By Jeff Madrick
The "Better Off Budget" is the only budget proposal in Congress that really places people's needs ahead of political compromise.
The Congressional Progressive Caucus has issued its annual budget and it is in different ways the antithesis of what both the Republicans and Democrats are offering. The Caucus calls it the “Better Off Budget," and it puts its money where its mouth is. Thank goodness they’ve issued it, because it puts in perspective how much is actually within our nation’s reach. It is aimed right where it should be: at creating jobs. The budget acknowledges that our jobs crisis is far from over (I’d call it the jobs emergency budget, of course). And it rightly says we can solve our problems.
The proposals errs slightly on the side of economic optimism, but that is as it should be. It stands in contrast to the modest improvements in social policy proposed by the Democrats, which won’t get unemployment down to 5 percent in the foreseeable future, and to the insensitive regression proposed by Paul Ryan and the Republicans. Those proposals are all politics, with little caring about the people’s thirst for jobs and opportunity. The progressives toss political compromise aside to do the right thing.
Their proposed budget does a lot of good in a lot of areas. It refuses to reduce entitlements; it provides a middle class tax break; it raises income tax rates on the wealthy; it provides a lot of money for infrastructure investment. I could go on.
But in this brief analysis I want to focus on the question of how much stimulus the economy can stand, which is really a question about how much slack there is in the economy. Conventional analyses say that slack—the potential to grow—has fallen. It’s mostly not because the economy is growing and catching up with its potential. The reason is that people are dropping out of the work force, maybe for good. They are losing skills. Some are retiring or getting close to retirement. Capital investment has been okay, but it has been far from stellar and therefore not likely to create exciting new products and industries that also increase productivity.
If the potential is not as high as typical economists, including the Congressional Budget Office, thought just a couple of years ago, we can’t push the economy up as fast as we might like, they argue.
The irony is that potential is down, as conventional economists measure it, because of the Great Recession and historically slow recovery, not because of a structural change in the economy. In particular, labor productivity growth is not very good. Total factor productivity, which (allegedly) measures the productivity of capital and labor combined, is somewhat stronger by historical comparison. I say allegedly because total factor productivity is a pretty flaky number.
Now, there is a pretty good relationship between how fast demand is growing and productivity growth, both labor and total factor productivity. In any case, if the potential of the economy is reduced because growth is slower, people can’t get jobs, and investment in research is far from hot—well, then potential would likely rise if we got the economy growing rapidly again. There is good theory, partly Keynesian but also something calledVerdoorn’s Law, to suggest this could well be the case.
So, in sum, that’s what this debate turns on. Will stimulus bump up against a genuine GDP ceiling and cause inflation, or is that ceiling only an artificial one based on recent data generated in a very slow economic recovery? I’d argue the CBO analysis and that of others is proposing an artificial ceiling. We can growth much faster, and we can get unemployment down to 5 percent. More demand can and often has led to faster productivity growth and more aggressive capital investment.
That’s what the Progressive Caucus Budget is all about. The nation can afford a decent social safety net and adequate investment in its future, and can get five to 10 million more people working again. If the progressives’ budget overstates the possibilities, it is not by much.
Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.