The White House may hope to dismiss last week's dismal jobs data as a "little bump," but the reality is that the state of the economy is dire. President Obama must acknowledge the economic malaise. Then he can make the powerful and true case that the policies he has been pursuing are correct while the Republican alternatives are horrendous canards.
It's alarming that once again we are letting the Republican candidates' rhetoric and near-hysterical fear of government spending distort the national debate and keep us from the more dramatic economic changes we still need.
The lessons of the Great Recession and the semi-recovery are clear:
- Keynes was, and is, right. Though much-maligned by Greenspan neo-libertarians, government spending in the absence of private sector demand can resuscitate an economy. The stimulus bill worked. It saved millions of jobs, generated demand when there was none, and kept the economy from near total collapse. The unemployment rate kept going up, but it would have been so much worse without it. Take a look at the data. There is no doubt that the jobs picture stabilized and then improved after the stimulus kicked in.
- Targeted government intervention works. Carefully calibrated government intervention in individual sectors can return those sectors to solvency and also force needed reform when done properly. The auto bailouts are a case study in wise use of capital both to overcome a short-term cash flow crisis and to impose necessary structural changes. The bank bailout was only a partial success, because although the sector was returned to solvency, the needed reforms were not imposed. Hence the social gains have been much more limited. But both sectors prove that government can play a hugely important and positive role as a lender of last resort.
- An individual health insurance mandate works. Look at the Massachusetts example. The requirement that people pay for their coverage when they can do so overcomes an enormous free-rider problem, as both Newt Gingrich and Mitt Romney have admitted, and it saves the government huge sums of money. The president should offer a full-throated defense of the mandate invoking both Romney and Gingrich.
- Making the Bush tax cuts permanent has not created jobs. The lack of job growth is driven by inadequate demand and excess capacity. Marginal tax rates at this point have a minimal impact.
- The housing crisis still needs to be addressed head-on. Too many homeowners—especially unemployed homeowners—have mortgages they can't afford, and this will be a drag on the economy for years to come. We know we can't depend on the housing sector to provide significant growth during the next few years, but we also must ensure that it doesn't drag us down. The failure to require significant mortgage reform as part of the bank bailout was an egregious policy error.
- Joblessness—not the deficit—should be our immediate policy concern. The debt crisis is real—but in the medium and long term, not the short term. The market is still saying to the U.S. government: We want to lend to you. While the issue of long-term entitlement costs looms, it will not metastasize for a decade or so. The immediate crisis is joblessness and the resulting anemic growth rate. If growth remains in the range of 1.8 percent to 2 percent, we will never generate enough revenue to balance our books. If growth accelerates to 4 percent, then deficits will organically decline. Priming the pump to increase growth is the imperative. Leave the deficit to next year.
All this argues for a more robust presidential response. He should trumpet the success of the stimulus, not just the bailout of Chrysler. He should starting pushing back against the Tea Party's rhetoric.
The president should go to bat for Keynes, for Roosevelt, for the policy tools that have worked. He should again challenge the deregulatory, Hoover-based-thinking that created the mess we are in. We need a full-throated defense of the policies of the past several years, not meekness and apology.