As the severe unemployment crisis drags
into its third year, proposals for
solving the crisis are proliferating.
Even more ideas will be tossed into the
mix as the 2012 election season intensifies.

Some of these proposals are good, some are
less good, and some are truly awful. The plan
offered by President Obama last September
included a mix of some good ideas, such as
more spending on infrastructure and education,
along with some bad ones, like cutting
Social Security taxes (otherwise known as
payroll taxes). The single worst idea in the
mix, supported by deficit hawks in both the
Democratic and Republican parties, is that
we are facing a fiscal train wreck and we
therefore, above all, need to cut government
spending. At the same time, there are actually
some major avenues still open for stimulating
job creation—both because they could create
lots of jobs relatively quickly and because they
could do so cheaply—that most policymakers
and politicians have thus far ignored.

{There Is No Federal debT
CrIsIs}

The official debate over the
economy shifted decisively last summer,
away from proposals for job creation to
obsessing over the size of the federal government’s
deficit (how much we are borrowing
each year) and debt (how much we owe overall).
The federal deficit has, indeed, been historically
large since the recession began, running at
about 10 percent of GDP for the past three
years, as opposed to the historic average of 2
percent of GDP. But that is only because the
jobs crisis itself is of historic magnitude. Solving
the unemployment crisis would accomplish far
more than any other measure toward bringing
the federal deficit down. This is simply because
when more people have jobs, they also pay more
taxes and rely less on government support, such
as unemployment insurance and Medicaid.

There is another point to emphasize here.
Despite the historically large fiscal deficits,
the federal government is now paying interest
on the total outstanding debt at a rate that is
historically low, not high. This is for the simple
reason that the interest rates on U.S. Treasury
bonds are themselves at historic lows, at around
2 percent. As such, while it is true that the
government will need to reduce its borrowing
once the recession is behind us, there is no
immediate crisis whatsoever in terms of the
government paying off the debt obligations it
faces now or over the next few years.

{CuTTINg soCIal seCurITy
Taxes as a Jobs Program
Is PerIlous}

Since its inception in 1939, the
political right in the U.S. has been trying
to kill Social Security. These efforts have
failed up until now because the program has
maintained overwhelming political support.
The enduring popularity of Social Security
follows from the fact that, over seventy-two
years, it has succeeded in reducing poverty for
retired people and those with disabilities, and
has done so at minimal administrative expense.

“Cutting [payroll taxes
compromises] the
principle that Social
Security is a selffinanced,
stand-alone
program, whose
funding is inviolate.”

The 2011 cut in the payroll tax, from 6.2
percent to 4.2 percent, that applied to workers
is costing the system $112 billion, or 15 percent
of total expected revenues for this year. Obama’s
proposal for 2012 would reduce the rate further,
which could bring the overall loss of funds
for Social Security to more than 25 percent of
committed outlays for 2012.
The Obama administration says that the
lost Social Security revenues resulting from
the payroll tax cuts will be replenished from
general revenues. It is no doubt sincere in this
intention. But cutting the traditional source
of Social Security revenues, even temporarily,
entails compromising the principle that
Social Security is a self-financed, stand-alone
program, whose funding is inviolate. If funding
for Social Security starts being treated regularly
in the same manner as all other government
programs, it then becomes vulnerable to the
types of attacks that have already occurred
over the past year with public education, public
safety, and pension programs for state-level
workers.

{small busINesses
Need CredIT}

The biggest single drag preventing
a recovery from taking hold has
been the dramatic contraction in credit
flowing to smaller businesses—i.e., those with
five hundred or fewer employees. Beginning in
2008 and continuing into 2011, non-corporate
businesses as a whole have undertaken zero net
borrowing to finance business expansion and
job creation. This was in contrast to 2007, the
last year before the financial crisis, when they
borrowed more than $500 billion to expand
their operations and hire new workers. This
pattern is especially damaging for prospects of a
jobs recovery since smaller businesses account
for more than 60 percent of all jobs in the U.S.
economy. They are also the main source of both
job expansions and contractions.

