A Dangerous Crossroads

The following was originally published at Working America's "Main Street" blog. [1]

Ominous signs emerged last week that a threat to undermine an economic recovery is afoot, and that threat has particularly severe consequences for America’s 15 million unemployed.

Before voting on an already scaled-down [2] jobs and jobless aid bill, House Democrats succumbed to pressure from conservative Blue Dogs and nervous moderates and weakened the bill further, eliminating some of its core provisions.

Then, despite narrowly passing the bill on a vote of 214 to 205, the House joined the Senate in leaving town for a week-long recess — allowing eligibility for extended federal unemployment insurance programs to expire June 2.

As a result, an estimated 300,000 long-term unemployed [3] will go without benefits by June 12, and 1.2 million would lose those payments in the month of June unless the program is retroactively, fully restored.

The changes made to the House bill were numerous. First, the provisions to continue the extended federal jobless benefits through Dec. 31 were changed to Nov. 30. This is not insignificant. It would mean that, from now on, newly unemployed Americans, like those 460,000 who have been filing initial state unemployment claims on average each week, would no longer be eligible for extended benefits. The newly unemployed would only qualify for the regular 26-weeks of state benefits.

With long-term unemployment continuing to rise, and more than five job-seekers for every opening, this is just part of a looming potential disaster.

Even worse, the provisions to continue the federal COBRA health insurance subsidy for newly unemployed workers was eliminated from the bill completely. Without the COBRA extension, newly unemployed workers would have to pay 100 percent of monthly premiums to keep their health insurance. For many workers with families that would mean that 40 percent or more of the unemployment check would go for insurance — that is before any actual medical or other expenses.

Clearly, the effect would be for many to simply drop their coverage, and those who might qualify would apply for Medicaid, putting additional pressure on state Medicaid finances at a time when the states can ill-afford it.

Worse still, as the AP reported [4], the $24 billion in continued aid to the states to help their Medicaid programs was also eliminated.

A modest $1 billion summer youth jobs plan was kept in the bill, but that will barely make a dent [5] in the near 20 percent unemployment rate among those age 16 to 24.

All of these developments point to the fact that too many Congressional Democrats are choosing to do the Republicans’ bidding for them. Fearful of being attacked for the new bogeyman word “spending”, they are now caught in the booby trap of asserting that current spending — to provide essential support for the still very weak economy and job market — somehow represents a threat to our economic future.

But while, in a sense, it’s all for show, it’s both disingenuous and dangerous. They raise a cry that spending must be “paid for” — but when they had a chance to do that in this bill, they buckled to pressure [6] from wealthy hedge fund and private equity managers. The amount of their incomes that would be taxed at regular federal income tax rates, instead of the current 15 percent ‘capital gains’ rate, was reduced by 25 percent at the last minute. And then the actual implementation of those new tax policies — which would make them pay according to the same rates as the rest of us — was pushed back to next year. “Paid for” indeed.

This is the worst possible time to start dismantling the fiscal pylons that have thus far stabilized the economy and allowed for the beginnings of a recovery. As Christina Romer, chair of the President’s Council of Economic Advisors, has reminded us — think 1937 [7]. In response to a policy pivot that emphasized short-term deficit reduction and lower spending, the still-weak economy headed back into a second severe recession.

That the short-term deficit argument was, temporarily, accepted then is understandable. After 1932, under the New Deal, unemployment had been steadily declining for four straight years and GDP growth had been averaging 9 percent annually. That is far from the case today. Recent GDP growth of about 3 percent is less than half that needed for sustained recovery. And unemployment has not shown any sustained, measurable decline. To the contrary, we’ve had 15 million unemployed each month for nearly a full year.

In Paris last week, Romer warned [8] against taking the 1937 road.

The economy is at risk of sliding back into a double-dip recession. And pulling out the fiscal supports, especially for the unemployed and for state Medicaid programs, is certain to increase that risk dramatically.

After asserting pressure to weaken the House jobs and jobless aid bill last week, more than 30 Blue Dog and moderate Democrats voted against the bill anyway. Like BP in the Gulf, they will disregard the warning signs and proceed in a full state of denial, as if the worst can’t happen. They seek to deconstruct the underpinnings of a nascent recovery, eliminating supports that are keeping the economy from literally crushing both low-income working families and, especially, the unemployed.

These moves could be called a lot of things, but ‘smart’ isn’t one of them.

In his column this weekend titled “The Pain Caucus” [9], Nobel Laureate economist Paul Krugman warned:

What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.

The sudden political lurch toward short-term deficit reduction and spending cuts (is anyone else baffled by the lack of discussion of bloated defense spending and the cost of the wars?) has Democrats doing the Republicans’ bidding. If they succeed they will cause massive economic misery for millions already struggling. And they will undermine any recovery, making the economic situation worse. Then, with the November mid-term elections approaching, Republicans will blame Democrats for a worsening economy.

We’re at an ominous crossroads, and a dangerous one at that.