The American Recovery and Reinvestment Act of 2009 provided $787 billion in funds to get the economy moving again. The government was focused on getting the economy out of recession which is defined as negative economic growth for two straight quarters as indicated by a decrease in GDP. The present definition of recession has nothing to do with unemployment. It's just defined as a decrease in GDP for two straight quarters. Therefore, GDP could increase but unemployment remain high. Such is the situation we're now in - the so-called jobless recovery.
The theory is that if government primes the pump by pouring money into the economy, which was the effect of the $787 billion, that economic activity would increase, consumers would buy more products and services and this would create more jobs. GDP is made up of private consumption plus investment plus government spending plus exports minus imports. In the US consumption is 70% of GDP and the trade balance (exports minus imports) is negative so it actually detreacts from GDP. When consumer spending drops off, that leaves government spending to make up the difference since private companies are not investing in the US and hence are not creating jobs. So the GDP is overly dependent on consumer spending, and hence Bush's reponse to the 9/11 attacks was "Go out and shop." Consumer spending stimulates economic activity which then means business will invest in order to produce more and this will mean more jobs for American citizens. This was the conventional wisdom a few years ago, but this chain of logic doesn't work any more.
The government dumping dollars into the hands of consumers as Bush did with his stimulus, Bush's so-called "booster shot for the economy," means that consumers will spend more temporarily, but it does not mean that jobs will be created in the US because most US consumer goods are made in China. So the jobs created, if anywhere, will be in China. Therefore, the US government is left with the denouement that it must pour money into the economy on a perpetual basis and this is impossible because it would lead to increasing deficits with no sustainable results in terms of job creation. The nation’s international trade deficit in goods and services increased to $42.3 billion in May from $40.3 billion (revised) in April, as imports increased more than exports. This was taken as a good sign in that this showed an increase in American consumption pointing the way out of recession. Yes, GDP increased, but the trade deficit increasing showed that the jobs created by this increase in consumption were mainly abroad.
The US relies too much on consumption. Temporary government programs such as the "Cash for Clunkers" program and the $8000 tax rebate for new home purchases improve the economy temporarily. They do not create sustainable jobs. So the government is left with the dilemma of pouring money into the economy and increasing the national debt or getting GDP up by encouaging those who do have money to consume more or investing in the economy in a way that will increase jobs directly WPA style rather than just giving money to consumers and hoping that their spending it will create jobs. However, the government response at present seems to be to worry about the deficit and hence to gut government spending. This is rational insofar as pouring money into consumers' hands in the hopes of creating jobs is irrational for the reasons given above. However, it doesn't solve the problem of widespread joblessness.
The stimulus bill was almost equally divided among tax cuts, contracts, grants and loans and entitlements. The tax cuts put money in consumers' hands that increased consumption but did not create jobs (except perhaps in China), the grants and loans merely staved off job losses by bailing out states and municipalities and entitlement spending similarly just put money in consumers' hands without creating jobs. This leaves contracts as the sole source of job creation. If the stimulus had put relatively more money into contracts, then perhaps more jobs would have been created. The result was that only a paltry number of jobs were created. There is plenty of work that needs to get done, but private enterprise does not want to do it. Private enterprise is oriented towards producing individual consumer products. The work that needs to be done is more general in nature such as infrastructure rebuilding.
Right now most government contracts are taken up by defense spending. This creates jobs for defense contractors and in the military. It does not create jobs in the civilian economy except in the FBI and CIA and other defense related jobs. Also defense contractors such as Boeing and General Dynamics create jobs in the civilian economy. Evidently, this spending which is huge is not sufficient to create enough jobs to bring unemployment down to an acceptable level. Therefore, the government has two choices it seems to me. 1) Expand the military even further even though the US spends more money on its military than the rest of the world combined. 2) Create WPA style jobs funded directly or indirectly by the government to rebuild infrastructure.
What most people don't realize is that functionally the military and military-related jobs are identical to WPA style jobs. Both are funded by the government either directly or indirectly through contracting. Both serve the same purpose in the economy of creating and sustaining jobs. Both are public sector jobs. If the government wants to create sustainable private sector jobs, then it has to do something about its trade policies. Right now US trade policy is such as to create non-American jobs. The net result is ongoing trade deficits as far as the eye can see which add to the national debt. Bringing jobs home from overseas would not only spur the American economy in terms of job creation but would help the national debt once the trade balance becomes positive again.
Politically, both Republicans and Democrats seem incapable of creating sustainable WPA style jobs in the civilian economy. The Republican solution would be more defense spending, tax cutting and elimination of social programs. The result of this would be that former teachers, firemen and policemen would be forced to join the military in order to get a paycheck. Republicans could conceivably set up programs to encourage millionaires and billionaires to consume more thus elevating GDP. Democrats have been caught flat-footed and have fallen for the conventional wisdom that stimulating the economy by putting money into consumers' hands will ultimately result in job creation here in America. That hasn't happened, and is not likely to happen. They are left with FDR style WPA solutions which they don't seem to have the heart to even bring up. Therefore, they are and will continue to be tarred with the brush of big spenders as their methods of stimulating the economy don't produce sustainable jobs and hence sustainable increases in government revenues. Taxing the rich and limiting the offshoring of corporate profits would provide immediate relief to government deficit problems, but the poltical will to do it is not there. Republican tax cutting will only exacerbate the deficit as 30 years of Reaganomics has shown. Reagan and Bush tax cutting skyrocketed the national debt. Tax cutting not adding to the deficit is what George H W Bush called "voodoo economics" and he was right.
The result is that both political parties are missing the boat. The Democrats' policies of putting government money into the economy are merely staving off disaster for many middle class families which is a good thing, but they are not creating long term sustainable jobs which would help not only the middle class but government revenues themselves. Republican policies would be a continuation of the Reagan-Bush policies of the last 30 years which produced the economic mess we now find ourselves in. Tax cuts have been directly responsible for adding to the national debt. A resumption of these policies would be a prescription not only for more hardship for the middle class and the poor but for outright disaster. The US would come to resemble a Third World country in which there are a few very rich families while the majority of the people are extremely poor. It would be a country in which 20% unemployment would be the new normal and Great Depression style homelessness would be widespread and acceptable. The US would be forced into an austerity lifestyle (except for the rich) and the government's whole fiunction would be to merely pay interest on the national debt.
