Ignoring the Real Problem

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As usual, the economic debate in Washington is ignoring the country's main problem. We are debating taxes and spending cuts when the real problem is boosting demand.

Unemployment is the most immediate problem facing the country. We still have 8.8 percent of the labor force unemployed. And in spite of the happy talk about the economy being on the right path and the recent pace of job growth, the entire decline in the unemployment rate over the last year was the result of people dropping out of the labor force. The share of the work force that is employed remains near its low-point for the downturn.

This is the economic reality and if we had an honest debate in Washington, the two parties would be putting forward competing plans to create jobs, not reduce the deficit. The current deficit is not a problem. If the deficit were smaller, then we would simply have less spending in the economy and more people unemployed. There is not some magic wand that will make the private sector increase spending and add jobs just because the government lays people off.

We learned this lesson back in the depression. Tens of millions of people are now suffering across the country because the people in Washington seem to have unlearned it in the last three years.

Over the longer term our deficit problem is a health care cost problem. If the United States paid an amount per person for health care comparable to that in other wealthy countries, we would have huge budget surpluses in the decades ahead, not deficits. For this reason, President Obama was right to focus on restraining cost growth in Medicare, rather than privatizing the system as proposed by Representative Paul Ryan.

According to the Congressional Budget Office's analysis, Representative Ryan's plan would add more than $30 trillion to the country's health care bill over Medicare's 75-year planning period if retirees were to buy Medicare-equivalent plans under his system compared with the existing Medicare system (See our analysis here). That is an amount that is almost six times the projected shortfall in Social Security.

Another problem with President Obama's speech was the comment he made about borrowing money from China. He and his economic advisers know that the amount of borrowing is determined by the trade deficit, not the budget deficit. If he wants us to borrow less from China then he should have been talking about the factors that determine the trade deficit, most importantly the value of the dollar, not the budget deficit. Bringing China up in an entirely inappropriate context is a crass appeal to jingoistic sentiments. It has no place in a serious discussion of economic policy.

This post originally appeared on the New York Times' Room for Debate.