified before the first Joint Economic Committee hearing, chaired by Sen. Charles Schumer (D-N.Y.), on what the government can do to get the economy out of reverse gear. I presented the Strategy for an Economic Rebound, the Economic Policy Institute (EPI) blueprint for federal action to generate jobs, increase incomes and make our communities and our country better places to live, work and raise kids.

If we’re going to get the economy moving again, we’ve got to preserve and produce jobs and help working families in five fundamental ways:

First, the plan must promote growth—and, thereby, create more jobs. Second, it must take effect as soon as possible before the economy plunges into a deep downturn. Third, it should increase deficits in the immediate future but not for years to come. Fourth, it should create new jobs by investing in the nation’s unmet priorities, such as the huge backlog of repairs in schools and bridges and the need for new sewage treatment plants and energy-efficient public facilities of all kinds. And fifth, the plan should put more money in the pockets of those who need it most: hardworking families and folks who are looking for work. These Americans are most likely to spend their money on the necessities of life, bolstering consumer demand, boosting business activity and preserving and producing more jobs.

To advance these goals, EPI’s Strategy for an Economic Rebound pumps $140 billion of stimulus into the economy, targeted to essential public investments and middle- and low-income families.

At a time when joblessness is increasing, our plan helps the nation’s rickety unemployment insurance (UI) system keep its promise to offer a helping hand to every American who seeks suitable work but cannot find it. In the last recession, national unemployment grew by 2.7 million from December 2000 to March 2002. But this growing need failed to trigger the national program that would have extended benefits under the current law to the hundreds of thousands of job seekers who needed help. By the time that Congress finally enacted a special program of additional benefits—Temporary Extended Unemployment Compensation—in March 2002, the official recession had been over for four months.

How can the nation do better this time? The better choice is to replace the Extended Benefits Program, which only lengthens benefits by 13 weeks and splits the cost equally between state and federal governments. Instead, we propose a new, 100 percent federally funded program that goes into effect when unemployment reaches excessive levels. This program would extend benefits by 13 weeks when unemployment hits 5.5 percent and another 13 weeks when it reaches 6 percent, with the federal government paying the cost. But, if the best Congress can do is to reform Extended Benefits, then let’s make sure that, when the three-month national unemployment rate reaches 5.5 percent, the program is triggered in every state where joblessness has reached above 5 percent.

Of course, the best response to rising unemployment is to put Americans back to work. As every parent, every commuter and every environmentally conscious citizen knows, there is a huge backlog of work that needs to be done fixing schools and bridges and building energy efficient facilities of all kinds.

The average age of public school buildings is roughly 40 years, and they need a total of at least $17 billion a year in maintenance and rehabilitation. Meanwhile, the U.S. Department of Transportation has found more than 6,000 major bridges that need to be repaired or replaced. On the environmental front, more than $4 billion in wastewater treatment projects are ready to go to construction, if funding is made available. Let’s provide the money for all these needs—schools, bridges, sewage treatment plants and more. Every $1 billion of construction spending creates 14,000 to 47,000 new jobs—and these should be good-paying union jobs—and also generates up to $6 billion in additional economic activity.

State and local governments also need emergency assistance so they won’t have to take actions that slow down the economy even more: raising taxes, cutting services and laying off public employees. But, in times of hardship, America needs more public employees providing essential services. Some of this emergency assistance should help state Medicaid plans, preserving and creating more jobs for health care workers. On the federal level, tax reduction should be targeted to those most likely to spend it immediately—low- and moderate-income people whose family budgets are already squeezed.

During the last recession, earlier in this decade, the Bush administration and Congress did too little and did it too late. The economy and the job market were very slow to recover, with the result that job growth, workers’ wages and family incomes all stagnated well beyond the “official” end of the recession. This time, we need to act before the downturn deepens.

The Bush administration is prescribing more of the quack remedies that weakened the economy and widened the federal deficit. More tax cuts for the wealthy will end up in the bank accounts of those least likely to spend the money. Without a rise in consumer demand, corporate tax relief and other supposed business incentives will not be effective in promoting growth.

Everyone’s talking about taking action against the recession. Let’s agree on an economic plan that works for working Americans.

Lawrence Mishel is president of the Economic Policy Institute, an independent, nonprofit, nonpartisan think tank that researches the impact of economic trends and policies on working people in the United States and around the world. EPI's mission is to inform people and empower them to seek solutions that will ensure broadly shared prosperity and opportunity.

EPI’s Strategy for an Economic Rebound can be downloaded at www.epi.org.