06.24.2010 0

Extending Misery

By Robert Romano

Debate continues in the Senate over a controversial $35.52 billion extension of unemployment welfare benefits as Senate Democrats continue to struggle to find the votes necessary to overcome a filibuster. Joining Republicans in defeating the measure last week were Senators Joe Lieberman and Ben Nelson, citing concerns that the combined legislation, which includes $24 billion for Medicaid expansion, would add $60 billion to the $13 trillion national debt.

They want the bill to be paid for with offsetting reductions in other areas of the $3.6 trillion federal budget. That’s the least that can be done.

While everyone has compassion for those who, through no fault of their own, have been laid off because of the troubled economy, it is time to consider that perpetually extending welfare to the jobless by means of expanding the debt is the least compassionate option available to policy makers.

A recent study by Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University found that “median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.”

That’s important because the 90 percent threshold of debt to Gross Domestic Product (GDP) is exactly where the current U.S. national debt is. As noted the House Ways & Means Committee Republicans, “the Administration estimates the total debt for Fiscal Year 2010 will reach $13.6 trillion, or 93.1 percent of Gross Domestic Product.” By 2012, the International Monetary Fund reports the U.S. national debt will reach 100 percent of the GDP.

This means Congress is doing nothing to rein in the growth-choking, jobs-killing debt. Indeed, by 2020 the Office of Management and Budget reports that the debt will grow to over $25 trillion.

Note that Rogoff and Reinhart are not just measuring the so-called “debt held by the public,” which stands at $8.559 trillion. That is the number often cited by members of Congress, economists, and even former Federal Reserve chairmen in offering a debt to GDP figure, which is only about 60 percent. No, the good economists are factoring the total debt, including “Intragovernmental Holdings” debt, money owed to the Medicare and Social Security trust funds, which stands at $4.487 trillion.

So, the entire debt is the important number to calculate when considering its impact on the economy, and therefore on jobs. The Obama Administration’s own economists, Christina Rohmer and Jared Bernstein, estimated a one percent increase in GDP would create 979,000 jobs.

Assuming the accuracy of the estimate, applying Rogoff and Reinhart’s analysis to Rohmer and Bernstein’s, a loss of 1 percent GDP because of the debt level would translate into the U.S. failing to generate approximately 1 million jobs every single year.

The data bears that out. Rogoff and Reinhart famously predicted that the $826 billion stimulus would generate economic growth of 3.7 percent and create 3.675 million jobs. Instead, the economy actually shrank by 2.4 percent in 2009. And, in the past year, according to the Bureau of Labor Statistics, the total number of employed Americans has dropped from 140.438 million to 139.420 million, a loss of about 1.018 million jobs.

With such obvious data to glean, one might assume that policy makers would find cause to correct course and actually reduce the debt.

Instead, the Keynesians have but one tool in their shed to respond to unemployment: borrowing and printing more money. This is analogous to bringing a hammer to fix a plumbing problem, and then wondering about all of the newly leaked water.

Ironically, as the Senate debates increasing the debt by another $60 billion to “help” the unemployed, they appear to be actually choking off future job growth. Couple that with another $100 billion in handouts to public employee unions to balance state and local government budgets, and in effect, by extending unemployment welfare, Congress is extending misery. Something to consider.

Robert Romano is the Senior Editor of ALG News Bureau.

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