June 30 (Bloomberg) -- Americans live in a new economic reality, and it’s long past time that Washington did, too.
In the short term, the nation faces a jobs crisis; in the long term, a deficit crisis. Each crisis presents opportunities to overhaul the state for a new era. Instead, Democrats and Republicans are using both to double down on the same stale ideas they were pushing in 2005, 2001, 1997 and even earlier.
The Bush tax cuts are a perfect example. The cuts and the tax code that preceded them were both designed in the 1990s -- an era of 5 percent unemployment, budget surpluses and a productivity-enhancing technological revolution. The current moment couldn’t be more different, yet we’re still debating whether we should return to the tax policies of George W. Bush circa 2004 or of Bill Clinton circa 1999. The new thinking about how to create policy suited for 2011 -- or even just a tax code suited to 2011? -- is nowhere to be found.
The debate on jobs is similarly narrow and counterproductive, pitting analyses of “cyclical unemployment” against competing narratives of “structural unemployment.” The cyclical side says that unemployment is a result of inadequate economic demand, thus we need Keynesian pump-priming to fill the gap. The structural side says that unemployment results from an erosion of skills and a changing economy, and that there’s nothing much we can do to close the gap quickly.
Structural v. Cyclical
There’s no need to choose -- or to give up hope. Much of our unemployment is structural and some of it is cyclical. Action is necessary either way. As former White House Council of Economic Advisers Chairman Christina Romer told me in March, “If you think our problem is structural, there are things we should be doing: money for training, or helping people get out of their mortgages, or massive investment in Detroit. Saying it’s structural is not the same as saying it’s not our problem.”
We should begin with a commitment to hundreds of billions of dollars in infrastructure investments. This isn’t make-work or even an optional expense. Waiting to fix a bridge is the same as waiting to pay down the deficit: You’ll have to spend the money later if you don’t spend it today. But waiting to fix a bridge also runs the risk that the bridge will collapse, forcing you to spend much more later than you would spend today. Advancing worker-intensive, economically vital investments from the future to the present is exactly how stimulus should work, and why the U.S. Chamber of Commerce and the AFL-CIO both support it.
Moreover, infrastructure investment would create jobs in the construction sector -- where unemployment is more than 16 percent -- at a time when materials and labor are unusually cheap due to slack demand. Former President Bill Clinton has suggested temporarily relaxing environmental regulations so construction projects could be approved quickly. A conservative economist told me that Republicans might support the idea if the government also temporarily suspended the Davis-Bacon Act, which requires public works projects to pay the prevailing wage, boosting labor costs. If that’s what it takes to get a deal, so be it.
As for deficit reduction, surely we can break the cycle of small thinking: raising taxes here, cutting Medicare spending there, capping domestic discretionary spending for a few years - - all while keeping the current shape of government virtually unchanged.
Cut Payroll Tax
How about a bigger, better idea? Let’s cut the payroll tax in half and impose a slightly larger tax on carbon emissions. To support this plan, you don’t need to have your hair on fire about global warming. You just need to like labor more than you like carbon emissions. We can reduce the tax burden on work, which we want more of, and shift it to emissions, which we want less of.
Here’s another idea: Buried within Medicare is a formula called the sustainable growth rate. The SGR was passed in 1997 by a Republican Congress and signed into law by a Democratic president in order to slow the growth in doctor payments. But the formula soon began mandating huge cuts in those payments. If the cuts were enacted -- they’re up to 30 percent now -- few doctors would stay in the Medicare program. Consequently, Congress routinely passes “doc fixes” that negate the SGR’s cuts and makes sure the doctors get paid.
Abolishing the SGR would solve the “doc fix” problem permanently, but it would also add about $300 billion to the deficit, which is why Congress consistently ducks the issue. But the SGR should be repealed -- with its demise paving the way for deep reforms to the system. As part of the deal, Republicans could get increases in the fees patients pay for services. Democrats could get a structural redesign of the system, increasing payments for treatments backed by solid evidence and decreasing payments for treatments that are less effective.
You wouldn’t know that such options even exist from the state of our cramped debates about jobs and the deficit. But those stilted discussions are a function of the political environment, not the policy options. We don’t have to keep repeating ourselves.
You know that old line about how the Chinese character for “crisis” combines the symbols for “danger” and “opportunity”? Well, it’s not true. The character is actually an amalgam <http://www.pinyin.info/chinese/crisis.html> of “danger” and “turning point.” But there’s a reason this invented bit of Eastern wisdom has such currency in Western management books and inspirational seminars: Crises often are opportunities. In Chicago Mayor Rahm Emanuel’s famous words, “You never want a serious crisis to go to waste.”
Right now, we’re wasting two of them.
(Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.)
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