Sandy-Induced Unemployment Spike Shows Need to Focus on Jobs, Not Austerity
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First-time jobless claims spiked to 439,000 after nearly a year under 400,000. The reason for this sudden weakness in the US economy? Suprestorm Sandy.
This sharp increase is due to Hurricane Sandy as claims increased significantly in the impacted areas. Note the spike in 2005 related to hurricane Katrina – we are seeing a similar impact, although on a smaller scale.
Obviously, Sandy washed out businesses and increased human needs over a large and heavily populated region of the country. And that correlates highly with initial unemployment claims, as we saw with Katrina.
But just because there’s a pat, plausible explanation for a spike in unemployment claims doesn’t mean that the economy has nothing to worry about. In fact Superstorm Sandy fits the definition of headwinds, so to speak, for the economy. This is a big and unpredictable world, and sometimes great tragedies occur that require those with means to step in and help. That’s always a risk for any economy, sudden events that change the dynamics.
What I’m trying to say is that maybe the government shouldn’t spend all its time ensuring a target level for the budget deficit in 2040. First of all, as something like Sandy proves, this is an impossible task. We do not know the impact of technological innovation, climate disaster, new political leadership or about ten thousand other exogenous events, which will disrupt a flat estimate of the economy and the budget. And this has been proven by the ten-year budget estimates in 2000, before 9-11 and Iraq and Katrina and the iPad and the Bush tax cuts, which showed surpluses as far as the eye can see.
What we do know is the current condition of the country. And that shows 7.9% unemployment, a disaster that just hit the Atlantic Coast, 5 million people out of work for at least six months, and basically a wave of human needs that need to be satisfied by government. But instead we’re on a slow road to austerity, the exact wrong thing to do.
Yet too many in Washington are fixated on cutting public spending to balance the budget, not on how to put people back to work and get our economy going. There is no theory of economics that explains how we can deflate our way to recovery. Businesses are not basing investment decisions on how much Congress cuts the debt in 2023. As Great Britain, Ireland, Spain and Greece have shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasing misery. [...]
The budget hawks have the sequence backwards. Public outlay for jobs and recovery come first, growth is restored, and revenues follow. Budget cuts in a deep slump lead only to a deeper slump.
That’s from a letter by 350 economists to Congressional lawmakers this week. Implementing austerity at this time solves no human problem. Borrowing is cheap and long-term budget estimates are fragile. The US reputation in the markets remains impeccable, as a destination for those seeking safe debt instruments.
Even an austerity measure that avoids the fiscal slope, the best-case scenario, something like an extension of the first $250,000 of Bush-era tax rates, an expiration of the relatively low-impact tax rate above that, and using the proceeds to cancel the sequester, still leaves us with an expired payroll tax cut and an uncertain result for extended unemployment benefits, both of which have the highest economic multipliers of any of the expiring measures. Not to mention the fact that we have ruined cities up and down the East Coast, affecting millions of Americans. Extending those two measures should be the bare minimum, before getting to economic recovery measures financed by ultra-low borrowing.
Washington exists in an alternate reality right now, where reaching a solution on how much austerity to undertake and what kind make more sense that identifying human needs and seeking to mitigate them.