What’s most important: dealing with the deficit and the perceived threat of debt default, or cutting unemployment? The US government seems to be relaxed about employment or lack of it at the moment. For President Obama the imperative is to agree a deal with Congress to let the deficit ceiling rise while committing to cutting it in the next few years. Without an agreement the US Treasury could, in effect, be unable to continue spending and in theory public services would cease to be funded. There is clearly a political game being played out, with Obama calling for a larger planned cut in the deficit ($4tn) than the Republican majority is willing to support. The debate currently turns on $250bn cuts to Medicare versus closing tax loopholes worth $400bn.
None of this is much comfort to the millions of US unemployed about to see their benefits terminated. In the US, unemployment benefits are paid for shorter periods than in many European countries. A person losing their job can expect to receive unemployment insurance for 6 months. In those states worst affected by joblessness, benefits can be extended by up to 99 weeks from the minimum 26 weeks.
The poor jobs outlook in US leaves a big demand gap in the economy and the threat of a deeper hole in consumer spending as more people’s unemployment benefits expire. This means government targets for cutting the fiscal deficit are unlikely to be achieved without a big expansion in private sector job creation or renewed government support. By support, of course, I mean spending – increased spending that would expand the deficit in order to promote employment.
As it is, the US economy, which is due to grow at less than 2% this year, the headline rate of joblessness is very high at its current 9.2% level. This is highly unusual in a country like the US, where the labour market is more dynamic than elsewhere, leading to faster job creation and destruction. At this point in the economic cycle, the economy should be seeing fast employment growth, with benefits falling and tax receipts rising. Data from the US Bureau of Labor Statistics show that just over 14m American are unemployed as at June 2011.
Ordinarily, a falling away of the automatic stabilisers would allow the budget deficit to fall. But this has been (and continues to be) no ordinary slowdown: it’s a balance sheet recession for households (and formerly, banks) and with people repairing their individual balance sheets (increasing saving, paying down debt, downsizing generally) they are in no mood to start borrowing and spending once again. In these circumstances demand falls away and if the shortfall isn’t taken up by government spending or through exporters selling more abroad, you face a long period of low or no growth, accompanied by stubbornly high unemployment rates.
At present 6.3m Americans are counted as being long-term unemployed and the mean average duration of joblessness is at almost 40 weeks and rising. With the general unemployment rate in the US up last month to 16.2% (see measure U-6 here), you can see why jobs had better start being created soon, or the US faces perhaps not just a double-dip recession, but something much worse. In the corridors of power the politicians argue over cutting programs or tax breaks. Meanwhile, the ranks of those Americans facing the end of their extended jobless benefits, also known as the ’99-ers’, continue to swell.