One major factor holding back small
businesses is the recession itself. They continue
to experience weak demand for their products
in the marketplace, so they are unwilling to
put money at risk by expanding their operations.
But the other overarching problem is
that small businesses are getting locked out

“The biggest single drag
preventing a recovery
has been the dramatic
contraction in credit
flowing to smaller
businesses.”

of credit markets even when they are ready
to start spending. A summer 2011 survey by
Pepperdine University’s Graziadio School
of Business and Management found that 95
percent of business owners report wanting to
execute a growth strategy, but only 53 percent
were obtaining the funding they needed to
execute that strategy. Meanwhile, bankers were
reporting that they were rejecting 60 percent
of their loan applications. Getting money into
the hands of small businesses that are primed
to invest and hire workers should be an idea
that all Democratic and Republican politicians
support.

{CommerCIal baNks
are holdINg massIve
Cash hoards}

While small businesses continue
to be short of investment
funds, the U.S. commercial banks
are now sitting on an historically unprecedented
cash hoard of $1.6 trillion, equaling more than10 percent of U.S. GDP. In previous recent
periods after recessions, the banks’ cash reserves
averaged well less than 1 percent of GDP.
The main reason the banks have built up
this unprecedented cash hoard is that, since
the recession began, the Federal Reserve has
pursued an aggressive policy to stimulate
the economy, accompanying the Obama
administration’s other efforts at stimulus.

The main tool deployed by the Fed has been
to hold the short-term interest rate that it
controls—the “federal funds rate”—at near
zero since mid-2008. As a result, the banks
have accumulated their massive cash holdings
precisely because they have been able to obtain
these funds virtually for free. Fed Chair Ben
Bernanke has also recently announced that it
will continue to hold this interest rate at near
zero through 2013.

But the point of the Fed’s zero-interestrate
policy is obviously not to just provide
the commercial banks with unlimited free
cash which the banks then hoard, but rather
to have these funds moved into productive
investments and job creation. The banks claim
that they are unable to expand lending now
because they also see weak market demand
and a high-risk environment. Such concerns
are real, but not to the extreme where banks
should reject 60 percent of loan applicants while
they continue to receive unlimited free cash
from the Fed. Another factor here is that the
banks have become more adept at various forms
of financial engineering and speculation, as
opposed to seriously exploring possibilities for
underwriting the growth of small businesses.
Until smaller businesses start receiving these
funds and putting them to productive uses, all
other efforts at pushing the economy out of its
slump will be greatly weakened.

{PushINg The baNks To
suPPorT Job CreaTIoN}

Two straightforward and
inexpensive policy initiatives—one
carrot and one stick—could themselves
transform the landscape. The carrot is an
expansion of existing federal loan guarantees
by something like $300 billion. This would
roughly double the number of annual guarantees
provided by the federal government. In
a stroke, it would dramatically lower the risks
facing both small businesses and banks as they
calculate their prospects for investing in what
remains a highly tenuous environment. Of
course, some businesses will default on these

“Injecting $800 billion
[into the hands of small
businesses] should lead
to the creation of about
twelve million new jobs.”

loans. But even if we allow for an implausibly
high default rate of, say, 12 percent—which
is three times higher than the rates on the
government’s existing guaranteed loans—the
costs to the government would still be only
about 1 percent of its overall budget.

The stick is for the government to tax
the excess cash reserves now held by banks,
to push the banks to become more bullish
on loans for job-creating investments, again
especially for small businesses. The tax rate
only needs to be high enough to persuade the
banks to stop hoarding mountains of cash. A
1 percent tax on money they received for free
may well be adequate. The revenues from the
tax could also cover the costs of the defaults
on guaranteed loans.

If administered effectively, these two
measures should be capable (over about
three years) of moving at least half of the idle
cash now sitting with the banks—i.e., $800
billion—into the hands of the small businesses
that are prepared to expand and hire workers.
The total impact of injecting $800 billion
should lead to the creation of about twelve
million new jobs, which could help drive the
unemployment rate down to around 5 percent.

It would thus serve as an effective complement
to the types of public spending proposals—
for infrastructure, the green economy,
state and local governments, and unemployment
insurance—proposed by Obama. The
success of this initiative could therefore provide
the foundation for delivering what working
Americans need and deserve right now—an
environment supporting the long-term defense
of Social Security, along with the basic right

New Labor Forum 21(1): 82-85, Winter 2012
Copyright © Joseph S. Murphy Institute, CUNY
ISSN: 1095-7960/12 print, DOI: 10.4179/NLF.202.0000013